The One Big Beautiful Bill has big, but not beautiful, implications for hospitals

The healthcare related provisions in the recently-enacted One Big Beautiful Bill Act will substantially reduce Medicaid funding and, as a result, pose significant challenges for healthcare providers. The full scope of the changes are expertly summarized by our colleagues, Elizabeth Sullivan and Emily Johnson, in a Client Alert posted on August 21, 2025. This alert will highlight several key features of the bill and the challenges resulting from those features and offer some responses. 

Medicaid eligibility work requirements, limitations on provider taxes, the introduction of co-pays and limits on retroactive coverage – all of which included in the One Big Beautiful Bill - are intended to rein in Medicaid costs and prevent fraud.  The consequences of these reductions (approximately $1 trillion over the next decade), however, will likely drive dramatic increases in uncompensated care as hospitals see their role as safety-net health care providers grow.  Moreover, cuts of the magnitude projected will have a domino effect across provider networks and insurance markets. 

According to the CBO, over 10 million Americans will lose coverage, many of whom rely on hospitals as their sole health care providers.  This places immense operational and financial pressure on institutions already grappling with workforce shortages, supply chain disruptions and post-COVID recovery challenges.  Accordingly, hospitals and their leadership should prepare to address challenges in at least four areas:

The Challenges

Uncompensated Care 

First, it is almost a given that, as a result of the introduction of work requirements for certain current Medicaid recipients, uncompensated care will increase over the next several years.  The magnitude of that increase is unclear, with some commentators predicting that it will be dramatic, while others anticipate small increases.  For health care providers already struggling, even small increases will be difficult to absorb.

Anticipating this challenge, particularly for rural hospitals, the OBBBA included a $50 billion Rural Health Transformation Program. Given the magnitude of the Medicaid reductions, the Fund is unlikely to provide meaningful relief. Moreover, the rules regarding allocation of the Fund among the 50 states, within individual states and among various types of providers are cloudy at best.

Operating Margin Pressures

The second challenge relates to operating margins. The above-described growth in uncompensated care coupled with inflationary pressures and labor challenges will drive operating margins down. Financial covenants, such as days cash on hand and debt service coverage ratio, will likely be more difficult to meet, possibly triggering bond and/or loan defaults.

Workforce Stress

The third area of pressure is workforce stress, particularly for rural hospitals.  Already facing high labor costs and recruiting and retention challenges, rural hospitals will find it next to impossible to meet salary demands, assuming they can find interested staff.  With the financial pressures described above limiting their cash flow, hospitals will find it even more difficult to find and keep staff.

Strategic Investments

Finally, in the near term, hospitals will find it difficult to fund necessary strategic investments and capital improvements.  In addition to the pressure on operating margins resulting from the cuts described above, rural hospitals in particular often have limited access to external capital.  Most are owned by non-profits, eliminating the option of raising equity.  And with limited cash flow, borrowing – even in the tax-exempt market – is unlikely.  Yet, to compete and to meet health care regulations and patient expectations, hospitals will need to continue to invest in updates to electronic health records, telemedicine platforms and artificial intelligence.  Moreover, older institutions will need to address deferred maintenance and physical plant improvements.

Data Gathering

Before attempting to address the challenges that result from changes in Medicaid rules and funding, hospital leadership should ask themselves a series of questions, the answers to which will guide responses to the challenges identified above.

Financial Resiliency

• How many days cash on hand does the institution have after excluding restricted funds?
• What happens to EBITDA and days cash on hand if Medicaid net revenue drops 10%, 15%, or 20%?
• Which debt covenants are at risk under those scenarios, and when does the institution trigger a breach?
• What is the monthly cash burn rate and liquidity runway under current vendor terms?
• Which service lines have negative margin after fully loaded overhead?
• What portion of gross charges sits in denials >90 days and self-pay AR >120 days?
• Which state-directed payments or provider taxes may decline or be capped?

Payer/Volume Dynamics

• How much volume is Medicaid or self-pay by service line and by site?
• What is the estimate of increased churn from eligibility changes and work requirements?
• Which clinics or access points see the highest preventable ED use and no-shows?

