Hospital financial performance improves as Medicaid funding risks grow

Going back to early 2026, hospital and health system financials have started to reflect industry responses to H.R. 1, the One Big Beautiful Bill Act (OBBBA).

In new reporting (registration required) from Strata Decision Technology on first-half 2026 trends, health system financial performance improved over the six-month period, even as margins remained tight. After falling to negative 0.6% in January, according to data on more than 2,200 hospitals, year-to-date median operating margin reached positive territory by March and increased to 0.7% in June.

While not exactly robust, the improvement partially indicates the ongoing preparations for the OBBBA. Changes in store for Medicaid in 2027 and beyond, including potentially substantial decreases in enrollment and provider reimbursement, are driving increased attention to scenario modeling and longer-term planning, said Alina Henderson, vice president for healthcare solutions and partnerships at Strata.

“The H.R. 1 impacts, as projected in bull-bear scenarios, are pretty seismic,” Henderson said. “Organizations have really started to prepare for that, and they’ve started to tighten up their spending. They’ve started to focus on cost containment.”

Hospitals shift to more targeted cost containment

Cost containment is not a new strategy in hospital C-suites, but the strategy is becoming more nuanced.

“Organizations are understanding they have to be more targeted as they as they think about that,” Henderson said. “They have to be more specific.”

Hospitals and health systems with a thorough understanding of their markets and patient populations are able to be precise in their approaches, such as by making the decision to say, “We need to stop spending our dollars on this high-acuity kind of cost infrastructure because that’s not what our patients need,” Henderson said. “We have more a community of younger generations, and we need to provide primary care, and we need to invest in pediatric.”

Cost containment is a component of margin management, but not all margin management is cost containment.

“Margin management in a lot of organizations and a lot of regions, in particular, means growth,” Henderson said.

“I make almost [a] joke that a margin management program in Florida is building a hospital,” she said. “That’s not the case in a lot of other places. But they see their volume, they know their patients, they know what their communities are demanding, and they’re meeting them where they are.”

Payer constraints increase pressure to reduce operating costs

Ongoing challenges are made starker by the financial stress affecting all corners of the healthcare system. In the current environment, even large providers cannot expect to compensate for the impending Medicaid payment decline by leveraging more money from commercial insurers.

“Payers don’t have that much margin left,” said Tyler Higgins, leader of the Strategic Cost Reduction practice at AArete, which works with both providers and payers.

Insurers also have increasingly little leeway to shift costs to members at a time when increases in premiums and deductibles make the affordability of healthcare a leading concern of U.S. consumers.

“It seems like the only avenue now is [to find] the actual avenue to cost takeout within the system,” Higgins said.

For providers, such strategies can range from streamlining the operating model to revamping the business structure. Considerations include how to right-size staff, purchased services, IT and supply chain.

“Try to do that now before it’s too late,” Higgins said. “In a health system, ‘too late’ can happen quickly, and you’ll be upside down financially.”

Medicaid coverage changes could increase emergency department demand

A particular area of operational strain under the OBBBA is expected to be the emergency department, which will have to accommodate a potential influx of newly uninsured patients. Emergency department (ED) visits already have been trending upward post-pandemic, although a 2025 report presented data showing deceleration from 8% to 6% growth over consecutive 12-month periods ending in Q2 2025.

However, that was before the expiration of enhanced subsidies for buying Affordable Care Act coverage contributed to an enrollment reduction of at least 2.9 million between 2025 and 2026 (CMS says a share of the decline stems from removed or blocked enrollments as part of program-integrity efforts).

In 2027, the OBBBA will affect Medicaid enrollment. That especially looks to be true in expansion states, where the work requirement and increased frequency of eligibility checks will take effect Jan. 1, except in states where CMS grants a delay on implementation of the work requirement.

“A certain population of folks [for whom] their front door to healthcare was their PCP [primary care provider] or something of that nature, it’s now going to be the emergency room,” Higgins said.

One trend forecasted in a 2026 report by Vizient examining shifts in care through 2036 is a further 6% increase in adult ED visits: “As insurance coverage contracts, more patients are expected to delay preventive care and rely on emergency departments.”

Hospital hiring could face pressure from Medicaid funding changes

A recent report from the Peterson-KFF Health System Tracker put the looming changes in the context of healthcare job growth. Over a 12-month period ending in September 2026, the healthcare sector added 372,000 jobs, compared with 124,000 for the rest of the U.S. economy. A February 2026 Wall Street Journal article headline referred to healthcare as the “Engine of America’s Labor Market.”

But the Peterson-KFF report identifies the OBBBA as a factor that could upend the job picture, with cuts in revenue possibly restricting hospital hiring.

“Some healthcare settings may see a drop in demand and/or an increase in uncompensated care as a result [of the OBBBA],” the report states. “These revenue strains may place an especially strong squeeze on hospital revenues and their employees, because hospitals are legally mandated to treat and stabilize emergency patients regardless of their ability to pay.”