Medicaid squeeze shifts from Congress to federal rulemaking

Hospitals have spent months pressing Congress on Medicaid, but the more consequential fight is increasingly moving away from Capitol Hill and into federal rulemaking. The Trump administration’s 2026 Unified Agenda, released July 2, outlines a series of Medicaid regulations expected over the next 18 months. Taken one by one, the proposals may look like technical adjustments. Viewed together with coverage changes already taking effect, they point to a broader strategy: reduce the financing tools hospitals rely on, narrow the population that qualifies for coverage and expand federal control over who gets paid. Many of these changes would be carried out through regulations and statutory deadlines rather than direct negotiations in Congress.

One of the biggest areas of concern is provider taxes, a financing tool used by nearly every state to support Medicaid. CMS is expected to propose lowering the Medicaid provider tax hold harmless threshold this month, according to America’s Essential Hospitals. The policy matters because provider taxes are widely used to help states fund their share of Medicaid costs and draw down federal matching dollars. Forty-nine states and the District of Columbia used at least one provider tax to finance Medicaid in fiscal year 2025, and 39 states plus the District of Columbia used three or more, according to a Georgetown University McCourt School of Public Policy report. The Commonwealth Fund says provider taxes generate about $37 billion annually for states, equal to roughly 18% of the nonfederal share of Medicaid spending nationwide.

States typically use the revenue from provider taxes to pull in federal matching funds and then direct much of that money back to hospitals through higher Medicaid payment rates. Federal policy is already limiting those financing arrangements. HR 1 lowers the provider tax safe harbor from 6% of net patient revenue to 3.5% by 2031 for Medicaid expansion states. A new CMS rule would tighten those limits even further through regulation. The effect could be especially significant in the 17 Medicaid expansion states that already tax hospitals above the future 3.5% threshold, 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 will save $775 billion. The agency later clarified which arrangements can be grandfathered. Separately, it finalized a rule phasing out certain provider taxes. Federal forecasters estimate the provider tax restrictions alone will reduce federal spending by nearly $226 billion over 10 years.

At the same time, the number of people covered by Medicaid is expected to fall. 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 keep coverage. Some states are not waiting for the federal deadline. Nebraska became the first state to adopt the new federal work requirements on May 1. Montana and Arkansas followed on July 1, although Arkansas is using 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 provides the longest operating example. Since launching in 2023, the program had enrolled about 16,183 people through March 2026, and critics have argued that 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 fall by as much as 29.6%, with some rural hospitals facing even larger declines. The Congressional Budget Office estimates work requirements will reduce federal Medicaid spending by more than $325 billion over 10 years and leave 4.8 million fewer people insured.

Health policy analysts expect much of the coverage loss to come not from people who fail to meet work requirements, but from eligible beneficiaries who do not complete the paperwork needed to prove compliance. For hospitals, fewer Medicaid enrollees could mean more uninsured patients, greater bad debt and higher uncompensated care. That risk is especially important for Medicaid expansion states, which are also facing reduced financing flexibility.

CMS is also preparing to expand Medicaid oversight. In October, the agency is expected to issue a proposed rule on provider enrollment and program integrity after its Comprehensive Regulations to Uncover Suspicious Healthcare request for information. Additional proposals would broaden CMS’ authority to terminate providers, require states to conduct more provider audits and revise budget neutrality policies for Section 1115 waivers starting in January 2027. The agency has also eliminated its expedited approval process for certain Medicaid waivers, leaving states with fewer administrative tools to adjust their programs.

These Medicaid changes are happening alongside other pressures on hospital finances. Several states are pursuing legislation aimed at limiting commercial hospital prices, adding another layer of financial strain beyond Medicaid policy. How states respond to the loss of Medicaid financing remains uncertain. Policymakers could raise other taxes, cut spending elsewhere or reduce Medicaid payment rates and eligibility, and each option would affect hospitals differently.

Safety-net and essential hospitals appear likely to face the greatest exposure because they rely most heavily on Medicaid financing mechanisms and usually have fewer alternatives to replace lost revenue. For hospitals, the most immediate opportunity may no longer be lobbying Congress. Instead, it may be participating in the federal rulemaking process before proposed regulations are finalized.