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Healthcare Providers’ Path from Crisis to Stability Amidst Potential Medicaid Cuts

As Medicaid cuts loom, health systems are facing severe downturns. For some hospitals, the ability to improve margins and streamline operations will be crucial for their survival.

Navigating Medicaid Cuts to Hospitals and Health Systems

Medicaid cuts will have both immediate and long-term impacts to the healthcare ecosystem and potentially devastate health systems, hospitals and other healthcare providers both operationally and financially. Recent estimates suggest healthcare providers could face a revenue loss of $80 billion in 2026, with hospitals being at the greatest risk, should states choose to drop expansion as a result of federal cuts.¹

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Over the last few years hospitals across the nation have been closing at an alarming rate, often due to financial, operational and regulatory challenges, leading to service access issues in communities, particularly in rural and other areas with high Medicaid utilization.² Medicaid cuts may further amplify access and capacity constraints, causing concern risk of creating healthcare deserts and increasing health disparities. Regardless of a provider’s reliance on Medicaid funding, these reductions will have pass-through effects as risks are transferred to other patients, ultimately increasing the costs of care and limiting access to quality care systemwide.

Policy Background

There are several routes that the federal administration may take to reduce Medicaid spending directed specifically at hospitals and health systems. Programmatic changes could include the following:

Reduction of Federal Medical Assistance Percentage (“FMAP”) from 90% to 50%-83% to align with traditional rates, thus shifting funding responsibility to states
Capping per capita funds or grants to states on the basis of number of enrollees or states’ historical Medicaid spending, thereby shifting the responsibility to manage funding to the states
Intensifying work requirements and reinforcing eligibility hurdles to reduce the number of eligible and enrolled individuals
Reducing waste, fraud and abuse in the Medicaid system by addressing improper spending and payments, though potentially creating operational delays for users

How Healthcare Providers Can Respond to Impacts

Healthcare providers must identify their risk exposure and develop mitigation plans to effectively navigate the complexities these regulatory changes may pose. Particularly, hospitals and health systems with greater risk must focus on strategies that minimize the impacts related to declining reimbursements, higher uninsured populations and increased scrutiny of patient care services provided.

Impact: Medicaid Costs to States Will Significantly Decrease Funding to Health Systems
Depending on a state’s economic situation, states may limit or forgo Medicaid expansion, leading to significant cuts in reimbursements to hospitals and health systems, impacting their revenue for operations and investments. States may address funding deficits by reallocating budgets, raising taxes or altering Medicaid eligibility and benefits. Despite these measures, providers may continue to face funding shortfalls and declining payments, leading to further financial distress that will necessitate major turnaround efforts, service consolidation and even closures, particularly in low-income urban and rural areas with high Medicaid enrollee populations.

Response:

Develop and leverage margin improvement strategy: Evaluate revenues and costs through clinical and non-clinical improvements (workforce, technology, procurement). Explore financing strategies that leverage working capital, ROI and forecasting to close financial gaps.
Expand alternate revenue strategies: Invest in value-based care models and shared savings programs such as accountable care organizations (“ACOs”) to prioritize improved patient outcomes and reduced costs through lessening the financial burden of care.³
Evaluate service rationalization and closure opportunities: Analyze profitability and community need by service line and rationalize service offerings to ensure quality care can be provided for prioritized patient care. Consider closing locations to improve overall cost structure in respective service area.
Develop strategies to reduce financial distress: If necessary, consider turnaround, restructuring, or merger and acquisition strategies such as joint ventures, partnerships and asset sales.

Impact: Shift of Medicaid Enrolled Population to Uninsured Group
Reductions in per capita caps and block grant funding, along with stricter work requirements, will decrease Medicaid enrollment and increase uninsured populations in many states. Estimates portray uncompensated care costs for providers rising by nearly $19 billion in 2026.⁴ Medicaid is a major source of funding for long-term care providers, nursing homes, community health centers, safety net hospitals, pediatricians and mental health providers. For many of these hospitals, more than 30% of their patient demographic is underinsured or covered by Medicaid.⁵ For the uninsured, patient access limitations may lead to deferment of preventative care in cost-effective settings like primary and ambulatory centers, resulting in increased volumes at emergency services and longer stays in acute care facilities.

