The Medicaid squeeze hospitals can’t lobby their way out of

By Alan Condon / July 10, 2026

Hospitals have spent months lobbying Congress over Medicaid. The fight that matters now is shifting away from Capitol Hill and into federal rulemaking.

The Trump administration’s 2026 Unified Agenda, published July 2, outlines a series of Medicaid regulations expected over the next 18 months. Read individually, they are technical adjustments. Read together with the coverage changes already rolling out, they describe one strategy: shrink the financing tools hospitals depend on, tighten who qualifies for coverage and widen federal authority over who gets paid.

Unlike recent legislation, many of these changes will be implemented through regulations and statutory deadlines rather than congressional negotiations.

Medicaid dollars are shrinking — and getting harder to earn

One of the most significant proposals targets provider taxes, a financing mechanism nearly every state uses to help fund Medicaid.

CMS is expected to propose lowering the Medicaid provider tax hold harmless threshold this month, according to America’s Essential Hospitals. Forty-nine states and the District of Columbia used at least one provider tax to finance Medicaid in fiscal year 2025, while 39 states and the District of Columbia used three or more, according to a report from Georgetown University’s McCourt School of Public Policy.

Provider taxes generate roughly $37 billion annually for states — about 18% of the nonfederal share of Medicaid spending nationwide, according to The Commonwealth Fund. States use this revenue to draw down federal matching dollars before directing much of the funding back to hospitals through higher Medicaid payment rates.

Federal law is already reducing those financing options. HR 1 lowers the provider tax safe harbor from 6% of net patient revenue to 3.5% by 2031 for Medicaid expansion states, The anticipated CMS rule would further tighten those limits through regulation.

The impact could be greatest in the 17 Medicaid expansion states that already tax hospitals above the future 3.5% threshold, according to the New Hampshire Fiscal Policy Institute, according to a Feb. 6 report from the New Hampshire Fiscal Policy Institute. 

Provider taxes are not the only financing mechanism under pressure. 

CMS has also moved to cap state directed payments in a change it says saves $775 billion, then clarified which arrangements can be grandfathered, and separately finalized a rule phasing out certain provider taxes. Federal forecasters put the provider tax restrictions alone at nearly $226 billion in reduced federal spending over 10 years. 

The paying population is shrinking, and some states aren’t waiting

As Medicaid financing tightens, enrollment is also expected to decline.

Beginning Jan. 1, 2027, HR 1 requires most Medicaid expansion adults ages 19 to 64 to complete at least 80 hours per month of work or other qualifying activities to maintain coverage. Some states have already implemented work requirements.

Nebraska became the first state to adopt the new federal work requirements May 1. Montana and Arkansas followed July 1, though Arkansas is running a soft launch and will not disenroll anyone for noncompliance until January 2027. Iowa plans to begin Dec. 1.

Georgia’s Pathways to Coverage program offers the longest operating example. Since launching in 2023, the program had enrolled about 16,183 people through March 2026, with critics arguing administrative costs have exceeded expectations.

The Commonwealth Fund estimates Medicaid work requirements could reduce operating margins by an average of 13.3% for hospitals in Medicaid expansion states. Safety-net hospitals could see margins decline by as much as 29.6%, with some rural hospitals facing larger reductions. 

The Congressional Budget Office estimates work requirements to reduce federal Medicaid spending by more than $325 billion over 10 years while leaving 4.8 million fewer people insured. Many health policy analysts expect much of the coverage loss to stem from eligible beneficiaries who fail to complete required paperwork rather than individuals who do not meet work requirements.

For hospitals, fewer Medicaid enrollees could translate into more uninsured patients, higher bad debt and increased uncompensated care, particularly in Medicaid expansion states that are simultaneously facing reduced financing flexibility.

Oversight is expanding

CMS also plans to increase Medicaid program oversight. 

In October, the agency is expected to issue a proposed rule addressing provider enrollment and program integrity following its Comprehensive Regulations to Uncover Suspicious Healthcare request for information. Additional proposals would expand CMS’ authority to terminate providers, require states to conduct more provider audits and revise budget neutrality policies for Section 1115 waivers beginning in January 2027.

CMS has also scrapped its expedited approval process for certain Medicaid waivers, giving states fewer administrative tools to modify their programs. At the same time, several states are pursuing legislation aimed at limiting commercial hospital prices, adding another layer of financial pressure beyond Medicaid policy.

How states respond to reduced Medicaid financing remains uncertain. Policymakers could increase other taxes, reduce spending elsewhere or lower Medicaid payment rates and eligibility, each carrying different implications for hospitals.

Safety-net and essential hospitals — which rely most heavily on Medicaid financing mechanisms and typically have fewer alternatives for replacing lost revenue — are likely to face the greatest exposure.

For hospitals, the immediate opportunity may be less about influencing legislation than participating in the federal rulemaking process before proposed regulations are finalized.