Federal Cuts to Medicaid Could End Medicaid Expansion and Affect Hospitals in Nearly Every State

Abstract

• Issue: Recent debates about reducing federal support for the Affordable Care Act’s Medicaid eligibility expansion have focused on federal spending cuts, how states might respond, and potential loss of coverage. However, the potential impact on health care providers that serve Medicaid patients has largely been overlooked.
• Goal: To assess the potential financial impact on hospitals in states that would be affected by reduced federal support for the Medicaid expansion.
• Methods: We used Urban Institute estimates of coverage losses to project the financial impact on acute-care hospitals if reduced federal spending causes states to stop covering Medicaid expansion enrollees.
• Key Findings and Conclusion: A reduction in federal funding for Medicaid expansion — one of a number of policy changes that Congress is considering — could cause significant coverage losses. For hospitals in Medicaid expansion states, these cuts could lead to a 19 percent decline in operating margins, on average. Safety-net hospitals could be disproportionately impacted, as they treat a higher share of Medicaid and low-income patients. These facilities could see operating margins reduced by an average of 56 percent — and even more in certain states and rural areas. These adverse outcomes will affect not only Medicaid patients but also the entire community served by these hospitals, as lower revenues and increased uncompensated care could force hospitals to reduce staff or eliminate services.

Background

The U.S. Congress is considering deep cuts to federal Medicaid spending, as much as $880 billion over 10 years. According to the Congressional Budget Office, such cuts would represent a 12 percent reduction in federal Medicaid spending, totaling $7.5 trillion over that 10-year period.¹

Congress is considering a number of potential policy changes to achieve these cuts. Regardless of the chosen policy, federal spending reductions of this magnitude will greatly affect state Medicaid expenditures. These in turn will impact not only Medicaid beneficiaries but entire safety-net health care systems, which serve a wide array of patients and families. One of the methods that Congress is considering is to reduce the federal Medicaid matching rate for the Affordable Care Act (ACA) expansion population to each state’s general matching rate. The share of costs paid by the federal government (the Federal Medicaid Assistance Percentage, or FMAP) for the traditional Medicaid program varies by state from 50 percent to about 77 percent in the current federal fiscal year. However, the federal government currently pays an enhanced FMAP of 90 percent for enrollees who qualify as newly eligible under the ACA’s Medicaid expansion. This enhanced FMAP has helped to incentivize 40 states and the District of Columbia to expand Medicaid eligibility to nonelderly adults with incomes up to 138 percent of the federal poverty level — totaling more than 16 million people in 2024.²

Eliminating the enhanced FMAP for the Medicaid expansion population would reduce federal spending and shift those costs to the states. While it is difficult to predict exactly how states would respond to the reduced federal support, several states have already established statutory provisions regarding such changes. Nine states (Arkansas, Arizona, Illinois, Indiana, Montana, New Hampshire, North Carolina, Utah, and Virginia) have statutory triggers to discontinue the expansion when federal funding is reduced, and another three states (Iowa, Idaho, and New Mexico) that have statutes to mitigate the financial impacts when federal funding decreases and would likely end the expansion as a result. Other states could respond by reducing Medicaid enrollment, cutting provider and health plan payment rates, eliminating optional benefits, raising taxes, or some combination of these measures.

For this analysis, we assume that eliminating the enhanced FMAP would cause all states to end the Medicaid expansion. States would have to significantly increase how much they pay for the Medicaid program, and it is unlikely any state would be able to absorb this higher cost over an extended time. Under this scenario, the Urban Institute estimates that about 10.8 million people would become uninsured and another 5.1 million would either enroll in employer-sponsored health coverage or purchase nongroup health insurance, assuming the full impact of the Medicaid coverage loss occurs in 2026.³

Recent reports have focused on the potential loss of coverage for Medicaid beneficiaries, but there has been little discussion about the impact on health care providers.⁴ Coverage losses will impact hospitals in particular by reducing their revenue and increasing uncompensated care costs. These adverse outcomes will affect not only hospitals and Medicaid patients but also the entire community. That’s because lower revenues and increased uncompensated care could force many hospitals to reduce staff or eliminate important services.⁵

In this brief, we examine the potential financial impact on hospitals in the 40 states and the District of Columbia if the Medicaid expansion were discontinued. Our analysis estimates the impact of Medicaid coverage loss on revenues, uncompensated care costs, and financial margins for hospitals in the affected states. For modeling purposes, we assume that Medicaid expansion is fully discontinued in all states in 2026. We present impact estimates by state and focus on two specific groups of hospitals: safety-net hospitals and rural hospitals. (See “How We Conducted This Study” for details.)