Response:

Optimize operational and workflow efficiencies: Maximize patient throughput by optimizing workflows in the emergency department and managing bed capacity in in-patient settings. Eliminate operational and material waste and use information flow to redesign efficient processes in key areas that cause significant healthcare delivery delays outside the core patient flow.
Boost coordination of care within systems: Optimize care coordination systems to manage patient care across various providers as alternative sites become limited for Medicaid patients. Ensure multi-disciplinary teams communicate effectively about bed capacity and care programs to efficiently transfer inpatient volume.
Implement robust member outreach strategies: Collaborate with Medicaid Managed Care Organizations (“MCOs”) to develop communication strategies and education programs about Medicaid eligibility and benefits, addressing information barriers for vulnerable populations and high-utilization areas.

Impact: Medicaid Reimbursement Denials and Delays
Increased scrutiny of fraud, waste and abuse within the Medicaid system may cause CMS to delay or deny payments to hospitals and health systems unless compliance is demonstrated. This adds an administrative burden, especially for resource-limited providers, who may face higher costs to appeal and justify payments, and potentially receive lower payments if documentation is not provided promptly.

Response:

Enhance Clinical Documentation Improvement (“CDI”) and compliance programs: Revenue cycle professionals should work with physicians and clinicians to identify opportunities to bolster compliance to their CDI and revenue integrity programs to maximize their claims output and reimbursement rates while reducing denials and overall compliance risk.
Optimize end-to-end revenue cycle: Given the potential influx of workload for Revenue Cycle Management (“RCM”) departments, providers should identify opportunities to bolster RCM teams through appropriate application of technologies and skill sets to drive operational efficiency.

Preparing for What’s Next: Strategic Options for Providers

Recognizing that each healthcare organization faces unique financial and operational challenges, a tailored approach is necessary to address margin pressures and long-term sustainability. A useful starting point is to evaluate key risk areas and develop a strategic playbook to inform decision-making. The review should include various scenarios, including the likelihood of meeting financial targets through margin/performance improvement initiatives, and in more severe cases, whether additional measures such as turnaround and restructuring are warranted.

The following diagram illustrates several focus areas our experts recommend to deliver margin and performance improvement solutions in focused areas to hospitals and health systems.

Margin & Performance Improvement Focus Areas

Additional areas of focus that can support broader transformation efforts may include: Service Line Rationalization: Conduct market analysis and financial projections on service lines that do not align with organization’s long-term strategy
Merge or Acquire: Consolidate operations with existing market players to continue to provide services to marginalized communities
Turnaround and Restructuring: For organizations most greatly impacted, capitalize on opportunities to restructure finances, operations, organization and assets to mitigate against potential bankruptcy

Staying Ahead of Regulatory Change
With significant Medicaid regulatory changes on the horizon, healthcare providers must be ready to adapt. Proactive planning is essential to mitigate financial and operational risks and to maintain continuity of care. Organizations may benefit from evaluating potential impact scenarios, identifying areas of vulnerability, and developing strategies to stabilize operations in a shifting landscape.

Footnotes:

1: Muoio, Dave, “Provider revenues to drop $80B in 2026 if cuts drive states from Medicaid expansion, analysis finds,” Fierce Healthcare (March 11, 2025).

2: Muoio, Dave, “Nearly half of rural hospitals in the red, 432 vulnerable to closure,” Fierce Healthcare (February 13, 2025).

3: Shannon McMahon and Claire Horton, “Our nation’s health suffers if Congress cuts Medicaid,” Kaiser Permanente (February 20, 2025).

4: Ibid.

5: Karl, Herring, and Ofengeym, “How States Support Safety Net Hospitals through Innovative Funding Approaches,” Manatt (Ocober 30, 2024).