Medicaid Cuts & The Impact on Hospitals: What You Need to Know

On July 4, 2025, President Donald Trump signed the One Big Beautiful Bill Act (OBBBA) into law. This massive budget reconciliation bill spans over 900 pages and makes sweeping changes to the federal budget, including Medicaid funding.

OBBB will cut more than $1 trillion from federal Medicaid funding over the next decade to offset tax cuts, the largest-ever cut to Medicaid spending. The new law marks a significant change to the way Medicaid operates.

Providers must be prepared to meet new challenges, as many hospitals are already operating on tight margins. Today’s preparation is essential for building a financially resilient and audit-ready organization in the future.

2025 Medicaid Cuts: What’s Different Now vs. Before

The Office Ally blog has covered the must-know details of the OBBBA here and here. Please see these articles for a more in-depth explanation. 

To recap, here’s a quick overview of the significant changes:

• ‍Co-pay requirements: With some exemptions, Medicaid recipients must now pay a $35 co-pay for services.
• State revenue restrictions: States can no longer use specific revenue sources, like provider taxes, to help cover Medicaid costs.
• Immigrant restrictions: Medicaid will no longer fund services for most immigrants and non-citizens.
• New eligibility rules: Among many other requirements, enrollees must resubmit eligibility documentation every six months instead of every year.
• Verification requirements: Hospitals must use trusted sources to verify patient address information and conduct quarterly reviews of the Social Security Administration’s Death Master File to confirm that only eligible patients receive Medicaid hospital coverage in only one state.
• Work requirements: Perhaps the biggest change is that the majority of adult Medicaid patients must now submit proof they work, volunteer, or go to school for at least 80 hours each month to remain eligible.

Differences from Previous Medicaid Reductions

Overall, the 2025 Medicaid changes represent a systematic and widespread shift. Not only are they the most significant changes to Medicaid yet, but they also come right after Medicaid unwinding and coincide with the expiration of Affordable Care Act (ACA) marketplace tax credits (estimated to cause around 5.1 million people to lose coverage).

The Congressional Budget Office (CBO) estimates 11.8 million people will lose Medicaid coverage due to OBBBA policies, mainly due to work requirement reporting. Lawmakers have floated work requirements as an idea in the past. Still, the provision has never been implemented, as it’s thought to impact low-income and rural populations disproportionately. Many eligible patients will lose coverage without submitting their work status and navigating paperwork demands.

Without key Medicaid funding, states must pass the cost of care onto the patient (increasing uncompensated care) or find other ways to make up the revenue. This is a stressful time for hospitals looking to protect reimbursement while remaining compliant with a host of brand-new laws.

How the Medicaid Cuts Impact Hospitals

In total, CBO estimates 16.9 million people will lose coverage from Medicaid cuts and ACA credit expiration. This loss of coverage will impact both patients and hospitals. Hospitals can expect to see:

Revenue Loss Resulting from Medicaid Reimbursements

A reduction in Medicaid funding means a loss in reimbursement dollars to hospitals. Hospitals already receive lower reimbursement from Medicaid than from Medicare and commercial payers, and these changes will only exacerbate the situation.

An analysis by the Urban Institute estimates that states will lose $33.7 billion in Medicaid reimbursement dollars. Hospitals in Medicaid expansion states could see a 19% decrease in operating margins.

For some hospitals, the effects of such a revenue loss will be immediate. For others, the consequences will come on gradually. Either way, hospitals are bound to feel the pressure.

Increased Burden of Uncompensated Care

The Commonwealth Fund estimates a $14.3 billion rise in uncompensated care as Medicaid recipients lose coverage. This massive churn means services will no longer be reimbursed, leaving hospitals to fill the void.

Uncompensated care doesn’t just impact hospital finances. The more uncompensated care a hospital reports, the worse its patient outcomes and staff morale tend to fare.

Significant Risk of Closure for Rural Hospitals

Rural hospitals are expected to face the most significant impact from federal Medicaid cuts. More than 60 million Americans (or 20% of the population) rely on rural hospitals and healthcare facilities, which tend to serve more children and adults than urban hospitals. 

