Tight margins, new laws, and old problems are putting pressure on hospitals

At first glance, America’s hospitals seem to be clawing back from the pandemic-era free fall. In April, the average year-to-date operating margin reached 3.3 percent—a 6 percent bump over the same period last year—thanks to an uptick in both inpatient and outpatient business, according to Kaufman Hall’s National Hospital Flash Report.  

But a wave of federal and state policy, soaring labor and capital costs, and a steady drumbeat of cyberattacks are pressing on the same thin margins that briefly brightened this spring.  

“The pressure on hospitals is probably more intense than it has ever been,” Hal Andrews, CEO of Trilliant Health told DHI. “Nearly four out of ten hospitals are already operating in the red, and the only real relief valve may be closing access points or entire service lines.” 

A budget bill’s trillion-dollar shadow

The biggest immediate threat is the freshly signed One Big Beautiful Bill Act. The law trims more than $1 trillion from Medicaid and related programs over the next decade; the nonpartisan Congressional Budget Office projects 10.9 million additional uninsured Americans by 2034, 7.8 million of them former Medicaid beneficiaries. 

In the 700-page statute is a phased crackdown on the hospital “provider taxes” many states have used to subsidize their share of Medicaid, which is funded by both the federal government and states. Though States pay up-front for care and the federal government pays them back up to 50%.  

The provider tax allows states to collect fees from hospitals and other healthcare providers, use that revenue to claim additional federal matching funds, and then return the money to hospitals. 

“In other businesses, we would call that money laundering,” Andrews said. “In healthcare, we call that the Medicare provider tax.” 

All states, except Alaska, have at least one version of the provider tax and most states have reimbursement rates close to 70%.  

Under the new law, the amount they can “tax” will be gradually reduced from 6% to 3.5% between fiscal years 2028 and 2034, but only for the 40 states that expanded Medicaid under the Affordable Care Act. The 10 states that didn’t expand Medicaid, predominantly Southern and Republican-controlled states, get to keep their 6% threshold. Additionally, starting in October 2026, no new provider taxes will be allowed at all, effectively freezing the current system in place. 

“The states who have been riding the provider tax train for 15 years realize that the train’s about to come to a stop. They’re faced with the reality that they’ll either have to reallocate state funds to invest in Medicaid, or their Medicaid payments will go down.” 

The consequences fall squarely on hospitals, Andrews share. 

“The people who are going to ultimately pay that bill are the hospitals who get paid less if a state reduces its Medicaid investment.” 

Price caps move from theory to law

While Congress cuts federal spending, state lawmakers have begun directly controlling hospital prices. In May 2025, Indiana—a firmly Republican state—enacted the nation’s first price-cap law for nonprofit hospitals. 

The law requires Indiana’s five largest nonprofit hospital systems to offer at least one employer contract capped at 260 percent of Medicare rates, with implementation required by September 1, 2025. Hospitals that exceed these limits risk losing their tax-exempt status. 

“From a political standpoint, it’s significant that it happened in Indiana first—a state that is a red state for federal election purposes and state election purposes,” he said. “For a Republican governor and Republican legislature to decide that price caps are the answer, I think is a warning sign for every hospital in every state.” 

“If it can happen in Indiana, it could happen anywhere,” Andrews warned. “And it’s not that it would happen exactly the way that it happened in Indiana, but it’s the notion that we’re going to allow the legislature to decide what reimbursement ought to be.” 

The uncertainty this creates is particularly problematic for an industry that makes long-term capital investments. “When you’re investing in healthcare services, you’re making five, 10, 15, 20, 50 year investments,” Andrews explained. “And if you’re making long-term capital investments in an environment where your reimbursement can change every year, depending on the whim of the legislature… I think [that] introduces uncertainty that makes it really hard to expand going into the future.” 

Bipartisan zeal for site-neutral payment

On Capitol Hill, lawmakers of both parties have found rare consensus: equalize Medicare rates across hospital outpatient departments and independent physician offices. House Budget Committee Chairman Jodey Arrington, Republican of Texas, has been a leading advocate, offering amendments to implement site-neutral payment reform while exempting rural hospitals. The policy could generate significant savings—site-neutral payments are typically 60 percent lower than hospital outpatient rates. 

“I know from my conversations with people on the staff of the Budget Committee, I know that Representative Arrington from Texas is absolutely in favor of site-neutral payment. And what I tell our clients is, if you’ve lost a Republican from West Texas, then you’ve lost,” Andrews noted. 

The policy has been the law since 2015 and just not been fully implemented. 

“The only thing that you can do if you’re a health system is to expand your outpatient sites of service and to overweight ambulatory surgery centers and imaging centers.” 

The cross-subsidy crisis

Hospital executives argue that the current payment differentials aren’t arbitrary—they reflect hospitals’ unique role in the healthcare system. “Hospitals, including in Indiana, rely on charges to commercial insurance patients to make up for” shortfalls from Medicare and Medicaid, which “usually do not cover the cost of care.” 

“It’s the commercially insured patients that make the whole system work,” Andrews explained. But those patients are becoming harder to find. “Multiple hospitals reported that the volume of patients on commercial insurance has not returned back to pre-pandemic levels.” 

The challenge is that all these policy changes are happening simultaneously. “If it were just that [Medicaid cuts], then hospitals would probably figure out how to do it,” Andrews said. “They’d cut services in some place or they, you know, quit investing in some service line or that sort of thing. But it’s that plus site-neutral payment… and now price caps.” 

Andrews worries that policymakers are viewing each lever in isolation without understanding the cumulative impact.  

“What’s the relief valve for hospitals? My fear is that people won’t realize until it’s too late that the only real response for hospitals is to close access points or to close service lines because there’s just not enough money to go around to do all the things that society wants hospitals to do.”