Hospitals brace for Medicaid cuts, some resort to layoffs

Some hospitals and health systems have begun to lay off staff in preparation for looming Medicaid cuts, but the best financial options will depend upon their circumstances, said a financial analyst.

A growing number of hospitals and health systems have announced staff reductions — layoffs and position eliminations — in anticipation of close to `$1 trillion in 10-year Medicaid cuts under the One Big Beautiful Bill Act (OBBBA).

Many of those organizations were already looking — before enactment of OBBBA — to improve efficiencies as part of their effort to return to their pre-COVID-19 financial position, said Mark Pascaris, senior director for Fitch Ratings, in an interview.

“They were already in efficiency and improvement initiative mode; there’s been an accelerator on that, which we will continue to see,” Pascaris said.

Leaders have told him they are planning more staff cuts that will be finalized in 2026.

However, those cuts come as other hospitals continue to hire. Hospitals added 32,000 positions in the first three months after the law was enacted in early July, according to data from the Bureau of Labor Statistics.

Cuts vs. growth

The labor reductions are part of the cost cutting approach some health systems are taking ahead of the impending cuts, while those same organizations and others are also pushing to grow revenue. Each organization will need to decide whether savings or revenue will drive their margin improvement ahead of the start of the major cuts.

“I laud every organization that is being as efficient as possible, every supply chain tool they can use, use (of) AI to drive productivity, you name it,” Pascaris said. “But at some point, the efficiency gets more and more difficult to execute. The low hanging fruit just isn’t there. So there has to be some degree of growth to help balance the equation.”

For example, the equation may tilt toward cuts over revenue for organizations that dominate stagnate markets, he said. In contrast, organizations in high-growth competitive markets will likely push new revenue initiatives.

“Otherwise, your market share is going to be shrinking, shrinking, shrinking, which means your leverage within the market could be getting weaker,” Pascaris said.

Other options

The coming financial turmoil is likely to drive a range of outcomes, including:

• Acquisitions by strong health systems
• Sales by small, independent hospitals
• Boost for some rurals from rural transformation funds

An unanticipated response to the law could be an acceleration in health system and hospital mergers and acquisitions (M&A). Those deals are seen as ways to improve efficiency and find new topline revenues.

“The very strong health systems with the deep pockets, the robust balance sheets, that are operating in strong markets, [are] looking at all of this uncertainty not just as a headwind but also as an opportunity to grow opportunistically — within their existing markets and maybe even to grow into new markets,” he said.

That M&A push could include big national initiatives, like Kaiser Permanente’s Risant, as well as regional partnerships.

Such a hospital M&A trend was expected to be helped along by a more lenient view toward dealmaking from the Trump administration, compared to that of the Biden administration.

However, that M&A push may not benefit some struggling independent organizations, which will have less interest than in the past 10 years.

“If you’re a system looking to grow, you’re going to want to grow in places that are accretive, that generate a decent cash flow and aren’t a big drain on your resources,” he said.

That will make hospitals in good markets, that are having financial struggles, look a lot more attractive than similarly struggling hospitals in markets with few growth opportunities.

Downgrades coming

Pascaris said more credit rating downgrades for hospitals are expected as the OBBBA cuts draw closer.

“‘If you can’t get your margins and generate good cash flow now, what’s going to happen in 2027, 2028 and 2029 when the OBBBA cuts really start to kick in?’” Pascaris said about conversations with executives. “We know that if you are not executing now, if you’re not executing next year, then something pretty drastic has to happen.”

Less action on either cuts or new revenue are needed by organizations that already have strong balance sheets and large amounts of liquidity.

“Obviously there’s inherent volatility in the equity markets but [if] your balance sheet is so strong, those investment returns can kind of help balance the equation,” Pascaris said.

Law repeal?

Despite political talk on rolling back the $1 trillion in 10-year cuts included in this summer’s tax law, hospitals and health system leaders are operating under the assumption those cuts will occur, said Pascaris.

The expectation that the cuts included into the One Big Beautiful Bill Act (OBBBA) will go into effect runs counter to the claims of some politicians and policywatchers, who have predicted they will be reversed.

They recent federal government shutdown occurred after Democrats pushed their own budget bill that would have reversed the OBBBA cuts. And some Republicans, like Sen. Josh Hawley (R-Ark.) have introduced bills to roll back some of the cuts and insist they won’t go into effect.

But the law remains fully in effect, so hospital executives are undertaking financial plans in accordance with it, Pascaris said.