Healthcare providers face new financial realities under OBBB budget reconciliation
The One Big Beautiful Bill Act (OBBB), which was signed into law on July 4, introduces sweeping changes to healthcare funding that will reshape the financial landscape for providers across the country.
With an estimated $1 trillion in Medicaid cuts through 2034 and an estimated $665 billion directly impacting hospitals, healthcare organizations should quickly assess their exposure and develop strategic responses.
The legislation delivers proposed tax relief and regulatory changes; however, the funding reductions create immediate planning challenges for healthcare providers, particularly those serving vulnerable populations.
Rural hospitals and providers face mounting financial pressure
The $665 billion in hospital cuts will disproportionately affect rural healthcare providers. Rural hospitals often receive 40-80% of their revenues from government payors, largely Medicare and Medicaid. Their geographic isolation precludes any opportunity to tap into other payors with better reimbursement, since the hospitals are reflective of the populations they serve.
These organizations, which already operate on thin margins, are also facing the likelihood that patients could lose Medicaid coverage, which will in turn reduce revenue to the hospital for care. Additionally, hospitals serving a large Medicaid population often receive matching funds from the federal government, through proceeds from a provider tax, to cover care for low-income patients. Reductions in these two crucial sources of revenue could lead to reduced services or even insolvency.
Medicaid work requirements increase coverage challenges
The OBBB mandates that Americans ages 19 through 64 receiving Medicaid spend 80 hours monthly working, training, studying or volunteering. These verification systems must be in place by December 31, 2026, with eligibility checks twice yearly. Additionally, states must conduct eligibility redeterminations at least every six months for Medicaid expansion adults beginning December 31, 2026.
The Congressional Budget Office (CBO) estimates that changes to provider taxes and other provisions will leave an estimated 11.8 million people uninsured by 2034.
Provider tax restrictions limit state flexibility
The legislation’s provider tax reforms create additional funding pressures:
- Provider tax moratorium: States cannot establish new provider taxes, limiting a key revenue source. Currently, state provider taxes must be no higher than 6% of net patient revenue. States may have up to three fiscal years to transition existing arrangements that don’t comply with the new limits. For states that expanded Medicaid, this percentage will be reduced, starting at 5.5% for fiscal year 2028 and declining by 0.5% annually, to 3.5% for federal fiscal year 2032.
- Expansion state reductions: States that expanded Medicaid must reduce provider tax rates, affecting hospital funding.
- Rural hospital exceptions: Some temporary protections exist for rural facilities, though implementation details remain unclear.
- State-directed payment caps: HHS will cap payment rates at 100% of Medicare rates for expansion states and 110% for non-expansion states, with grandfathered payments reduced by 10% annually starting January 1, 2028.
Rural Health Transformation Fund provides strategic opportunity
Despite the cuts, Republicans added a $50 billion Rural Health Transformation Fund to cushion impacts on rural hospitals. The funding will be distributed beginning in 2026 over a five-year period, with states responsible for applying, and the specific mechanisms for allocating funds to healthcare providers still being determined.
Critical operational impacts include:
- Erosion of operating margins from reduced Medicaid reimbursements and provider tax limitations.
- Increased uncompensated care from work requirement-related coverage losses.
- Administrative burden from twice-yearly eligibility verification processes.
- Service line sustainability challenges requiring difficult strategic decisions.
- Potential facility closures, with researchers estimating over 300 rural hospitals at risk.
- Strategic opportunities through the $50 billion Rural Health Transformation Fund.
Senior living providers benefit from targeted protections
The skilled nursing and assisted living sectors face a more manageable landscape under the OBBB than initially anticipated. According to the American Health Care Association (AHCA), “impacts to SNFs aren’t as severe” due to specific legislative protections for the long-term care sector.
Protected from provider tax increases
Republican lawmakers shielded nursing homes and intermediate care facilities with specific carve-outs to remain at status quo treatment. Other provider types face reduced allowable revenue percentages, but long-term care providers maintain current treatment.
This protection shields facilities from potential additional tax burdens that hospitals and managed care organizations could face. The 0.5% annual reduction in allowable percentage of revenues beginning in 2028 affects other sectors but exempts nursing homes and ICFs entirely.
