OBBBA spurs funding shifts and reform: How providers can prepare for what’s next

The U.S. health care landscape is undergoing a profound transformation as recent legislative and regulatory shifts, most notably the enactment of the One Big Beautiful Bill Act (OBBBA), reshape the financial and operational realities for providers. With nearly $1 trillion in projected federal health care spending cuts through 2034, the OBBBA introduces sweeping changes to Medicare and Medicaid, including work requirements, eligibility redeterminations and caps on provider taxes. Simultaneously, the expiration of enhanced Affordable Care Act (ACA) subsidies threatens to leave millions uninsured, exacerbating medical debt and increasing demand for charity care. Reduced reimbursements under Section 340B of the Public Health Service Act further erode margins, particularly for safety net hospitals and rural providers already facing workforce shortages and rising compliance costs.

These converging pressures signal a new era of fiscal constraint and regulatory complexity, demanding that health care organizations adopt resilient, data-driven strategies to sustain care delivery amid mounting uncertainty.

Health care eligibility and enrollment

The OBBBA introduces a more restrictive framework for Medicaid eligibility, fundamentally altering how individuals qualify for and maintain coverage. The legislation tightens enrollment standards and imposes new work-related requirements, potentially reshaping the health care landscape for low-income adults.

Since 2020, the number of Medicaid and Children’s Health Insurance Program (CHIP) participants increased by 9%, reaching approximately 77 million nationwide. But beginning Jan. 1, 2027, most nondisabled adults must meet minimum thresholds for employment, job training or community service requirements to maintain eligibility, echoing some state-level policies already in place. 

Retroactive coverage will be reduced from 90 to 30 days, raising concerns about increased medical debt for families facing sudden health emergencies. The law also mandates stricter preenrollment income and asset verification, repeals automatic renewal provisions, and requires biannual eligibility redeterminations for adult enrollees.

The OBBBA further restricts access through new asset and home equity tests, disqualifying individuals with high-value home equity and introducing functional assessments for long-term care eligibility. Analysts warn these measures could disproportionately impact seniors and people with disabilities, curbing access to essential services.

The eligibility and enrollment overhaul is projected to leave 7.8 million people uninsured. Hospitals in Medicaid expansion states may see operating margins decline by as much as 13.3% in 2027, with safety net hospitals facing losses up to 29.6%. For instance, the Commonwealth Fund estimates that eight safety net hospitals in New Mexico will see Medicaid revenue drop 35%, uncompensated care costs surge 122%, and operating margins swing from 5.5% to −0.5%, a 6-point decline. Likewise, Kentucky’s 55 safety net hospitals could face a 32% cut in Medicaid revenue, a 113% spike in uncompensated care, and margins narrowing from 7.7% to 2%, a 5.7-point drop.

These financial pressures could lead to service reductions and operational cutbacks, such as rural hospitals closing maternity wards, urban safety-net facilities scaling back behavioral health programs, and nonprofit systems delaying upgrades to critical care units. The Georgia Pathways to Coverage Medicaid program, which requires 80 hours of monthly work or training, has reduced Medicaid enrollment without boosting employment. In Arkansas, similar requirements led to 18,000 coverage losses, with many participants unaware of the rules or unable to navigate compliance. Over the next decade, federal Medicaid spending is expected to fall by $326 billion, largely due to coverage reductions. 

In light of these challenges, health care providers are bracing for increased churn and uncompensated care. To mitigate disruption, hospitals and clinics should look to invest in outreach and navigation support to help patients adapt to the evolving eligibility landscape. In addition, organizations should consider alternative funding options and proactive measures.

Federal and state financing for health care providers

Provider taxes

The provider tax program helps states leverage federal funds while supporting health care providers that serve Medicaid populations. Provider taxes are a critical and complex component of Medicaid financing for providers. But provider taxes are facing rate reductions, driving providers to model financial impacts and engage with states to mitigate effects through strategic planning over the next two years. These rate reductions include a freeze on provider taxes at 2025 levels, preventing states from increasing taxes to address Medicaid budget shortfalls. For “expansion states”—those that expanded Medicaid under the ACA—the cap on provider taxes would gradually lower from the current 6% to 3.5%, reaching full effect by 2031 to 2032.

The reduction in the provider tax cap implies a significant potential loss of state Medicaid funding—$175 billion over 10 years. Completely removing state reliance on provider taxes would reduce federal Medicaid spending by $630 billion over the next decade. While intergovernmental transfers, non-expansion states and nursing facilities remain unaffected, proactive efforts are essential to manage the evolving fiscal landscape.

Rural Health Transformation (RHT) Program

The OBBBA created the RHT Program, a $50 billion federal program aimed at revitalizing rural health care infrastructure and expanding the workforce in underserved regions. Administered by the Centers for Medicare & Medicaid Services (CMS), the program will disburse $10 billion annually over five years starting in 2026.

To access funding, states must submit a comprehensive rural health transformation blueprint to CMS, detailing strategies to address local health care challenges. Approved uses of funds include:

• Promoting successful interventions for the prevention and management of chronic diseases.
• Providing innovative solutions for the prevention and management of chronic diseases.
• Making payments to providers for specific health care items or services.
• Offering training and assistance for the development and adoption of advanced technology solutions.
• Recruiting and retaining workforce talent in rural communities, with a minimum five-year commitment.
• Providing assistance, software and hardware for technology to enhance efficiency, cybersecurity or patient outcomes.
• Assisting rural communities to right-size health care delivery systems and service lines.
• Enhancing access to opioid and other substance abuse treatment and mental health services.
• Supporting innovative care models such as value-based arrangements and alternative payment models.
• Promoting sustainable access to high-quality rural health care, as determined by CMS.

Funding will be split evenly: $25 billion distributed equally among approved states, and $25 billion allocated based on rural population share, facility density and hospital financial health.

