Senate Medicaid hearing highlights the debate over federal spending cuts

Cuts to federal Medicaid spending are necessary to streamline the program and don’t necessarily portend tough times for providers, conservative policymakers and analysts argued during a Senate hearing.

The Aug. 4 hearing of the Senate Budget Committee included discussion of whether healthcare policies in the One Big Beautiful Bill Act (OBBBA) should be scaled back or perhaps expanded after the midterm elections.

Predictably, Democrats said the policies already are having adverse impacts and can be linked to hospital closures, while Republicans said the provisions are strengthening program sustainability by curbing fraudulent and excessive spending.

The hearing was the first chaired by Sen. Ron Johnson (R-Wis.), who assumed the lead role on the Budget Committee after the death of Sen. Lindsey Graham (R-S.C.), the former chair, on July 11.

“I hope we can get bipartisan agreement that we need to figure out how to eliminate this fraud,” Johnson said. “I can’t tell you how much it is. We don’t do a very good job tracking. We don’t have controls in place.”

Sen. Jeff Merkley (D-Ore.), the committee’s ranking member, said scaling back Medicaid funding is a misplaced solution to fraud concerns.

“Deliberately reducing health insurance coverage for low-income families isn’t tackling fraud,” Merkley said.

Comparing baseline projections from the Congressional Budget Office (CBO) in January 2025 (pre-OBBBA) and February 2026, a recent KFF analysis calculated that Medicaid enrollment will be 11 million (13%) less in 2035 than if there were no OBBBA. However, “comparing baselines may understate the effects of Medicaid cuts” in the legislation, the analysis states.

Provider taxes and state-directed payments draw scrutiny

Part of the hearing focused on Medicaid provider taxes and state-directed payments (SDPs), both of which are being scaled back under the OBBBA and accompanying regulations.

Republican members of the committee and conservative-leaning panelists said provider taxes are an inappropriate financing scheme in which states tax providers to draw in federal matching funds. The taxpaying organizations generally are reimbursed in equal or higher amounts relative to their contribution, as allowed under current federal laws and regulations.

The OBBBA’s looming reduction to the safe-harbor rate for provider taxes is expected to drop federal and state Medicaid spending by $384 billion through 2035, per proposed CMS regulations implementing the legislative provision starting in FY28. A budget proposal by then-President Barack Obama in 2012 would have imposed the same decrease from 6% to 3.5% of net patient revenue that the OBBBA includes, said Brian Blase, president of the conservative-leaning Paragon Health Institute.

Provider taxes serve as a key funding mechanism for SDPs, which are estimated to total $137 billion annually, with 84% going to hospitals. Blase said the payments, as made through managed care organizations, circumvent upper payment limits that apply in Medicaid fee-for-service.

The restrictions in the OBBBA “established a comparable payment constraint on the Medicaid managed care side,” Blase stated in written testimony for the hearing. The legislation requires SDPs to phase down from the average commercial rate to the Medicare rate in expansion states and 110% of Medicare in non-expansion states.

Rural hospital funding becomes a partisan dividing line

Conversation at the hearing also focused on how the OBBBA will affect rural hospitals.

“Obviously, it’s a complicated problem,” Blase said. “You had rural hospitals that were struggling before the bill last year was passed.”

He cited a report by HHS’s Assistant Secretary for Planning and Evaluation (ASPE), which concluded that among rural hospitals that closed between 2011 and 2023, occupancy tended to be below 50% and declining. In a majority of cases, the closed hospitals were adjacent to urban counties.

Blase also touted the Rural Health Transformation Program (RHTP), which is set to disperse $10 billion per year to states from 2026 through 2030.

However, there are questions about the degree to which the RHTP will support hospitals and other providers. In written comments submitted Aug. 5, the American Hospital Association said CMS “should lift the 15% funding cap it imposed on provider payments and the 20% cap it imposed on infrastructure and capital improvement funding for years two through five of the program.”

At the hearing, Democrats said the RHTP is not sufficient to counter healthcare spending cuts that were projected to total more than $900 billion over a decade under the OBBBA (the KFF analysis, comparing the CBO’s January 2025 and February 2026 baseline estimates, puts the spending decrease at $503 billion spanning 2025 through 2035 but suggests that likely is an underestimate).

Sen. Tim Kaine (D-Va.) said the Medicaid cuts were cited in the recent closures of units at three rural Virginia hospitals, along with the shutdowns of nine clinics.

“They closed even though they knew that Congress had tried to provide a little bit of money [in the RHTP] to try to help bridge this problem,” Kaine said.

Program-integrity proposals target eligibility and enrollment

Another conservative policy analyst, Jonathan Ingram of the Foundation for Government Accountability, said Medicaid program design should be addressed.

One example is the opportunity for hospitals to conduct presumptive eligibility determinations. Ingram said 43% of sampled spending on presumptively eligible Medicaid enrollees was found to be improper, according to a 2019 CMS audit.

He said Congress should enact legislation that holds hospitals accountable for incorrect presumptive eligibility determinations. Also among his recommended steps are prohibiting beneficiary self-attestation for key eligibility factors and strengthening provider revalidation standards.

“Bureaucrats wrote rules that enroll people without verifying eligibility and pay providers that nobody has screened,” Ingram said. “It’s fraud by design.”

The Medicaid debate and the midterms

Democrats noted that most of the OBBBA’s Medicaid impacts, including the work requirement and the cuts to provider payments, won’t be felt until 2027 and later. Thus, the legislation may not factor significantly into the 2026 midterm elections.

Nonetheless, recent hospital financial reporting includes signs of what could be in store, said Sen. Sheldon Whitehouse (D-R.I.). For-profit health systems reported increasing payer-mix challenges arising from the expiration of enhanced subsidies for buying Affordable Care Act marketplace insurance, indicating the potential impact of jumps in uninsurance.

HCA Healthcare and Community Health Systems both lowered their full-year 2026 projections due, in part, to increases in self-pay patients. Universal Health Services cited Medicaid SDP revenue uncertainty in adjusting its forecast.

“What we are seeing is that the entities that receive the Medicaid funding are having to start doing their budgeting for the trillion-dollar cuts,” Whitehouse said, mentioning hospitals, physician practices and nursing homes. “It’s responsible to look forward, and as they’re doing that, they’re starting to say, ‘Our numbers don’t work anymore.’”