Impacts of H.R. 1 on Hospitals

Much of the discussion surrounding H.R. 1 has focused on its effect on Medicaid beneficiaries. Hospitals, however, may be just as interested in understanding what the legislation could mean for their own financial performance. Changes to Medicaid enrollment, supplemental payment programs, provider-tax financing, and uncompensated care have the potential to affect reimbursement and operating margins for many hospitals. While the impact will vary across organizations, now is a good time to assess potential exposure and begin planning for the changes ahead.  This short blog will address the possible impact of HR 1 on hospitals.

What is H.R. 1

H.R. 1 (the One Big Beautiful Bill Act, enacted July 4, 2025) affects hospitals more than any other part of the health system. The bill reduces Medicaid enrollment, cuts Medicaid payments, restricts hospital financing mechanisms, tightens 340B eligibility, and increases uncompensated care. The Congressional Budget Office (CBO) estimates that the enacted law will reduce federal Medicaid spending by approximately $911 billion over 10 years and increase the number of uninsured Americans by about 10 million by 2034.  Hospitals with heavy percentages of Medicaid patients and those that rely very heavily upon Medicaid supplemental payments will experience the largest losses. 

The areas where the impacts of H.R. 1 will be the largest include the following: 

• Medicaid Eligibility Cuts
  • H.R. 1 imposes work requirements (80 hours/month) and semi-annual eligibility redeterminations. The Congressional Budget Office’s latest estimate is that the 2025 reconciliation law (H.R. 1 / Public Law 119-21) will reduce Medicaid enrollment by 12.9 million people in 2034 relative to what enrollment would have been under current law. CBO also estimates that 7.5 million additional people will be uninsured in 2034. 
  • 12.9 million fewer Medicaid enrollees does not mean 12.9 million more uninsured people because some people who leave Medicaid may obtain other coverage.  Since the CBO estimates a reduction of 12.9 million from Medicaid rolls and an increase in uninsured Americans by 10 million, the residual 2.9 million will find insurance from other sources. 

• Cuts in Medicaid State Directed Payments (SDPs)
  • Before H.R. 1, CMS rules generally allowed hospital SDPs to be benchmarked against the average commercial rate (ACR) which can be substantially higher than Medicare rates.  H.R. 1 caps SDPs to 100% of Medicare in expansion states and 110% of Medicare in non-expansion states.  Approximately $78 billion of federal Medicaid spending annually is directed to hospital services through SDPs. Since the federal share is roughly two-thirds nationally, the corresponding total hospital SDP payments could be on the order of $115 billion–$120 billion annually.
  • For example, a hospital in a Medicaid expansion state that received a $160 million base Medicaid payment and $80 million in SDP, for a total of $240 million, would compare that amount to 100% of what Medicare would have paid.  If the equivalent Medicare payment would have been $200 million then the ratio of $240 million to $200 million would yield a value of 120% which would exceed the allowed value of 100% in a Medicaid expansion state. 

• Changes to Medicaid Provider Taxes
  • H.R. 1 makes significant changes to Medicaid provider taxes, and these changes could be particularly important for hospitals because provider taxes are a major source of the state’s share of Medicaid financing.  The CBO estimates that the provider-tax provisions will reduce federal Medicaid spending by approximately $191 billion over 10 years.
  • Perhaps the largest area of impact relates to the changes H.R. 1 makes in the way that the assessment of a “Hold Harmless” violation.  The current maximum safe harbor percentage is 6.0%, and the percentage will reduce by 0.5% per year until 2032, when the value becomes 3.5%.  The new rule also specifies that any predictable correlation between a provider tax and Medicaid payments is now treated as a “hold harmless” violation, even if the state never guaranteed repayment and even if the tax meets the old statistical tests.

• Impact of Medicare DSH (Disproportionate Share Hospital) Reductions
  • There is a major difference between the Medicare DSH effect and the preceding direct payment impact areas listed above.  H.R. 1 does not change the Medicare DSH formula.  Its impact on Medicare DSH is primarily indirect, through increased uninsured rates and reduced Medicaid enrollment.     
  • The Medicare DSH payment is made up of two parts: the traditional DSH payment plus Uncompensated Care Costs (UCC). 
  • The Medicare traditional DSH formula is the result of adding the Medicaid fraction (Medicaid Inpatient Days/Total Inpatient Days) plus the SSI fraction (Medicare Part A Days for SSI Beneficiaries/Total Medicare Part A Days). 
  • In addition to possible lower DSH payments that result from smaller numbers of Medicaid patients, a reduction in the DSH fraction below 11.75 % could result in removal from the 340 B program.   
  • The second component of Medicare DSH payment is the UCC computation, which relates to the UCC amounts reported in Medicare Worksheet S-10.  To the extent that reduced Medicaid enrollment leads to higher numbers of uninsured patients and, as a result, higher UCC costs, this would increase the Medicare DSH amount that is based on UCC costs.

