$4B at stake in Medicaid change

ILLINOIS| HEALTHCARE

SPRINGFIELD — Illinois hospitals stand to lose upwards of $4 billion in revenue over the next several years due to impending changes in Medicaid rules that limit states' ability to direct higher reimbursement payments to facilities that serve the most vulnerable populations.

That's according to a recent study by KFF, a nonpartisan health policy think tank, as well as estimates by the Illinois Health and Hospital Association.

And unless Congress acts to reverse those policies before they take full effect, IHA officials warn, roughly half the hospitals in Illinois could be forced to reduce staff, cut back on services or close altogether.

"The governor's people have consistently said that they don't have a printing press over in the Capitol, and that they're not going to be able to fill in this revenue," David Gross, IHA's senior vice president for government relations, said in an interview. "So it's a concern that some of the estimates that have been undertaken in Washington assume that the state's going to pick up the costs of these cuts."

State directed payments

The upcoming change affects a little-known practice within Medicaid known as "state directed payments," or SDPs. Those are supplemental reimbursement rates that some hospitals are paid for specific services.

Most states today, including Illinois, operate their Medicaid programs under a "managed care" model. That means they pay for-profit health insurance companies a flat per-person fee each month to manage the care of Medicaid recipients. Those companies, known as managed care organizations, or MCOs, are then responsible for reimbursing hospitals and other providers for the services they provide.

Currently, states are allowed to direct their MCOs to pay higher reimbursement rates to particular hospitals for specific services to help keep those facilities financially viable or to make sure certain services remain available in their communities.

"They are a critical piece to ensuring that hospitals are able to provide access to the Medicaid population in Illinois and across the country," said Ben Winick, IHA's vice president of healthcare finance.

Nearly all states use SDPs as part of their overall Medicaid payment system. Gross described them as "a way to enhance what have traditionally been low Medicaid rates in states."

New federal limits

For several years, according to KFF, federal rules have capped these state-directed payments at the average rate paid by commercial insurers for those same services.Commercial rates tend to be about twice the rate paid by Medicare and more than twice the rate paid by Medicaid.

But under the Budget Reconciliation Act passed by Congress in 2025, known as H.R. 1, or the "One Big Beautiful Bill Act," states like Illinois that expanded their Medicaid programs under the Affordable Care Act will see their cap lowered to 100% of the Medicare rate.

The handful of states that did not expand their Medicaid programs will be capped at 110% of the Medicare rate.

Those new caps will be phased in over a number of years, starting in 2028.