Workforce and Operations

• What premium labor, agency, and overtime spend can be reduced without closing beds?
• Which units routinely run below safe productivity benchmarks or minimum volumes?
• Which facilities or equipment represent near-term safety/regulatory risks or have large, deferred maintenance?

Strategy and partnerships

• Which regional systems or physician groups could share call coverage, tele-specialty, or back-office functions within 90 days?
• Is the institution positioned to compete for Rural Health Transformation Program dollars; what does it need to submit and by when?
• Is the board aligned on thresholds that trigger affiliation, service consolidation, or asset conversion?

Compliance and revenue integrity

• Are front-end eligibility, presumptive charity, and point-of-service estimates consistently deployed?
• Does the institution have 340B capture gaps or contract pharmacy leakage?
• Is the institution tracking denial root causes weekly with accountable owners and targets?

Overcoming the Challenges

Unfortunately, there is no silver bullet solution to the existing and looming challenges facing hospitals.  Performing financial modeling that includes the reductions in state-directed payments and caps relative to Medicare rates, incorporates provider tax phase-downs, and factors in eligibility churn impacts on payer mix will help provide a starting point. Hospitals should then use this information to inform contract renegotiations, staffing plans, and Rural Health Transformation funding proposals. Additionally, the following responses can reduce the impact, particularly if implemented en masse.

Balancing Needs

As a first step, hospitals should prioritize short-term and long-term needs.  While immediate financial pressures must be addressed, long-term projects that ensure sustainability must be addressed and planned for. Additionally, institutions should prioritize projects eligible for Rural Health Transformation Program funding, such as cybersecurity, EHR optimization, telehealth, workforce recruitment with retention requirements, chronic disease management technology, and facility right-sizing. Grant applications should be sequenced to ensure measurable ROI and sustainability, avoiding funding cliffs.

Cut Cost and Operations Where Appropriate

Reset productivity standards; update staffing grids, consolidate beds, redesign operating room blocks, and standardize supply formularies. Track reductions in transfers and length of stay and utilize hospital-at-home models or enhance swing-bed programs where appropriate. Assess outsourcing or regionalize high-variance back-office functions such as revenue cycle management, IT/cybersecurity, and biomedical services would make more financial sense.

Financial Restructuring

Any institution that has a meaningful amount of debt outstanding should conduct a comprehensive review of its terms.  Knowing critical covenant targets takes on an added significance if the institution anticipates revenue and cash flow declines.  Refinancing debt at more favorable terms and/or restructuring debt to move to interest-only debt service should always be considered.

Partnerships, Affiliations and Collaborations

Every hospital, and especially small and rural hospitals, should consider strategic partnerships with larger systems, neighboring hospitals and other business partners to share resources, technology and expertise. Pursue clinical co-management or joint ventures for surgery, imaging, dialysis, or infusion to share risk and capital.

Telemedicine and Virtual Care

Institutions should leverage telehealth and virtual care.  Properly implemented, these programs allow hospitals to add or expand service lines, expand access to specialists, reduce travel time for patients and lower overall costs.

Strategic Pricing

Utilizing data-driven pricing strategies and managing revenue cycle processes can improve results and increase cash flow.

Advocacy and Community

Work with state Medicaid agencies on directed payments, redistribution timing, and flexibility in rural transformation projects. Engage community partners to support transportation, housing, and behavioral health integration, reducing avoidable utilization.

The list of strategies discussed above is by no means complete.  Every hospital likely could utilize one or more of them and many institutions may need to use all.  One bit of good news from the OBBBA Medicaid changes is that they are implemented over time, through 2028.  As a result, institutions will have some time to adapt.

Conclusion

The next three years offer a window to stabilize operations, fortify partnerships and engage policy leaders. The stakes are high and go beyond financial sustainability. They touch every dimension of mission fulfilment, community health and workforce integrity. Hospital leadership that treats this moment not as a crisis but as a catalyst for transformation will be best positioned to survive.

For questions regarding OBBBA challenges for health care providers, contact McDonald Hopkins healthcare/healthcare restructuring attorneys Rachel Carey and Shawn Riley.