Steps to Reduce the Impact of H.R. 1

• Expand presumptive eligibility (PE) for Medicaid patients.
  • The biggest negative impact of H.R. 1 on hospitals is the potential loss of Medicaid patients, which means anything that can be done to stop or minimize the reduction in Medicaid patients is very beneficial.  Expanding PE means increasing the number of patients who can be temporarily enrolled and increasing the number of hospital staff who can approve it.  Presumptive eligibility (PE) allows hospitals to immediately enroll patients in Medicaid for a brief period without waiting for full verification. A hospital can approve PE if the patient appears to meet the following criteria:
    • Income criteria
    • Residency
    • Citizenship/immigration rules (self‑attested)
    • Category (pregnant, child, adult, etc.)
  • Coverage begins the same day, and the hospital can bill Medicaid for services during the PE period.
  • PE will be especially important because H.R. 1 causes large Medicaid coverage losses due to Work requirements and Semiannual redeterminations.  Expanding PE helps hospitals catch patients who lost coverage and temporarily restore Medicaid, so they don’t become uninsured.

• Control Uncompensated Care Costs from Uninsured Patients
  • The biggest single source of uncompensated care for U.S. hospitals is care provided to uninsured patients, especially emergency department visits and inpatient admissions for people with no coverage—including undocumented immigrants, adults who lost Medicaid due to churn, and low‑income individuals who cannot afford insurance.  Uninsured patients often use EDs as the source for primary care.  They may often enter with severe, expensive conditions, and the hospital must provide care. There are a variety of strategies to help reduce costs in this area.  The identification of insurance eligibility before or immediately after admission is probably the highest-value intervention.  Making Medicaid enrollment assistance available at the hospital is also very important.  Billing and collection policies can also play a key role in reducing write-offs for charity care or bad debt. 
  • Another key strategy revolves around redirecting patients to less costly settings such as urgent care centers or Federally Qualified Health Centers.  This will involve seeking partnerships with these lower-cost settings and helping to improve access to them. 

• Reducing losses from insured patients with high deductibles or coinsurance.
  • High‑deductible health plans (HDHPs) have grown dramatically over the past decade and are an increasing source of UCC.  According to the Bureau of Labor Statistics in 2024, 50% of private-industry workers participating in medical plans were in HDHPs.  The median individual deductible among those workers was $2,750. The share of adults enrolled in HDHPs has risen from about 25% in 2010 to over 50% by the mid‑2020s, according to national employer survey data and federal marketplace trends. This is one of the most significant shifts in U.S. insurance design in the last 15 years.   Health insurance plans sold on the Affordable Care Act (ACA) Marketplace usually have higher deductibles.  The Bronze plans often have deductibles between $6,000 and $9,000.   They are the most common plan type purchased by individuals, especially younger adults and lower‑income workers.  While write-offs for nonpayment in commercial insurance plans can qualify as UCC in Worksheet S-10, recovery of the deductible or coinsurance would be much more beneficial. 
  • The most often cited methods for reducing write-offs in HDHPs all involve intervening before the bill becomes bad debt. Some believe that active initial intervention can reduce bad debts by 20 to 40%. 
  • A strategy that is not often discussed is the negotiation phase with insurers.  For example, require different levels of reimbursement for HDHP vs. non‑HDHP plans.  Insurers do not like differential reimbursement because it makes HDHPs more expensive, but the underlying economics can make this a necessity.  For ACA plans, you might consider not contracting Bronze or Catastrophic plans.  Obviously, the success of negotiations is dependent upon the hospital’s market power. 

• Optimizing Medicaid Revenue
  • For the Medicaid patients that a hospital treats, it is still critical to realize the greatest level of payment from those patients.  Medicaid payment has historically been well below costs, so improving payment where possible may be critical to financial solvency.
  • Perhaps the most important action is to ensure that all Medicaid days have been accurately accounted for.  Remember the number of Medicaid days will affect DSH and participation in 340 B. 
  • The major areas where missing Medicaid days may be found include registration errors. For example, the patient was Medicaid‑eligible but registered as self-pay, or the patient had retroactive eligibility but wasn’t updated.  In other cases, the patient may have been qualified for Medicaid after discharge.  Patients not on Medicaid but approved for Emergency care such as illegal immigrants do qualify as Medicaid. Another large area is billing the wrong Medicaid Managed Care Organizations (MCO) which might result in a denial and therefore the loss of Medicaid days. 

While much of the public discussion surrounding H.R. 1 has focused on policy and politics, hospital leaders ultimately must focus on operations and financial performance. Understanding the organization’s exposure to Medicaid enrollment changes, supplemental payment reductions, provider-tax reforms, and uncompensated care growth is an important first step. The sooner those impacts are assessed, the more time hospitals have to develop strategies that protect both financial stability and access to care.