Staffing mandate relief provides substantial operational benefits
The legislation includes a 10-year delay of the federal staffing mandate for nursing homes.
The AHCA had been pushing Congress to resolve this rule since it was finalized and expressed satisfaction with its inclusion in the final package. The original mandate would have imposed billions in additional compliance costs while creating unrealistic staffing requirements during ongoing workforce shortages.
Coverage changes require process adjustments
The OBBB limits retroactive coverage to one month prior to application for expansion enrollees and two months for traditional coverage, effective January 1, 2027. While less impactful than for hospitals, the reduction in retroactive Medicaid coverage from 90 to 60 days requires operational adjustments for facilities managing complex admission workflows. This change is an improvement from earlier proposals that aimed for 30-day limits.
Immigration enforcement worsens workforce challenges
Healthcare organizations face additional operational pressures from enhanced border security and immigration enforcement measures included in the OBBB. Many healthcare facilities, particularly in long-term care and home health services, rely on immigrant workers.
Stricter enforcement without expanded work visa programs could exacerbate existing workforce shortages in:
- Nursing and direct care positions
- Environmental services and food service roles
- Home health and personal care assistance
- Support staff across all healthcare settings
Healthcare administrators should evaluate workforce composition and develop contingency plans for potential labor market disruptions.
Tax provisions offer strategic opportunities
Despite funding challenges, the OBBB includes several tax provisions that benefit healthcare organizations and their stakeholders, including a 2.5% Medicare Physician Fee Schedule increase for 2026. Others include:
1. Senior-focused tax relief
A new $6,000 deduction for individuals aged 65 and older is meant to help offset federal taxes on Social Security benefits. This change may improve patients’ ability to afford healthcare services and could positively impact census in private-pay settings.
2. Entity structure advantages
Healthcare organizations structured as pass-through entities benefit from extended individual tax rates and enhanced Section 199A deductions. These changes improve after-tax cash flow for physician practices, outpatient facilities and other professional service providers.
3. Capital investment incentives
Extended bonus depreciation and enhanced expensing provisions support equipment purchases and facility improvements. Healthcare organizations planning technology upgrades or facility expansions should evaluate timing to maximize tax benefits.
Strategic response framework
Healthcare organizations should consider implementing immediate assessment and planning processes to address these legislative changes:
1. Financial impact modeling and strategic positioning
- Quantify specific Medicaid reimbursement reductions by service line and payer mix.
- Project cash flow impacts from work requirement-related coverage losses (estimated 1.8 million rural residents).
- Model uncompensated care increases from eligibility verification challenges.
- Identify critical financial thresholds and operational trigger points.
- Create scenario-based operating plans for multiple funding environments.
2. Operational optimization and compliance readiness
- Evaluate service line profitability under reduced reimbursement scenarios.
- Assess staffing models for increased uncompensated care demands from coverage losses.
- Review payer mix strategies and charity care policies for coverage transition impacts.
- Consider consolidation or partnership opportunities for sustainability.
- Leverage staffing mandate delays for operational efficiency improvements.
3. Regulatory compliance
- Update admission and billing procedures for coverage changes.
- Implement workforce planning for potential labor market shifts.
- Leverage staffing mandate delays for operational efficiency.
- Maximize available tax benefits through strategic planning.
Healthcare leaders should not wait to see how implementation unfolds but should prepare immediately. Organizations without established foundations should prioritize creating them now, as private funding will become essential to supplement operational revenue. Consider expanding services into historically private-pay wellness areas that align with your mission, such as medical spas, nutrition programs, cooking classes or gym memberships.
Additionally, healthcare organizations should accelerate automation planning to address labor gaps, meet patient demand and optimize staff deployment for highest-impact activities.
How Wipfli can help
Healthcare organizations figuring out this complex environment need advisors who understand both the immediate operational challenges and long-term strategic implications of these policy changes.
Wipfli can help. Our healthcare specialists provide comprehensive guidance on financial modeling, reimbursement optimization, tax strategy and operational efficiency. Learn more about how Wipfli's healthcare professionals can help your organization adapt in this transformed regulatory landscape. Visit our tax policy page to stay up to date on the latest legislation.
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