Proposed Medicaid Cuts Require Rural Hospitals and Their Suppliers to Plan for Financial Distress

The recently passed One Big Beautiful Bill Act (OBBBA) includes significant cuts to Medicaid funding. Estimates predict that the act will reduce federal Medicaid support by more than $700 billion over the next 10 years, introducing work requirements for participants, increased cost-sharing for recipients, and stricter eligibility verifications.

The impact on rural healthcare providers will be particularly acute, with a projected $155 billion reduction in federal Medicaid spending in rural areas over the next 10 years. While the act includes a $50 billion appropriation for certain healthcare activities over five years, the bulk of the appropriation is not targeted based on need.

The upshot is that funding to rural hospitals is projected to drop precipitously, which is likely to exacerbate an already deeply distressed market. Distress among rural hospitals is nothing new: A 2024 report in the Journal of Rural Health identified approximately 750 of 2,311 rural hospitals observed were at medium to high risk of distress. Other reporting estimates that about 50% of rural hospitals already operate at negative margins, and the impending cuts threaten to further erode operating margins by more than 50%. Healthcare executives warn that the cuts could lead to widespread hospital closures, particularly in rural areas already facing financial challenges. Even those hospitals that do not close may meaningfully reduce their services; even before these reductions, the 10-year period spanning 2012 to 2022 saw approximately a quarter of all rural hospitals discontinue providing obstetric services, for example.

For rural hospitals and other providers dependent on Medicaid funding for their survival, these developments underscore the importance of proactive financial planning and exploring strategies to mitigate anticipated revenue losses. And not only for the hospitals: Bondholders, vendors, and lessors (particularly equipment lessors) must also carefully consider whether and under what terms to continue to accept exposure to rural hospitals. Conversely, opportunistic buyers may wish to consider whether a roll-up strategy could create efficiencies sufficient to justify the capital and operational risks of acquisition: Many rural hospitals operate independently of the major hospital companies, and widespread distress could depress acquisition prices enough to warrant a fresh look. In fact, a 2023 report identified that during the period spanning 2010 to 2018, about 17% of unprofitable rural hospitals became targets of completed mergers.

Hospitals in financial distress represent a unique challenge when restructuring or winding down their operations. The competing interests of maintaining patient care weighed against the continued viability of the enterprise require a careful and strategic approach. In many cases, a chapter 11 filing can preserve patient services, jobs, and community access to care in a controlled manner.

Proactive planning is a must under these circumstances. Just like in the healthcare profession, early intervention is key when dealing with a financially distressed hospital. Engaging professionals early to prepare for disruptions to reimbursement and income streams will help to mitigate and manage the impact of future cuts to Medicaid. Analyzing a hospital’s existing payor mix, creating realistic financial forecasts, and increasing efforts to collect accounts receivable will help to bolster a hospital’s resiliency. Likewise, a thoughtful legal strategy should be employed to engage financial stakeholders (lenders, bondholders, vendors, and others) to head off potential issues, negotiate appropriate concessions where possible, and determine the best path forward to preserve the business.

Questions about how OBBBA’s cuts to Medicaid funding may impact your business? Reach out to Jack O’Connor, Lisa Vandesteeg, Ryan Hardy, or another member of LP’s Financial Services and Restructuring Group.