With Medicaid cuts, pain for hospitals isn’t imminent, but it’s coming

While hospitals have lambasted the pending cuts in Medicaid that are part of the massive tax legislation President Trump signed last month, industry analysts say they won’t feel the pain right away.

That doesn’t mean some hospitals and health systems won’t be facing a difficult road. But analysts from Fitch Ratings say they have some time to prepare.

Much of the impact of the Medicaid cuts and new work requirements on healthy recipients won’t be felt for at least a couple of years. So hospitals may likely continue modest financial improvements over the course of 2025, and perhaps into 2026, says Mark Pascaris, senior director of Fitch Ratings.

The package calls for about $1 trillion in reduced spending for Medicaid over the next 10 years, according to an analysis from the Congressional Budget Office.

Assuming that estimate is accurate, Pascaris tells Chief Healthcare Executive®, “There's no way that that doesn't pose some kind of challenges for not-for-profit hospitals.”

• Read more: Medicaid at 60: Warnings of ‘access at risk’

Hospitals will likely start to see the impact of Medicaid cuts by 2027, when some of the cuts in funding and work requirements take effect.

“It’s not to say that there won't be any pressure points on Medicaid between now and then, but a lot of it, the bulk of it, won't be felt for a couple of years,” Pascaris says.

But he says, “This comes up in conversation with just about every health system we work with. You know, they're taking action today because they know what's coming.”

Kevin Holloran, senior director of the U.S. nonprofit hospital sector at Fitch Ratings, tells Chief Healthcare Executive® that hospitals and health systems are preparing for the pending Medicaid cuts and that there will be a “lot of headwinds.”

“It is a part of every conversation we have with every single management team,” Holloran says. (See part of our conversation in this video. The story continues below.)

Threatening recovery

Hospitals have rebounded financially over the past couple of years, with Fitch upgrading the outlook for nonprofit hospitals from “deteriorating” to “neutral” in December 2024. Fitch had assigned a “deteriorating” outlook to nonprofit hospitals for more than two years.

But Fitch has also warned about the prospect of Medicaid cuts dealing a blow to hospitals. Fitch warned in March that Medicaid cuts could reverse the recovery of the nonprofit hospital sector.

Hospitals have warned that with Medicaid cuts over the coming years, health systems are going to be treating more people without the ability to pay, with many showing up in emergency departments for their health care. Nearly 12 million Americans could lose Medicaid coverage over the next decade, according to the Congressional Budget Office.

States may be forced to cut benefits or cover fewer people, or they’ll face the unpopular remedy of raising taxes to support their Medicaid programs. But with less support from Medicaid, hospitals have warned that they may have to reduce services or potentially close their doors.

Holloran says if the projections of up to nearly 12 million people losing coverage prove to be accurate, the system will see more patients “self pay, which we generally call no pay.”

“The reality is that's going to really smack the margins hard,” Holloran says. “You probably will see closures.”

Pascaris says he expects vulnerable hospitals to, at minimum, begin to scale back services, and adds that some may not survive.

“When you're in a period of stress, one of the tools you're going to look at are going to be staff cutbacks, are going to be a rationalization of services,” Pascaris says.

“Management teams will just look down the the roster of what it is they do and what is high value, in terms of margin generation, and in terms of mission priority, and those that are third or fourth tier might go,” he adds. “I mean, we will see some of that. Now in terms of hospital closures? Yeah, I think that that is a concern that we might see in parts of rural America and in the poorer parts of urban America.”

Most closures will likely involve hospitals that are already struggling, including those outside of Fitch’s rated universe, he adds.

“There's just a real public policy concern for a lot of policymakers in a lot of states, because if their rural hospitals close, and therefore there's just no alternative, comparable services to be offered to their constituents,” Pascaris says.

Holloran adds that some of the impact won’t be known for some time, and it’s possible some projections of reduced coverage on Medicaid or the health exchanges may not be as severe as feared. But he also said it’s possible that some of the worst scenarios could be accurate.

“We'll have to see where this goes,” Holloran says. “So it could have a small impact. It could have a major impact up to and including, yes, closures and curtailment of service.”

• Read more: Nurses warn Medicaid cuts will hurt patients and hospitals

Boomers retiring

Holloran says hospitals have made progress in improving their financial position. And the Medicaid changes will be phased in over time, so he expects hospitals to continue solid, if modest, performance in the coming years.

He also points out the Medicaid cuts are going to have an impact, which will be amplified by an uptick in older Americans who will be leaving commercial insurance and getting coverage from Medicare.

The last of the Baby Boom generation hits retirement age in 2030, and Holloran suggests that the healthcare industry needs to pay more attention to the increase of older Americans needing more healthcare services in the next few years.

“That's getting closer and closer,” Holloran says. “Quite frankly, in 2030, the last Baby Boomer turns 65, your healthcare needs go up. The amount of people in the workforce goes down. The payer mix probably shifts lower … So we've got a conflagration of events.”

In a few years, with more people hitting retirement age and Medicaid covering fewer Americans, Holloran says, “I think really, you start seeing some pain points in the sector, quite frankly.”