5 Key Facts About Medicaid and Hospitals

There are several options under consideration in Congress to significantly reduce Medicaid spending to help pay for tax cuts, with the recently passed House budget resolution targeting cuts to Medicaid of up to $880 billion or more over a decade. Large reductions in Medicaid spending are likely to have direct implications for the 83 million people covered by Medicaid, state budgets, and health care providers, including hospitals. Medicaid accounted for about one fifth (19%) of all spending on hospital care in 2023. Changes in hospital finances could affect patient care and may have broader economic implications, given that, for example, hospitals employ 6.7 million people and are the sixth largest employer in the country when comparing industry subsectors.

A number of policies to achieve large Medicaid savings have been discussed. These include imposing a per capita cap on federal Medicaid spending, reducing the federal government’s share of costs for the ACA Medicaid expansion group, imposing Medicaid work requirements, limiting states’ use of provider taxes to finance the state share of Medicaid spending, and placing restrictions on supplemental payments to providers and/or state-directed payments (which are payments managed care plans make to providers, including hospitals). Such policies could force states to make tough choices about raising state revenues to replace the lost federal dollars or making cuts to Medicaid by reducing the number of people covered; covering fewer benefits; or reducing payment rates for hospitals, physicians, nursing homes, and other health care providers.

Absorbing reductions in Medicaid spending could be challenging for hospitals, particularly for those that are financially vulnerable, such as hospitals that care for a relatively large share of Medicaid patients. Reducing reimbursement rates or cutting supplemental payments to hospitals would have a direct impact on hospital finances. Rolling back coverage would increase the number of uninsured patients, which could result in higher uncompensated care costs (and have implications for the health of Medicaid enrollees who lose coverage or have access to fewer benefits). Hospitals may respond to those financial pressures by operating more efficiently or by making various cuts—such as offering fewer services, laying off staff, or investing less in quality improvements—and lower payment rates could reduce the willingness of hospitals to see Medicaid patients. Cuts to Medicaid spending could also potentially accelerate the pace of hospital closures, including in rural areas. Given differences in state responses to potential federal Medicaid cuts, the impact would likely vary across states and hospitals.

1. Medicaid covered about one fifth of all hospital spending in 2023.

Medicaid accounted for 19% of all spending on hospital care in 2023, or $283 billion out of the $1.5 trillion spent on hospital care (Figure 1). The other major payers for hospital care are Medicare (25%) and private health insurance (37%). Medicaid also covered about one fifth of hospital discharges in 2023.

2. Hospital care accounted for about one third of total Medicaid spending in 2023.

Hospital care accounted for about one third (32%) of Medicaid spending in 2023, or $283 billion out of $872 billion in total Medicaid expenditures. For purposes of comparison, hospital care represented a larger share of Medicaid spending (32%) than physician and clinical services (14%) or retail prescription drugs (6%). Because hospital care accounts for a large share of Medicaid expenditures, it is likely that any substantial reduction in Medicaid spending would impact hospitals, and some proposed policy changes directly target supplemental or state directed payments to hospitals.

3. Medicaid covered about four in ten births nationally in 2023 and almost half of births in rural areas.

Medicaid covered 1.5 million births in 2023—representing 41% of all U.S. births—and financed nearly half (47%) of births in rural areas (Figure 3). Births are the most common reason for a hospital inpatient stay. Medicaid covered more than two in ten births in nearly every state, at least four in ten births in 25 states and DC, and more than half of births in four states: Louisiana, Mississippi, New Mexico, and Oklahoma. The share was the largest in Louisiana, where Medicaid covered nearly two in three (64% of) births. (See prior KFF work for more about women and Medicaid).

State Medicaid programs are required to cover pregnancy-related services without cost sharing for people with incomes up to 138% of the federal poverty level (FPL), including in states that have not adopted the ACA Medicaid expansion. For births covered by Medicaid, states must also provide pregnancy-related coverage for at least 60 days postpartum and cover infants for twelve months. Nearly all states have taken up the option to extend postpartum coverage through one year postpartum.

