Medicaid cuts could reverse nonprofit hospital sector recovery, analysts say

Hospitals have been warning that cuts to Medicaid would hurt them financially, and now more financial analysts are echoing those concerns.

Fitch Ratings warns that nonprofit hospitals would see financial difficulties with substantial cuts to Medicaid.

Fitch Ratings warns that major reductions in Medicaid would damage nonprofit hospitals financially. If Congress and the Trump administration put less in Medicaid, nonprofit hospitals would see less revenue, and “could pressure ratings and potentially the sector outlook,” Fitch said this week.

Nearly 80 million Americans rely on Medicaid for health care, and if fewer people have coverage, nonprofit hospitals will likely end up providing more uncompensated care. Most nonprofit hospitals have been recovering slowly from the fallout of the COVID-19 pandemic, and substantial cuts in Medicaid would undo even the modest gains for many hospitals, Fitch said.

Those nonprofit hospitals with a higher percentage of Medicaid patients would face greater losses if Medicaid spending is cut, Fitch says. Hospitals have been pointing out that safety-net hospitals in cities and hospitals in rural areas rely heavily on Medicaid funding.

It's unclear what will happen with funding for Medicaid. Congress is working on a federal spending plan, and the clock is ticking. The short-term spending package approved just before Christmas only runs through March 14.

Trump has said he isn’t planning cuts to Medicaid, or Medicare or Social Security, for that matter.

But House Republicans have approved a budget plan that calls for the House Commerce and Energy Committee to reduce spending by $880 billion over the next 10 years. That committee oversees Medicaid, and while it’s unclear if the plans will call for a reduction for Medicaid, as Fitch said, “Achieving the budget cuts would be difficult without changing Medicaid eligibility or Medicaid funding.”

The House and Senate will have to come together on the budget, so the House won’t have the final word.

Hospital advocacy groups have been fearing the prospect of Medicaid cuts, saying they will end up losing money if they are seeing more patients who can’t pay for their care. Healthcare leaders at the HIMSS Global Health Conference & Exhibition this week also expressed concerns about reduced funding for Medicaid.

Fitch said hospitals have reason to be worried.

“Lower revenues and higher unreimbursed expenses from more self-pay patients could reverse recent improvements. This is particularly true for hospitals with a higher share of Medicaid patients, which inherently have thinner margins,” Fitch said this week.

Hospital operating margins are improving, but they remain below pre-pandemic levels, Fitch noted.

“A decrease in Medicaid reimbursement and/or an increase in uninsured care would hinder hospitals’ nascent financial recovery from weak sector-wide post-pandemic performance due to higher labor costs and elevated inflation,” Fitch said this week.

If there are cuts in Medicaid, states could step up to offer more funding to offset those cuts, Fitch said. But conversely, states could also change eligibility or reduce support.

Fitch revised its outlook for nonprofit hospitals in December from “deteriorating,” a designation in place for more than two years, to “neutral.” But depending on the size of the Medicaid cuts and the impact on nonprofit hospitals, Fitch warned that it could revise its outlook for the sector as a hole.

During a media call in January, Mark Pascaris, senior director and analytic lead of Fitch Ratings’ nonprofit healthcare team, said that nonprofit hospitals are making some gains, but challenges remain.

“The sector continues to face a lot of headwinds. That hasn't changed, but we're in a better position today than we were a couple of years ago,” he said. But he added, “There's still a lot of fragility.”

Even before Trump took office and Congress began its new legislative session, hospitals have stressed the importance of preserving Medicaid funding.

Moody’s Ratings in January warned that Medicaid cuts would hurt hospitals, saying the fallout “would negatively affect not-for-profit and for-profit hospitals.”

“Hospitals could suffer from significant federal funding cuts and regulatory changes affecting Medicaid and state directed payments (SDP), which are administered by state Medicaid agencies but approved by the federal government,” Moody’s said. “A reduction in Medicaid or SDP funding would disproportionately impact hospitals in states that expanded Medicaid under the Affordable Care Act.”