Hospital Medicaid pay cuts spread as state budget gaps widen

Modern Healthcare – Wednesday, October 8, 2025
By Alex Kacik

States are ratcheting down Medicaid reimbursement rates, squeezing providers already bracing for short- and long-term cuts from state and federal governments.

Idaho and North Carolina have lowered Medicaid payments amid rising healthcare costs and budget pressures. Other states are expected to follow suit to offset budget shortfalls that are set to deepen when federal Medicaid funding declines under the new tax law.

More people are using healthcare services and expensive medications as the population ages, driving up Medicaid spending. On top of that, states often look to healthcare and education cuts when budgets are tight. But providers warn they can’t afford to limit spending as demand for care grows.

“We are doing a tremendous amount of advocacy because we know there is a possibility of state Medicaid cuts, and we are hopeful the state can come up with a solution so access to care is not an area we compromise on,” said Tesa Anewishki, president and CEO of Loretto Hospital in Chicago.

States run the risk of increasing utilization and inflating long-term healthcare costs if patients end up in hospital emergency rooms with severe conditions after they lose access to care, health system executives said.

Cuts to the program for patients with low incomes and disabilities will likely hit rural providers the hardest.

About half of Idaho’s hospitals are critical-access facilities. On Sept. 1, the state cut Medicaid pay rates 4% for nearly all Medicaid providers except federally qualified health centers, clinics in rural healthcare deserts and tribal providers. Despite Idaho’s population growth, hospitals are weighing cuts to Medicaid-dependent services such as labor and delivery and mental healthcare, said Toni Lawson, chief advocacy officer for the Idaho Hospital Association.

About half of the hospitals in the Gem State are operating with less than a 1% margin, according to Idaho Hospital Association data. Lawson said facilities will struggle to absorb a 4% state Medicaid cut, a 2% hit this year to Medicare via sequestration and potential coverage losses tied to Medicaid work requirements that take effect late next year under the new tax law.

“Small hospitals and other vulnerable providers are having to make tough decisions about whether they can subsidize these services they are losing money on but have significant value to the community,” she said.

Slashing Medicaid funding and limiting coverage hits a growing payer source for hospitals, particularly those in rural communities.

Medicaid payments have become a bigger share of rural hospitals’ net patient revenue, rising from 10.9% in 2018 to 12.1% in 2024, according to Modern Healthcare Data + Insights estimates.

Nearly 40% of North Carolina’s hospitals are in rural areas. On Oct. 1, North Carolina implemented Medicaid pay rate reductions of at least 3% for most Medicaid providers to try to balance its fiscal 2026 budget.

Greenville, North Carolina-based ECU Health expects to lose $50 million in revenue because of the Oct. 1 Medicaid cuts. That estimate does not include the potential losses stemming from the “One Big Beautiful Bill.”

“Despite these challenges, we remain committed to advocating for policies that support the most vulnerable rural areas of the state, regions where access to care is already severely limited and where there is significant potential for state and federal investment to stabilize and strengthen rural health care services and local economies,” an ECU spokesperson said.

Illinois may be the next state to impose healthcare cuts.

Illinois Gov. J.B. Pritzker (D) late last month tasked state agencies to identify 4% in cuts to try to stabilize the 2026 budget.

Roughly 76% of Loretto Hospital’s patients have Medicaid coverage, while 11% do not have insurance and receive charity care. The safety-net hospital hopes to shore up its finances by recruiting more specialists through its physician fellowship program and improving its coding and documentation via its revamped electronic health record.

But if state overseers pare back healthcare spending, Loretto may be forced to close facilities or trim services such as senior and women’s health centers and its substance-use disability rehabilitation program, Anewishki said.

“These facilities may be lifelines for our most vulnerable,” she said. “We can’t talk about eliminating healthcare disparities and decreasing life expectancy gaps and eliminating services in the same conversation.”

Indiana is considering another approach to reduce Medicaid spending.

The Hoosier State enacted a law this year that established a state-directed payment program initially designed to increase providers’ Medicaid reimbursement. But if the Centers for Medicare and Medicaid Services approves a proposal from the state that would tack price caps onto the law, it could do the opposite, executives at the Indiana Hospital Association said.

Under the proposal, the state would reduce a health system’s Medicaid state-directed payments by 25% if its average commercial prices are higher than 265% of the Medicare rate, the hospital association said.

If approved, the proposal could result in a nearly $1 billion reduction in Medicaid reimbursement to Indiana hospitals next year, the association estimated. About $8 million of that would fall on small, county hospitals.

CMS did not return a request for comment.

The association disputes the state’s calculation of average commercial prices, said Scott Tittle, president of the Indiana Hospital Association.

“Hospitals are already struggling,” he said. “Fourteen birthing units have closed since 2019. If this proposal goes through, we are worried about significant losses in access to services many Hoosiers rely on.”

More states will likely decrease provider Medicaid reimbursement as financial pressures mount, experts said.

“I wouldn’t want to be a state budget director right now, it is a nightmare,” said Jeff Goldsmith, president of consultancy Health Futures.

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