4. The ACA Medicaid expansion has helped improve hospital finances and is associated with lower charity care costs.

Expanding Medicaid under the ACA has had financial benefits for hospitals, according to several studies. These benefits include:

• Improvements in payer mix (fewer uninsured patients, more Medicaid patients, or both),
• Reductions in uncompensated care,
• Increases in hospital revenues and operating margins, and
• Fewer hospital closures.

The financial impact of Medicaid expansion for at least certain measures may be most evident among rural hospitals, small hospitals, and hospitals that see a higher proportion of low-income patients, based on some of the research.

Hospital charity care costs (one component of uncompensated care) were generally higher in 2023 in states that had not expanded Medicaid (Figure 4). Hospital charity care programs, also known as “financial assistance programs,” provide free or discounted services to eligible patients who are unable to afford their care and are one component of uncompensated care. Among the ten states with the highest charity care costs as a percentage of operating expenses in 2023, eight had not expanded Medicaid as of November of that year (one did so in December).

Texas, a non-expansion state, had both the highest uninsured rate (16%) and the highest average charity care costs as a percent of operating expenses (6.6%) in the country. Conversely, all thirteen states where average charity care costs as a percentage of operating expenses were less than 1.0% had expanded Medicaid. Wisconsin, which had the lowest uninsured rate and average charity care as a percentage of operating costs in 2023 among non-expansion states, has expanded Medicaid eligibility up to 100% of the federal poverty level under a Medicaid waiver and therefore does not have a coverage gap.

Although Medicaid expansion has helped improve hospitals’ finances, operating margins were lower than average in 2023 among hospitals with relatively high Medicaid shares, according to KFF analysis. This is true overall and in both rural and urban areas.

5. Medicaid financing for hospitals is complex.

States deliver and pay for services in Medicaid through fee-for-service (FFS) or managed care (Box 1). Hospital FFS rates consist of base rates and supplemental payments. Base rates vary considerably across states and, on average, are below hospitals’ costs of providing services to Medicaid enrollees. States may rely on supplemental payments – such as payments to hospitals that serve a disproportionate share of low-income patients – to help cover hospitals’ costs. FFS supplemental hospital payments as a share of total FFS hospital payments vary widely across states. In eight states, FFS hospital supplemental payments make up more than 75% of total FFS hospital payments (Figure 5). States with capitated managed care arrangements are generally prohibited from contractually directing how managed care plans pay providers. Subject to CMS approval, however, states may implement certain “state directed payments” (SDPs). Many states that contract with managed care plans use SDPs to make uniform hospital rate increases that are like FFS supplemental payments (Box 1).

According to MACPAC, in FY 2022, 61% of Medicaid payments to hospitals were made through managed care delivery systems and 39% were made on a FFS basis. About half of FFS payments to hospitals were made through supplemental payments, while one third of managed care payments to hospitals were made through state directed payments. States are permitted to finance the non-federal share of Medicaid spending through multiple sources, including state general funds, health-care related taxes, and local government funds (Box 1). Most FFS hospital supplemental payments and state directed uniform rate increases are financed by provider taxes and funds from local governments. Efforts to restrict provider taxes or intergovernmental transfers could have bigger implications for states that rely more heavily on these financing mechanisms as well as states with larger shares of hospital funding for supplemental payments.

In an effort to increase access for Medicaid enrollees, Medicaid managed care rules finalized in 2024 permit states to pay hospitals and nursing facilities at the average commercial payment rate (ACR) when using directed payments, which is substantially higher than the Medicare payment ceiling used for Medicaid FFS supplemental payments. CBO Medicaid spending projections for 2025-2034 included a 4% (or $267 billion) increase from the February 2024 baseline to the June 2024 baseline, with half of the increase attributed to expected growth in directed payments in Medicaid managed care (driven in part by the rule change allowing states to pay at the ACR). Federal policy options under consideration include proposals to repeal the 2024 managed care rules (including the provision that formalized/codified states’ ability to pay certain providers up to the ACR) and proposals to limit the use of provider taxes.