Illinois hospitals to lose billions through Medicaid policy change, study finds

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.

"This idea that they have in Washington that we should pay at Medicare rates, the problem with that is that Congress continues to cut Medicare, and Medicare only covers about 70% of our hospital costs," Gross said.

That change is one of several in the law that are aimed at slashing nearly $1 trillion out of the Medicaid program over the next 10 years. According to KFF's analysis, the new caps on state directed payments will account for about $60.1 billion in reduced federal spending on hospital services nationwide, including about $4 billion in Illinois.

That represents about 77% of all federal spending on SDPs for hospital services, according to KFF. Illinois and seven other states will account for just over half of the total reduction.

KFF acknowledges that number only represents the federal portion of the revenue hospitals receive from SDPs. Total revenue losses could be higher or lower due to other policy changes within the budget law as well as how states and hospitals respond to those changes.

IHA, however, estimates the loss to Illinois hospitals will be about $3 billion over five years, starting in 2028 when the new caps start to be phased in.

Other Medicaid cuts

In addition to cutting state directed payments, the budget reconciliation bill also orders reductions in healthcare provider taxes, a major source for financing states' share of Medicaid costs. Those are taxes levied on hospitals, nursing homes and MCOs. The revenue generated is used to draw down federal Medicaid matching funds.

Currently, federal rules cap the amount states can raise from provider taxes at 6% of net patient revenue. But under a provision of the budget law that only applies to states like Illinois that expanded Medicaid eligibility under the Affordable Care Act, that 6% cap will gradually be cut starting in Fiscal Year 2028 until it reaches 3.5% in FY 2032.

"Both policy changes really work in tandem," Winick said. "The hospital provider tax is used primarily to finance the state-directed payments."

According to the Governor's Office of Management and Budget, the cuts in provider taxes will have ripple effects throughout the Medicaid program, extending far beyond hospital payments.

In a Feb. 6 memo, GOMB Director Alexis Sturm warned the new caps on provider tax revenues will result in a total $4.5 billion reduction in Medicaid funding by fiscal year 2031. That includes $1.7 billion from the reduction in provider taxes and $2.8 billion in federal matching funds.

"It should be noted that these amounts show the impact of H.R. 1 only through fiscal year 2031," Sturm wrote. "The total annual impact to the Medicaid program after full phase-in of the rate caps will be $6.1 billion by fiscal year 2033 -- $3.8 billion of which is lost federal support.

Hospitals most at risk

Gross and Winick said all hospitals will feel the effects of the policy changes, but two classes of hospitals in particular -- critical access hospitals and safety net facilities -- are the most vulnerable. Those are the hospitals that have few other sources of revenue besides Medicaid and Medicare, and they account for about half of all hospitals in Illinois.

Critical access hospitals are generally small facilities located in small towns and rural communities. They are defined in federal regulations as facilities that have fewer than 25 acute-care inpatient beds. They are located more than 35 miles from another hospital, although that requirement can vary depending on the terrain, and they operate 24/7 emergency rooms.

Safety net hospitals are those that serve higher volumes of Medicaid and uninsured patients. Although there is not one standard definition for them, they tend to be located in urban areas and have open-door policies requiring them to treat any patient regardless of their insurance status or ability to pay.

On a statewide basis, Gross said, Medicare and Medicaid make up 30-40% of all hospital revenue. But for safety-net and critical access hospitals, they make up more than half. In 2025, according to state data, Medicaid covered 3.2 million people in Illinois, or about a fourth of the state's population. Another 2.4 million were covered by Medicare in 2024, according to KFF.

"So if you think about where Medicare patients show up, they show up in these rural hospitals, these critical access hospitals," Gross said. "And of course the Medicaid patients show up largely in part in our safety net hospitals. So those two groups of hospitals are really going to be challenged."

Capitol News Illinois is a nonprofit, nonpartisan news service that distributes state government coverage to hundreds of news outlets statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.