Medicaid policy changes threaten financial boon for hospitals and health systems

Proposed legislative and regulatory policy changes for Medicaid mean the program will no longer be a financial boon to hospitals and health systems, according to a rating agency official.

“It’s the end of the Medicaid bull run,” Patrick Zagar, director for S&P Global Ratings, said during the HFMA Annual Conference.

Specifically, congressional proposals and CMS rule changes targeting state-directed payments (SDPs) will whittle their “exponential growth for some providers and states.”

Medicaid SDPs, which primarily benefit hospitals, have surged both in their number and total spending, according to the Medicaid and CHIP Payment and Access Commission (MACPAC). In 2024, the cumulative spending on federally approved SDPs was projected to reach $110 billion, up from a cumulative $69 billion by February 2023, according to MACPAC.

A budget reconciliation bill, called the One Big Beautiful Bill Act, under consideration by Congress would target SDP spending in different ways:

• The House-passed version would cap rates for future SDPs at 100% in Medicaid expansion states and 110% in non-expansion states
• The Senate version of the bill would establish those caps for both new and existing SDPs

Trump administration’s targeting of SDPs includes a May 12 proposed rule from CMS that would create new limits on how states use provider taxes to finance their share of Medicaid.

CMS has begun reapproving SDPs, which require annual reapprovals, in recent months after providers noted approvals were paused in the first months of the Trump administration.

Bill’s effects

Zagar noted the reconciliation bill’s provisions also target Medicaid fraud and waste, establish work requirements, and establish limits for provider taxes.

The significance of those proposals for provider finances will depend on their details, he said.

As competing legislative proposals advance and recede in Congress, Zagar noted that his rating agency is not changing any hospital ratings based on the various competing legislation under consideration. However, the likelihood of Congress passing some major Medicaid change has reduced the number of ratings upgrades S&P has awarded to various hospitals.

The entities S&P expects the Medicaid legislative changes to most affect included:   

• Safety net providers and/or those with high Medicaid and supplemental funding receipts
• All providers indirectly if safety net provided made insolvent
• critical access hospitals or regional referral centers if not exempted

He noted many of the potential legislative policy changes would not go into effect until 2026, at the earliest.

“The timing of these changes and how they affect the credit will differ by provider, it will differ by state,” Zagar said.

So far this year, hospitals and health systems have responded to weaker earnings with a bigger focus on their balance sheets and initiatives that include:

• Selling real estate
• Selling laboratory businesses
• Evaluating energy assets
• Outsourcing functions

Additionally, he noted the amount of borrowing has increased this year to its highest level since the pre-pandemic period. That can increase balance sheet pressure and, in some cases, has resulted in negative ratings changes. Overall, balance sheets are similar to what they were in 2019.

Sometimes the push to take on more debt was driven by concerns about threats to not-for-profit hospital tax exemptions from policymakers.

Other trends S&P is watching include strong demand for services; payer pressure on reimbursement; and the outpatient shift.