Unfortunately, rural hospitals also tend to have lower financial reserves making them less prepared to bear the brunt of major cuts. Rural hospitals will lose $70 billion over the next decade, or 21 cents for every Medicaid dollar received.

At the time of writing, it’s estimated that 700 rural hospitals may be forced to close, and 300 are at risk of imminent closure. In 11 states, 50% of hospitals are at risk of closing due to the cuts to Medicaid. Closing rural hospitals would mean residents in these areas must either forgo care or travel long distances to receive it. 

The OBBBA does provide a $50 billion relief fund package for rural hospitals, but full details have not yet been released. To receive these relief funds, rural hospitals must apply by December 31, 2025. 

Long-Term Capital Planning & Budget Impacts

Most hospitals engage in long-term strategic planning to invest in improvements or expand services. Loss of reliable Medicaid funding in the budget may lead to:

• Delayed or canceled capital improvement projects
• Delayed or canceled hiring plans
• Reduction in preventative and community health programs
• Hospital closure

How to Prepare for the Medicaid Shift

The OBBBA is lengthy and detailed, meaning providers know what’s happening now and what to expect over the next 5-10 years. Now is the time to take an active role in protecting reimbursement dollars.

Revenue Recovery & Financial Diversification

The first, potentially most obvious action, is to reduce dependency on Medicaid funds, especially if your state has no plan to offset the loss. Hospitals can strengthen collections processes, pursue grants to fund community work, and conduct internal audits to plug existing revenue leaks.

Find Efficiencies & Opportunities with Healthcare Solutions

An internal audit can show only so much. The right technology can help providers find new opportunities for reimbursement. Hospitals should consider tools that help:

• Automate eligibility verification
• Reduce denials
• Optimize patient scheduling
• Assist in smart decision-making
• Identify alternative coverage for self-pay or uninsured patients

Office Ally’s MAPS is a self-screening and enrollment platform that helps hospitals guide self-pay patients to financial assistance programs, reducing uncompensated care and improving reimbursement potential. Learn more about MAPS.

Prepare for Audits & Ensure Documentation Integrity

As history has shown, any changes to Medicaid prompt a series of audits to ensure providers follow new rules. Hospitals must be prepared for audits by maintaining updated documentation and billing procedures.

Audit preparation starts with airtight documentation and coding accuracy. Providers should conduct regular internal audits and training to ensure staff are prepared. This proactivity, coupled with a robust audit tracking solution, helps hospitals hit deadlines and protect reimbursement. 

Office Ally’s Audit & Denial Tracker allows hospitals to reliably monitor audit requests, track appeals, and stay compliant in real-time—all in one, centralized platform.

Create Contingency Plans & Prepare for the Next 1-2 Years

Hospitals should expect their budgets to change. Unfortunately, no one can be exactly sure how much they will change. Therefore, it is in a hospital’s best interest to plan for as many scenarios as possible.

What will happen if your hospital sees a 15% increase in self-pay patients? Or a 10% drop in operating margin? Consider all possible questions to keep leadership teams aligned and prepared for the coming years, no matter what happens.

Continuously Monitor Legislation & Changes

The full changes from the bill start rolling out this year and don’t officially finish until 2029. Some hospitals may not see impacts until closer to 2034. Between now and then, America will experience two presidential elections and several shakeups in Congress, meaning Medicaid policies will likely change again.

It’s not an easy task, but providers need systems in place to keep up with the timeline of current legislation while keeping an eye on any future Medicaid-related laws that might come to pass.

Staying Proactive in the Face of Medicaid Cuts

Though the Medicaid program has changed in years past, Medicaid cuts in 2025 are no longer business as usual. Hospitals face serious threats to financial health, workforce stability and patient access, especially in underserved areas. However, providers can weather the storm with a proactive attitude and supportive tools. 

Office Ally is here to help. From our MAPS screening and enrollment platform to our Audit & Denial Tracker and Insurance Discovery, our tools are designed to support hospitals in staying compliant and financially resilient.

Ready to prepare your hospital for what’s next? Contact us today for a consultation to see which of our solutions may work best for you.