The law that he’s fighting is on track to pull $911 billion in federal funding for Medicaid over a decade, and hospitals likely figured that was the worst of it. But the two rule changes the Centers for Medicare and Medicaid Services (CMS) has since proposed would go hundreds of billions deeper, executives told Politico — deep enough to potentially force hospitals to cut staff, close service lines, merge with bigger systems or shut down for good.
“Our core message to CMS is to stick to the statute. Congress cut enough,” said Robert Nelb, director of policy at America’s Essential Hospitals, a Washington-based association of hospitals that treat large numbers of low-income patients. “There’s no need to cut any more out of the Medicaid system at a time when the safety net is really struggling.”
What the new rules could do
Medicaid runs on a split bill: the states put up part of the cost while Washington matches it. For decades, many states have taxed their own hospitals, which enlarges the state’s share on paper and pulls down a bigger federal match. The extra money then returns to those same hospitals as larger reimbursements.
Congress, however, narrowed that practice last year, along with state-directed payments — a separate tool states use to lift reimbursement rates for chosen providers, rural hospitals among them. But the CMS’s two proposed rules would squeeze both even harder.
How much harder? The CMS’ own actuaries put the provider tax rule at $246 billion in reduced federal Medicaid spending from fiscal 2026 through 2035, against the roughly $332 billion the Congressional Budget Office (CBO) scored for the provider tax and state-directed payment provisions Congress passed, according to an analysis by federal health officials.
The hit to hospitals, however, runs larger than either number because federal savings and provider revenue aren’t the same measure. Georgetown University’s Center for Children and Families read the CBO’s impact analysis to mean the two rules together would cut payments to providers by about $750 billion once state dollars are counted alongside federal dollars.
For its part, the CMS frames both rules as efforts to protect Medicaid’s financial integrity. By its count, state-directed payments went from two states in 2016 to 41 today, accounting for over a quarter of all Medicaid managed care spending in fiscal 2025 and would grow from $107 billion in fiscal 2024 to $296 billion by fiscal 2034 if nothing changes. Federal prosecutors have kept up a steady run of Medicaid cases too, among them a $12.7 million kickback scheme in North Carolina.
And conservative groups, including the think tank Paragon Health Institute, have likened the hospital taxes to “money laundering,” arguing they let states hand federal taxpayers the bill for spending that the states signed up for themselves.
Hospitals don’t argue the system is perfect. “Everyone agrees Medicaid financing should be accountable,” Charlene MacDonald, president and CEO of the Federation of American Hospitals, told Politico. “The real question is: Do states have the resources they need to address chronic underpayment in communities?”
