Officials warn Medicaid cuts could close 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.

The joint federal-state program provides free or low-cost health care to individuals based on income and family size, serving Americans with disabilities, seniors, children pregnant mothers and others.

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 stems 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 brings in more federal matching funds, which are pegged to state payments.

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.

The joint federal-state program provides free or low-cost health care to individuals based on income and family size, serving Americans with disabilities, seniors, children pregnant mothers and others.

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

The concerns stems 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 brings 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%. The rate would be gradually lowered each year, starting in 2027, and would apply only to states that have expanded Medicaid offerings under the Affordable Care Act, which includes Iowa. It would exempt nursing homes and facilities for people with intellectual disabilities.

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.

The arrangements allow states to leverage federal dollars to increase Medicaid reimbursements by making supplemental payments for services covered in Medicaid managed care contracts. The federal government currently caps the rate at which it matches state funds at the average commercial rate. The Senate bill would gradually reduce the rate each year in states like Iowa that expanded Medicaid.

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 the he called a key driver of the growing federal deficit.

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 through 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.

"Prior to this inception of the direct programs, Iowa's hospitals hadn't seen an increase in Medicaid reimbursement since 2014," Mitchell said. "If you think of cost of labor, if you think about the cost of drugs, you think about the cost of equipment, you think about just the changing health care environment, 11 years is a long time to go without seeing significant increases. 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. 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.

Several rural hospitals on 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.

Proposed Medicaid cuts will only worsen the financial difficulties faced by these hospitals, Mitchell said.

"There are several hospitals who are already operating on very tight margins, and this kind of seismic shift could potentially drive some hospitals to close their doors," he said.

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.

While the changes will primarily harm critical access hospitals — a designation given to small rural hospitals, primarily to ensure access to essential health care services in underserved areas — the Senate bill will have broader ripple effects, including reduced health care access, longer wait times for procedures and exacerbate health care workforce shortages.

Mitchell said the 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.

G rassley says rural hospitals a priority

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 to keep rural hospitals up and running. The designation was created to address the issue of rural hospital closures and maintain access to essential emergency and outpatient services in rural communities. It allows eligible rural hospitals to transition to a new operational model, focusing on emergency and outpatient care while potentially avoiding closure.

According to Grassley's office, the program has provided a financial lifeline for 38 rural communities across America. He also pushed to expand use of the Rural Community Hospital Demonstration program by the Centers for Medicare & Medicaid Services that provides cost-based reimbursement to certain small rural hospitals for inpatient services, which are too large to qualify as Critical Access Hospitals.

A total of 30 hospitals across they country, including four in Iowa, are participating in the demonstration program.

"Senator Grassley is a tireless advocate for rural health care because he understands it's essential for Iowans' health and well-being," a spokesperson said. "Senate Republicans are working to close a provider tax loophole that states like California and New York have exploited — at taxpayers' expense — while passing legislation that will prevent the biggest tax increase in American history. While negotiations remain ongoing, Grassley is continuing to prioritize necessary resources for rural hospitals."

Grassley, in a Q&A from his office, 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."

"I've been a longtime champion for protecting the Medicaid program for the most vulnerable Iowans," Grassley said. " … The Senate bill includes measures to strengthen the integrity of the Medicaid program, delay costly Biden-era regulations, stop Obamacare subsidies from going to illegal immigrants and enacting work requirements for able-bodied adults with reasonable exemptions, such as parents with young kids."

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.

"While Democrats fearmonger against strengthening the integrity of Medicaid, Senator Ernst is focused on protecting Medicaid for the most vulnerable," the Ernst spokesperson said of the Red Oak native. "She will continue to stand up for Iowa's rural hospitals, clinics, and community health centers that serve our state."