How the Coming Medicaid Funding Cuts Will Impact the Healthcare System

As federal healthcare policy and funding continues to evolve — most recently due to the roughly $1 trillion in cuts to Medicaid passed by Congress in the so-called “One Big Beautiful Bill Act” — businesses across the healthcare industry are preparing for significant reductions in Medicaid funding structures. These reductions will create both immediate operational challenges, and long-term strategic considerations for healthcare providers nationwide. Here’s what businesses can expect, and what they can do to prepare:

Understanding the Scope of Proposed Changes
The anticipated Medicaid cuts encompass multiple dimensions of healthcare financing. Beyond direct reimbursement reductions, the legislation modifies federal funding mechanisms for states, and tightens eligibility requirements for individuals. Companies in the healthcare space should recognize that these modifications are not temporary. They represent a fundamental shift in the structure of the Medicaid system, rather than a temporary adjustment.

Identifying At-Risk Provider Categories and Financial Implications
Certain healthcare providers face disproportionate exposure to these cuts. Organizations with high Medicaid payer-mix ratios, smaller operational scales, and geographic concentration in states with expanded Medicaid coverage represent the highest-risk providers, and by extension, their patients and vendors face the most risk. Rural hospitals often exemplify these vulnerabilities, facing multiple pressures from federal cuts, state-level program uncertainties, and restrictions on provider taxes. These organizations must navigate reduced reimbursements from Medicaid as well as the complex interplay between federal policy changes and state-level implementation decisions.

Market participants should anticipate increased negotiations between hospital operators and their lenders, particularly bondholders, to seek covenant modifications or potential restructurings. Vendor payment terms are likely to become more conservative, though major industry shifts are still developing.

Rural Healthcare Funding Responses
Recognizing the vulnerability of rural providers, policymakers have launched the Rural Health Transformation Program (RHTP), offering $50 billion in funding over five years. However, the RHTP is being implemented on an expedited timeline while creating additional administrative burdens for states where rural hospitals are already struggling.

Even with the inclusion of the RHTP, rural providers will be hard hit. The Congressional Budget Office estimated that rural provider losses will total roughly $137 billion over the next decade.

Medicare Sequestration Considerations
Healthcare businesses should also monitor potential Medicare sequestration implementation, which would likely follow a phased approach depending on timing. While Congress retains the ability to waive sequestration requirements under the S-Pay Go Act, the Office of Management and Budget maintains the relevant scorecard, and certain programs face potential reductions up to 4%. In the event that Medicare sequestration is triggered, healthcare providers, including operators in the senior living industry, will be adversely impacted by reduced Medicare benefits and reimbursements.

Home Health and Alternative Care Settings
Home health and personal care services face particular pressure from proposed 6.4% rate cuts, though these sectors may benefit from broader healthcare trends favoring more convenient, lower-cost care settings. This dynamic creates both challenges and opportunities for providers positioned in these market segments.

Strategic Recommendations
Healthcare companies should implement comprehensive preparatory measures to mitigate the impact of cuts to Medicaid, including continuing to incorporate

• Technology to make healthcare more accessible and efficient
• AI-enhanced revenue collection systems
• Systematic cost-reduction strategies
• Collaborative resource-sharing arrangements among smaller providers

Organizations should also evaluate their Medicaid exposure profiles and develop scenario-based financial planning to address various implementation timelines and policy outcomes.

The coming changes in Medicaid funding represent a fundamental shift in the U.S. healthcare system that will bring business distress. Staying ahead of the curve requires proactive strategic planning and operational adaptation across all provider categories. LP Partner Jack O’Connor recently joined a panel of experts — including Hoa Nguyen, Assistant Editor at Octus; Kyle Owusu, Senior Credit Analyst at Octus; and Lucas Hammonds, Senior Legal Analyst at Octus — to discuss the potential impact of these changes to federal funding. To view this webinar, click here.

Please reach out to Jack, Lisa Vandesteeg, Ryan Hardy, or another member of LP’s Financial Services and Restructuring Group for more information.