How Medicaid Coverage Losses Impact Hospital Finances

Reductions in Medicaid coverage will impact hospitals by reducing Medicaid payments and increasing uncompensated care costs, resulting in lower hospital operating margins. Exhibit 1 shows the projected 2026 baseline (current law) revenues and expenses by payer source for 2,958 general acute-care hospitals in the 40 states and the District of Columbia that expanded Medicaid coverage under the ACA. The Hospital Finance Simulation Model (HFSM) incorporates the following dynamics of how changes in coverage across a population would affect hospital utilization, costs, and revenues:

1. The Urban Institute estimates that about 15.9 million Americans would lose Medicaid coverage. Based on this projected level of coverage loss, we estimate that hospitals’ expenses for Medicaid patients would decline by $37 billion (25.2%) and corresponding revenues would decline by $33.7 billion (25.4%).
2. The Urban Institute estimates that of those who lose Medicaid coverage, about 10.8 million would become uninsured. With this change in coverage status, we estimate that hospitals’ uncompensated care expenses would increase by $14.3 billion (63.6%) as former Medicaid beneficiaries lose their coverage and become uninsured.
3. The Urban Institute further estimates that of the Americans losing their Medicaid coverage, about 5.1 million would either enroll in employer-sponsored health insurance or purchase nongroup health plans. For this segment, we estimate that hospitals’ expenses for commercially insured patients would increase by $11.5 billion (2.4%) and corresponding revenues would increase by $14 billion (2.5%), based on the assumption that payment rates would remain similar to those for current commercially insured patients.

These dynamics result in a reduction in hospital expenses of $11.2 billion because people are projected to use hospital services less when uninsured compared to being covered by public or commercial insurance. Hospital revenues are projected to decline by $19.8 billion (representing $33.7 billion in reductions in Medicaid revenues partially offset by a $14 billion increase in commercial insurance revenues). Thus, hospital net operating income is projected to decline by $8.6 billion (about 20%), which would reduce operating margins from 3.8 percent to 3.1 percent and margins on patient care from −3.3 percent to −4.2 percent.

To help offset hospitals’ increased uncompensated care costs, Medicare could increase Disproportionate Share Hospital payments and Uncompensated Care payments to hospitals and local governments could increase tax appropriations to hospitals for providing uncompensated care. However, we did not assume that these amounts change in this analysis.

How Medicaid Coverage Losses Impact Safety-Net Hospitals

The results we present above illustrate the potential effects on the 2,958 general acute-care hospitals in Medicaid expansion states. However, those effects can vary dramatically across different groups of hospitals, depending on their patient–payer mix and the level of Medicaid expansion enrollment in their respective states. Medicaid coverage losses would disproportionately impact safety-net hospitals because these providers treat a higher share of Medicaid and low-income patients.

On average, the 567 safety-net hospitals identified in this study that are located in Medicaid expansion states are estimated to receive about $85 million per hospital in Medicaid revenues (24% of net patient care revenues) and provide $9.7 million per hospital in uncompensated care costs (2.6% of total operating expenses) in 2026 (see Appendix B for a list of these hospitals). In contrast, other acute-care hospitals are estimated to receive about $35 million per hospital in Medicaid revenues (10% of net patient care revenues) and provide $7.1 million per hospital in uncompensated care costs (1.9% of total operating expenses).

Exhibit 2 shows that net operating income for safety-net hospitals would decline by $5.0 billion, which would reduce operating margins from 3.9 percent to 1.7 percent (56.3% reduction) and further reduce margins on patient care from −6.8 percent to −9.7 percent.

