Medicaid Funding Fight May Hit Hospitals Nationwide–Who Could Be Affected?
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The Centers for Medicare and Medicaid Services (CMS) is proposing a sweeping crackdown on state Medicaid funding as part of its bid to “eliminate waste, fraud and abuse,” a move that could leave many hospitals vulnerable.
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The rule, unveiled on Wednesday, would impose new limits on how states use Medicaid payment structures to funnel billions of dollars to hospitals and other providers, with the aim of stopping states from drawing excess federal funds. However, for states that rely heavily on supplemental payments for Medicaid, this could have serious implications for their hospitals, where much of the funding is directed.
With the United States midterm elections coming up later this year, Medicaid has become a battleground in American fiscal policy as lawmakers seek ways to rein in federal spending while maintaining coverage for tens of millions of Americans.
The proposed changes would save $775 billion over a decade, CMS said, but in some states, these supplemental payments make up more than 75 percent of the money hospital providers rely on.
Which States Could Be Hit Hardest?
The impact will likely vary between states, depending on how heavily their hospital providers rely on supplemental payments.
Data from the Medicaid and CHIP Payment and Access Commission show that hospitals in states such as Kansas, New Hampshire, Pennsylvania, Texas, Tennessee, and Virginia rely particularly heavily on supplemental payments, with that funding making up more than 80 percent of total hospital payments.
States like California, New York, and Texas lead the nation in Medicaid supplemental or disproportionate share hospital (DSH) payments by sheer volume, with the highest figures in raw dollars rather than as a percentage.
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States Where Hospital Providers Rely Heavily On Medicaid Supplemental Payments
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Meanwhile, for states like Alaska, Kentucky, North Dakota, and South Dakota, this funding accounts for only about 5 percent or less of total hospital payments.
In states that are particularly reliant on supplemental payments, rural hospitals are likely to be the most affected.
Many of them already operate on thin or negative margins, and nearly one-third of the nation’s rural hospitals are in danger of closing due to sustained financial losses and low cash reserves, according to the Center for Healthcare Quality and Payment Reform. This means Medicaid funding cuts could lead to these facilities shutting down.
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Number of Rural Hospitals in Each State at "Immediate Risk of Closure"
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What CMS Is Changing
CMS is planning to set clear caps on the Medicaid Managed Care State Directed Payments and Medicaid Fee-for-Service Targeted Practitioner Payments.
State-directed payments are arrangements in which a state instructs Medicaid managed care plans to pay certain providers (such as hospitals) at specific rates or through targeted increases, rather than allowing insurers to negotiate payments independently. They are typically used to boost provider funding, improve care quality, and help offset low base Medicaid reimbursement rates.
However, CMS said that states have often used these arrangements to shift “money from federal coffers to state coffers,” as they can “shift the state’s share of Medicaid financing to federal taxpayers by drawing more federal dollars without equivalent state fund spending.”
The agency added that when this arrangement is misused, it can drive up costs without improving care, but when used correctly, state-directed payments can “properly fulfill their role to expand access, lower cost, and improve quality of care and health outcomes for Medicaid enrollees.”
Centers for Medicare and Medicaid Services Administrator Dr. Mehmet Oz speaks to the media in Washington, D.C., on May 13, 2026.These payments would therefore be capped at 100 percent of Medicare payment rates in expansion states and 110 percent in non-expansion states under the new rule.
Meanwhile, fee-for-service payments are supplemental payments made directly by states under the traditional fee-for-service Medicaid system to specific types of clinicians—such as doctors at academic medical centers—to raise their reimbursement above standard rates. Similar caps will also be placed on these payments.
The rule is currently in the proposal stage and will go through a public comment period before any final changes are implemented.
Though much still needs to happen before this proposed rule takes effect, the move aligns with the national debate over Medicaid’s future, balancing federal budget pressures against the program’s role as a safety net for nearly 80 million Americans. For hospitals across the country, the outcome could determine not just their funding, but whether some can remain open at all.
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