Texas Medicaid hospital funding gap grows amid CMS delays on FY27 approvals

Hospitals in Texas are facing a substantial gap in anticipated Medicaid funding, with CMS currently declining to approve more than $9.8 billion in scheduled FY27 supplemental payments.

Since Texas’s state fiscal year began Sept. 1, CMS has withheld funding from three state-directed payment (SDP) programs, including the Comprehensive Hospital Increase Reimbursement Program (CHIRP). The resulting impact at hospitals was projected to be $27 million per day, the Texas Hospital Association (THA) said in a report released in August.

Other affected SDPs help fund Medicaid services provided by medical groups and rural health clinics, although CHIRP accounts for more than $9.1 billion of the expected amount.

The THA anticipated an initial Medicaid claims backlog that would take at least 90 days to clear when including administrative processing, with expectations that the bottleneck will only grow if the standoff persists.

“Because of the unpaid Medicaid backlog that’s accumulating, even briefly stalling [SDP] approval starves hospitals of cash for many months,” the THA’s report states. “This is a painful, destabilizing situation that can push hospitals into riskier methods of funding operations, like taking on debt.”

Provider-tax methodology is at the center of the dispute

The disagreement between the Trump administration and the Republican leadership of Texas relates to the collection of provider taxes used to help fund Medicaid SDPs.

As described in Aug. 7 correspondence from Gov. Greg Abbott to HHS Secretary Robert F. Kennedy Jr., part of the impasse is that the state’s provider taxes are based on a hospital’s total net patient revenue. CMS instead is applying federal provider-tax requirements separately to permissible classes of services (i.e., inpatient, outpatient) and has questioned Texas’s use of aggregate hospital net patient revenue in those calculations.

The agency also has structural concerns regarding the state’s provider-tax system, specifically with how local governments are grouped into Health Care Provider Participation Districts (HCPPDs) for the purpose of tax assessment.

The concerns “must be resolved before the proposal can be approved,” CMS wrote in Sept. 3 correspondence (see page 17) to Texas’s Health and Human Services Commission (HHSC).

If the state ultimately changes its tax methodology to address CMS’s concerns, separating provider-tax calculations into inpatient and outpatient services could significantly change tax assessments for hospitals depending on their mix of revenue across the two settings.

Texas contends that CMS is departing from its prior approach by conditioning approval of the SDP application on resolution of the separate financing dispute.

“The state separately acknowledges that CMS and Texas continue to have discussions regarding certain financing structures in place in Texas and requests that CMS refrain from inappropriately conflating those discussions with the preprint approval process, thereby, unjustifiably delaying approval of this preprint [i.e., the SDP application],” reads Sept. 9 correspondence from HHSC.

Texas cites OBBBA protections for existing provider taxes

If the tax revenue is deemed to derive from an impermissible arrangement, Texas cannot use that revenue to draw in federal matching funds. Thus, CMS says it is authorized to defer those funds while the issue is resolved.

One point of defense in Abbott’s letter is that the One Big Beautiful Bill Act (OBBBA) specifically allows Medicaid non-expansion states such as Texas to maintain the hold-harmless thresholds in their current provider taxes as long as the tax was enacted and imposed before July 4, 2025, and did not exceed the regulatory limits that were in place at the time.

“CMS’s request directly undermines the protections recently passed by Congress and signed by the President in the One Big Beautiful Bill Act,” Abbott wrote.

The governor requested written assurances that CMS would not remove the OBBBA’s grandfathering protection for Texas’s provider taxes after the state makes the requested changes, and that CMS would not retroactively disallow or recoup previously issued Medicaid funding.

CMS and Texas continue to work on a memorandum of understanding that could resolve the situation. The agency says it is providing technical assistance, while Abbott indicated that Texas would be willing to modify its tax structure if CMS can provide the requested assurances.

The dispute illustrates the Trump administration’s effort to tighten rules around provider taxes and SDPs in tandem with the OBBBA. In some respects, the administration is going beyond the OBBBA’s relevant provisions.

“The agency is working with all states to ensure compliance with both longstanding and recent statutory requirements and remains engaged with the state on these issues,” CMS said in a written statement about the Texas situation.

Hospitals assess liquidity and service-line exposure

In the meantime, Texas hospitals are left to navigate a potentially major financial crunch.

“If the federal government continues to withhold payment approvals, Texas hospitals will be forced to make difficult decisions about cuts to service lines, such as NICU and labor and delivery units,” John Hawkins, CEO of the THA, said in a Sept. 1 written statement. “No community wants that. Hospitals that serve primarily Medicaid patients — and hospitals that are already barely scraping by — will be hurt hard and fast, and we need federal action now.”

Services that the THA says are particularly exposed to a prolonged Medicaid payment disruption include maternity and pediatric services, among others:

• Labor and delivery, obstetric and neonatal care
• Well-child visits
• Mental health and substance use hospitalizations
• Treatment of pediatric cardiac and respiratory conditions
• Treatment for allergic or autoimmune disease

Rural hospitals, which tend to have less cash on hand, stand to be particularly affected, the THA noted.