Current estimates of the proposed cuts to Medicaid and Medicare total nearly $1 trillion, an amount far exceeding the $50 billion included in the RHT Program.

Health care providers should consider engaging with their states and associations to ensure their recommendations are included in state planning efforts. Providers should also consider using the funds for future investments, including technology, margin improvement, workforce strategies, patient programs and joint ventures.

State-directed Medicaid and Medicare payments

Starting in 2028, Medicaid payments will decrease annually by 10% as part of a phased reduction, until reaching 110% of Medicare rates for non-expansion states and 100% for expansion states. These gradual reductions require providers to prepare for long-term financial impacts and adjust strategies to maintain sustainability and care quality amid tightening reimbursement structures. Providers should also anticipate downstream effects on payer negotiations, as commercial insurers may benchmark hospital rates against these adjusted Medicaid/Medicare ceilings.

Disproportionate share hospital (DSH) payments

Federal DSH payments, designed to offset uncompensated care costs for hospitals serving large Medicaid and uninsured populations, are facing renewed pressure under the OBBBA. DSH payments rose 60% between 2008 and 2023, reaching $16 billion, reflecting growing demand for uncompensated care. Originally slated for reduction under the ACA, DSH funding remained critical due to uneven Medicaid expansion and persistent coverage gaps.

Now, the OBBBA’s enrollment changes are poised to erode the very metrics that determine DSH eligibility. As Medicaid patient volumes decline, hospitals risk falling below the thresholds required to qualify for DSH support—even as uncompensated care rises. The likely result: Fewer hospitals will meet the criteria, and those that do will receive smaller allotments, with rural and community facilities most exposed.

The fiscal squeeze intensifies with the expiration of a temporary funding patch, triggering an $8 billion annual cut to Medicaid DSH payments effective Oct. 1, 2025, through fiscal year 2028, totaling $24 billion. Simultaneously, the OBBBA caps state-directed payments at Medicare rates, curbing hospitals’ ability to offset DSH losses through supplemental mechanisms.

The disconnect between rising uninsured care and shrinking federal support is already prompting service cuts, staff reductions and deferred capital investments. CMS finalized a rule that further complicates the landscape by tightening how third-party payments factor into DSH limits, adding compliance burdens that could destabilize already vulnerable institutions.

On the horizon

The impact is already being felt, particularly in rural and underserved areas, where some hospitals are scaling back services, laying off staff and deferring critical infrastructure upgrades.

ACA coverage

Federal subsidies underpinning ACA coverage for roughly 19 million Americans lapsed at the close of 2025, eliminating a key financial buffer that accounted for $125 billion in spending last year. The enhanced ACA tax credits, which lowered out-of-pocket costs and expanded access to health care coverage, are poised to sunset just as insurers propose steep premium hikes for 2026.

A Peterson-KFF analysis projects an average rate increase of 18% for certain plans, the sharpest annual jump since 2018, driven by policy uncertainty, escalating medical and labor costs, and demographic shifts. The convergence of subsidy withdrawal and rising premiums threatens to push consumers toward self-insurance or out of the market entirely, with ripple effects across the health care ecosystem.

Hospitals and other health care providers face mounting exposure to uncompensated care, projected to rise by $7.7 billion, while lost revenue from coverage attrition could exceed $32 billion in 2026. The ACA’s open enrollment window, running Nov. 1 through Jan. 15 in most states, tested the resilience of the marketplace amid waning affordability.

Providers are urged to stress-test financial models under scenarios of higher uninsured rates and growing uncompensated care. Strategic outreach and policy engagement will be critical to mitigate fiscal strain and preserve access.

340B Drug Pricing Program

The 340B program requires drug manufacturers to provide outpatient drugs at significantly reduced prices to eligible health care organizations, including those that support vulnerable populations. The $81 billion of purchases at 340B discounted prices in 2024, up 22% from the year prior, has been largely driven by expanded eligibility, broader Medicaid coverage and the rise of contract pharmacy arrangements. This rapid expansion has sparked debate over whether the program still aligns with its original mission to support vulnerable populations, or whether it has evolved into a broader subsidy benefiting a wider range of hospitals and clinics.

The Health Resources & Services Administration has announced a pilot program that modifies the 340B program. The pilot program, originally planned to begin Jan. 1, 2026, was subjected to litigation in late 2025 and is currently on hold, facing potential modifications. The 340B Rebate Model Pilot Program would allow pharmaceutical manufacturers to provide rebates to safety net providers instead of discounted prices upfront. Under the current discount model, providers pay 25% to 50% less for prescription medications. The pilot program would start with 10 drugs that have been subject to price negotiations in Medicare for 2026.

The pilot program would require providers to initially pay full price for medications and request rebates within 45 days of dispensing. Drugmakers would then be required to make payment within 10 days. The program would be voluntary for drugmakers, but not for providers.

Although the exact financial impact varies depending on hospital size and purchasing volume, many 340B hospitals are expected to experience short-term cash flow challenges—potentially amounting to several million dollars—due to delayed revenue recognition and increased working capital demands. Given that some DSHs previously generated tens of millions of dollars annually in 340B profits under the old model, even a partial delay or reduction in those funds could significantly strain cash flow.

Health care providers also face an increase in administrative efforts, as they will be required to monitor multiple rebate models and track which pharmaceuticals are not covered by the pilot program. Additionally, providers will need to manage expected cash flow issues while awaiting requested rebate payments from drugmakers.

Hospitals and other 340B participants should model the potential impact on pharmacy margins and cash reserves, especially if manufacturers strategically limit participation in the rebate model. Health care organizations may want to revise their agreements with manufacturers to incorporate rebate pass-through provisions, audit rights and mechanisms for resolving disputes.