Officials warn cuts will hurt rural hospitals

Plans by Senate Republicans to scale back a Medicaid provider tax that states like Iowa use to fund their Medicaid program could deal a greater financial blow to rural hospitals, state and national hospital groups warn.

The massive tax-and-spending reconciliation bill making its way through the U.S. Senate includes provisions that "further undermine the ability for hospitals to provide care to Medicaid patients" by reining in a Medicaid funding mechanism that hospital groups say would slash payments to their facilities, according to the American Hospital Association.

The association notes rural areas disproportionately rely on Medicaid, and their hospitals are often the first backstop for patients without health coverage.

Hospital networks have said they might reduce pediatric, maternity or behavioral health services, close rural facilities or lay off workers if the Medicaid changes become law, according to a recent member survey by the American Medical Group Association.

The concerns stem from the bill's caps on provider taxes, where states charge extra taxes to medical providers — mainly hospitals, nursing homes and facilities for people with intellectual disabilities — and in return give the providers higher Medicaid payments that bring in more federal matching funds, which are pegged to state payments.

The Senate legislation, which still is being negotiated and subject to further changes, would limit the amount of money a state can tax a health care provider from 6% of patient revenue to 3.5%.

It would also change state-directed payments, a Medicaid funding mechanism that allows states to direct how managed care organizations pay providers, often to address specific state health priorities and close gaps in Medicaid payment rates.

Republicans, including Iowa U.S. Sen. Chuck Grassley, say the Medicaid funding mechanism needs additional transparency, and that spending through the arrangements is projected to skyrocket, fueling concerns that states are using creative financing schemes to inflate Medicaid funding from the federal government.

Grassley has supported efforts to lower the provider tax. As chairman of the Senate Finance Committee, Grassley released a report in 2019 on the need for greater transparency in Medicaid financing mechanisms that he called a key driver of the growing federal deficit.

Broad effects

Providers contend that state-directed payments are essential to keep Medicaid-dependent clinics and hospitals afloat.

The state-directed payment provision would reduce reimbursement rates to the Medicare upper payment limit, resulting in a $4 billion cut to Iowa hospital funding over the next 10 years, said Chris Mitchell, president and chief executive officer of the Iowa Hospital Association.

"Coming out of COVID, our hospitals were in a real difficult financial position," Mitchell said. "We worked very closely with Gov. Reynolds and her team … to develop this program which would allow hospitals to see increased Medicaid rates. How we are able to leverage those dollars, though, is through the provider tax. So, hospitals are essentially taxed to create the federal match, and then that money is drawn down and distributed to hospitals to boost their Medicaid payments."

The state-directed payments, he said, are crucial for expanding access to care and sustaining essential health services, especially in rural areas.

Without these payments, hospitals will likely have to cut staff and services, or both, affecting the entire community.

"So, ultimately, hospitals would have difficult decisions to make. There's not a lot of levers for them to pull with these kind of cuts," Mitchell said. "They either reduce labor (or) reduce services, and when those services go away, they don't just go away for the Medicaid population," but for the entire population served by that hospital.

Cuts to Medicaid and the Affordable Care Act marketplaces included in the reconciliation bill are projected to increase the number of uninsured Americans by millions.

"We are required by federal law to treat every patient that comes into our door (and) stabilize them, regardless of their ability to pay," Mitchell said. "So if you can't (pay), that leaves hospitals in a bind. Either they have to reduce the number of services that they offer to reduce costs and/or reduce the number of staff that they pay to work there.

"And my point is, these cuts are coming to Medicaid, but it impacts the entire community, because when a service leaves the hospital, it doesn't matter what kind of insurance that you have, if it's not there, the services aren't there and you can't access them, right?"

Tight margins

According to the Center for Healthcare Quality and Payment Reform, 20 rural Iowa hospitals are at risk of closure, with five facing immediate risk of shutting down. These closures are primarily due to a combination of financial pressures, including low reimbursement rates from Medicare and Medicaid.

Many rural Iowa hospitals operate at a loss, with private insurance reimbursements often not covering the cost of care.

According to the American Hospital Association, 48% of rural hospitals operated at a financial loss in 2023. A total of 92 rural hospitals have closed their doors or been unable to continue providing inpatient services over the past 10 years.

Nearly half, 47%, of rural births in the United States are covered by Medicaid, and 65% of nursing home residents in rural counties are covered by Medicaid.

Potential compromise

Mitchell said his association has had ongoing conversations with Iowa Republican U.S. Sens. Joni Ernst and Grassley and their offices regarding the bill.

Senate Republican leaders have been discussing potential compromises, including a fund for rural hospitals that would be impacted by the changes to the provider tax structure, according to Politico.

Mitchell said he's hopeful for a compromise that addresses the potential harmful impact of the Medicare upper payment limit provision on hospital funding and access to quality health care.

"From our perspective, there needs to be some movement on that particular provision to try to preserve some of the funding and the access to the high-quality health care that Iowans enjoy and use each and every day," he said.

A lifelong resident of rural Iowa from New Hartford, Grassley said he's fought to strengthen and expand rural communities' access to health care.

As a senior member and former chairman of the Senate Finance Committee, he introduced bipartisan legislation to prevent rural hospital closures by extending and updating Medicare programs to ensure eligible rural hospitals are reimbursed for their costs.

He also helped establish the voluntary rural emergency hospital program. It allows eligible rural hospitals to transition to a new operational model, focusing on emergency and outpatient care while potentially avoiding closure.

Grassley, in a weekly Q&A sent out by his office June 20, said the Senate bill includes measures aimed at stopping "wasteful spending that drains resources for people who truly need this safety net and puts an unfair burden on taxpayers."

A spokesperson for Ernst emphasized the bill is not finalized, and Senate Republicans are looking for ways to safeguard rural hospitals from proposed cuts to the key Medicaid funding method.