Safety-net hospitals are heavily dependent on revenues received from treating Medicaid patients. As a result, the reduction in Medicaid revenues due to eliminating the Medicaid expansion has a larger impact on total operating revenue loss (−3.8%) compared to the average across all hospitals (−1.8%). Because most of these patients who would have been covered by Medicaid would likely become uninsured, safety-net hospitals would experience a larger increase in uncompensated care costs (80.5%) compared to the average across all hospitals (63.6%).

This dynamic would reduce net operating income by $5.0 billion, a 57.9 percent reduction, which would result in a decrease in operating margins of 2.2 percentage points and a reduction in patient care margins of 2.9 percentage points for safety-net hospitals compared to reductions of 0.7 percentage points and 0.9 percentage points respectively across all acute-care hospitals.

State-Level Impacts of Medicaid Coverage Losses on Safety-Net Hospitals

The loss of Medicaid coverage due to reduced federal funding for Medicaid expansion will have a significant impact on Medicaid revenues and uncompensated care costs for safety-net hospitals in all affected states. However, the financial impact on hospitals will vary across states depending on the size of the state’s Medicaid expansion population that loses coverage and the proportion of total Medicaid beneficiaries affected. In addition, safety-net hospitals in expansion states have benefited from reduced uncompensated care costs, a benefit that would now be reversed.

For example, we estimate that the eight safety-net hospitals in New Mexico will see Medicaid revenues reduced by 35 percent, uncompensated care expenses increase by 122 percent, and operating margins decrease from 5.5 percent to −0.5 percent (a decline of 6.0 percentage points). Similarly, the 55 hospitals that meet our criteria for safety-net hospitals in Kentucky could see Medicaid revenues reduced by 32 percent, uncompensated care expenses increase by 113 percent, and operating margins reduced from 7.7 percent to 2.0 percent (a decline of 5.7 percentage points).

Exhibit 3 presents changes in Medicaid revenues, uncompensated care costs, and operating margins for safety-net hospitals in each expansion state. Appendix A1 and Appendix A2 contain additional information about the impacts on safety-net hospitals and rural hospitals in each state.

How Medicaid Coverage Losses Impact Rural Safety-Net Hospitals

We found that among safety-net hospitals, those located in rural areas will be the most severely impacted by reduced federal support for the Medicaid expansion.⁶ Rural hospitals already run on slim margins and operate at a loss with respect to patient care margins. The 316 rural safety-net hospitals that we identified in the Medicaid expansion states would be disproportionately impacted if the federal government reduced funding for the Medicaid expansion (Exhibit 4). Eliminating the Medicaid expansion would reduce net operating income by more than 60 percent, which would further erode operating margins for these already struggling hospitals.

Hospitals in rural communities have been closing at an alarming rate. Since 2005, 194 rural hospitals have closed or converted to providing only outpatient services, and a further reduction in operating margins would likely intensify this trend.⁷ Additionally, more than 700 rural hospitals (a third of all rural hospitals) are currently at risk of closing because of serious financial problems (including losses on patient services, insufficient revenues from other sources to offset these losses, and low financial reserves), and more than 300 are at immediate risk of closure.⁸

Discussion

The improved financial stability experienced by many hospitals following the ACA’s Medicaid expansion has allowed them to hire new staff and maintain or offer new services to their communities. These improvements in hospital finances and services would be jeopardized if states discontinue the expansion due to reduced federal support for the program.

The financial impact of such a policy change would not only affect hospitals and Medicaid patients but also their surrounding communities, particularly in poor and rural areas.⁹ Many rural hospitals already experience negative operating margins, and the additional pressure from further reductions in Medicaid revenue and increases in uncompensated care could accelerate closures.

When a hospital closes, the effects ripple throughout a community, particularly if it is the only health care facility in the area. Many physicians relocate to another hospital or leave the area, further reducing timely access to health services and emergency care. Research shows that the economic impact of a hospital closure is felt immediately, with per capita income falling and the unemployment rate rising.¹⁰

Congressional proposals to reduce federal funding for Medicaid could have unintended effects on health providers, particularly safety-net hospitals and rural hospitals. The loss of Medicaid revenue could end up reducing access to care for entire communities, regardless of what type of health insurance individual residents have. For care that people are able to access, the cuts could raise costs as providers struggle to keep their doors open.