What providers stand to lose with Medicaid payment program limits

Modern Healthcare – Tuesday, July 15, 2025
By Caroline Hudson

Providers face a widening gulf between Medicaid pay rates and those of other payers, and are scrambling to determine what it means for their bottom line.

Steep Medicaid cuts in the law President Donald Trump signed July 4 have dominated conversations among providers and industry groups, particularly the fate of supplemental payment programs such as state-directed payments and provider taxes. Providers are getting a clearer look into what recent cuts in the funding they use to cover care costs means financially and operationally.

Here’s a look at why state-directed payments, and provider taxes in particular, are important funding mechanisms and what providers stand to lose under the new law.

What are provider taxes and state-directed payments?

Both are used as mechanisms to supplement Medicaid funding, which is jointly funded by federal and state governments. The goal is to close pay gaps between Medicaid, which has some of the lowest reimbursement rates, and other payers.

Provider taxes, fees or assessments allow states to charge providers fees and use the money to help cover the state-funded portion of Medicaid services.

Directed payments allow states to enforce certain reimbursement rates for health plans as part of Medicaid managed care. Examples include fee schedule restrictions or uniform rate increases.

What changes will be implemented under the new law?

New state provider taxes are banned. Existing taxes must be reduced from 6% of a provider’s net patient revenue to 3.5% over several years. Congress also tightened the standards for what provider taxes are permitted.

States that expanded Medicaid under the Affordable Care Act of 2010 can no longer use directed payments to reimburse providers more than 100% of Medicare rates. The cap is set at 110% of Medicare rates for states that have not expanded Medicaid.

How common are these programs?

Forty-nine states and the District of Columbia had at least one provider tax or fee in place to fund Medicaid in fiscal year 2024, according to the Kaiser Family Foundation’s Medicaid budget survey.

More than $110 billion a year was projected to flow through directed payment agreements approved as of last August, according to the Medicaid and CHIP Payment and Access Commission.

What is the potential financial impact of policy changes?

Industry groups are painting a grim picture of how the changes will impact provider revenue.

The Greater New York Hospital Association estimates about half of the $8 billion it expects hospitals to lose due to the new law will be tied to taxes and state-directed payments. That includes a $1.5 billion reduction in provider tax revenue by 2032 and up to a $1 billion impact tied to changes on state-directed payments.

“Over the last five years, we went from the heroes of the COVID pandemic to today an afterthought,” said Kenneth Raske, president of Greater New York Hospital Association. “You can destroy an institution in a heartbeat, but it takes decades to build one.”

Josh Dobson, president and CEO of the North Carolina Healthcare Association, said most of the Medicaid cuts will hit the Healthcare Access and Stabilization Program, a directed payment model launched as part of the state’s Medicaid expansion in 2023. He estimated Medicaid cuts in the state will swell to $32 billion over the next 10 years due to the changes in provider taxes and state-directed payments.

Colorado Hospital Association President and CEO Jeff Tieman estimated $10.4 billion in cuts over the next five years due to the provider tax changes. The state of Colorado applied for a new directed payment program just before the law passed, and the Centers for Medicare and Medicaid Services review process will determine whether the program complies with the new law, Tieman said.

The new law will lead to an estimated $66 billion to $128 billion in Medicaid losses in California over the next decade, mostly tied to the limitations on provider taxes and state-directed payments. That doesn’t include uncompensated care, said Carmela Coyle, president and CEO of the California Hospital Association.

How are providers responding?

Providers are reeling from the impending cuts and scrambling to determine how their balance sheets will be affected, though that process may take weeks or months.

“Like other systems, we’re reviewing the final language closely to determine impacts and make necessary adjustments,” said a spokesperson for Tampa General Hospital in Florida.

A Medical University of South Carolina Health spokesperson said the system is communicating with federal, state and local lawmakers about the new policies.

Some are hoping Congress will lessen the blow through other means, such as renewing the exchange premium tax credits that are set to expire at the end of the year.

Banner Health President and CEO Amy Perry said the system is reviewing how the cuts will impact rural and underserved areas in its footprint, including its critical access hospitals in Nebraska, Colorado and Arizona.

Still, many providers are staying mum and referring questions to industry groups. About a dozen health systems declined to comment or did not respond to requests for comment for this story.

What actions can providers take?

Some providers are choosing to focus on factors they can control as they flesh out what the law will mean for their operations.

Ardent Health CEO Marty Bonick said the system will continue to focus on operational efficiency and innovation to strengthen its bottom line.

“We have to think differently, and I think we have been. How do we do more with less? How do we streamline workflows, embrace automation and artificial intelligence? I think the organizations that really can lean into that mindset are going to be the ones that ultimately weather the storm,” Bonick said.

Raske from the Greater New York Hospital Association said his priority is making sure stakeholders know about the pending losses. He said the trade group is having discussions with New York state, but at this point, he doesn’t know if the state will be able to help ease the effects.

Healthcare leaders said providers will have to make tough choices about cutting employees and services to offset the coming impact.

“States simply cannot backfill the losses,” Coyle said. “Hospitals are going to have to understand what they can do to try to control their costs in this environment.”

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