Illinois hospitals to lose billions through Medicaid policy change,
study finds
[September 03, 2026]
By Peter Hancock
SPRINGFIELD — Illinois hospitals stand to lose upwards of $4 billion in
revenue over the next several years due to impending changes in Medicaid
rules that limit states’ ability to direct higher reimbursement payments
to facilities that serve the most vulnerable populations.
That’s according to a recent study by KFF, a nonpartisan health policy
think tank, as well as estimates by the Illinois Health and Hospital
Association.
And unless Congress acts to reverse those policies before they take full
effect, IHA officials warn, roughly half the hospitals in Illinois could
be forced to reduce staff, cut back on services or close altogether.
“The governor’s people have consistently said that they don’t have a
printing press over in the Capitol, and that they’re not going to be
able to fill in this revenue,” David Gross, IHA’s senior vice president
for government relations, said in an interview. “So it’s a concern that
some of the estimates that have been undertaken in Washington assume
that the state’s going to pick up the costs of these cuts.”
State Directed Payments
The upcoming change affects a little-known practice within Medicaid
known as “state directed payments,” or SDPs. Those are supplemental
reimbursement rates that some hospitals are paid for specific services.
Most states today, including Illinois, operate their Medicaid programs
under a “managed care” model. That means they pay for-profit health
insurance companies a flat per-person fee each month to manage the care
of Medicaid recipients. Those companies, known as managed care
organizations, or MCOs, are then responsible for reimbursing hospitals
and other providers for the services they provide.
Currently, states are allowed to direct their MCOs to pay higher
reimbursement rates to particular hospitals for specific services to
help keep those facilities financially viable or to make sure certain
services remain available in their communities.
“They are a critical piece to ensuring that hospitals are able to
provide access to the Medicaid population in Illinois and across the
country,” said Ben Winick, IHA’s vice president of healthcare finance.
Nearly all states use SDPs as part of their overall Medicaid payment
system. Gross described them as “a way to enhance what have
traditionally been low Medicaid rates in states.”
New federal limits
For several years, according to KFF, federal rules have capped these
state directed payments at the average rate paid by commercial insurers
for those same services. Commercial rates tend to be about twice the
rate paid by Medicare and more than twice the rate paid by Medicaid.
But under the budget reconciliation act passed by Congress in 2025 known
as H.R. 1, or the “One Big Beautiful Bill Act,” states like Illinois
that expanded their Medicaid programs under the Affordable Care Act will
see their cap lowered to 100% of the Medicare rate.
The handful of states that did not expand their Medicaid programs will
be capped at 110% of the Medicare rate.
Those new caps will be phased in over a number of years, starting in
2028.
“This idea that they have in Washington that we should pay at Medicare
rates, the problem with that is that Congress continues to cut Medicare,
and Medicare only covers about 70% of our hospital costs,” Gross said.
That change is one of several in the law that are aimed at slashing
nearly $1 trillion out of the Medicaid program over the next 10 years.
According to KFF’s analysis, the new caps on state directed payments
will account for about $60.1 billion in reduced federal spending on
hospital services nationwide, including about $4 billion in Illinois.
That represents about 77% of all federal spending on SDPs for hospital
services, according to KFF. Illinois and seven other states will account
for just over half of the total reduction.
KFF acknowledges that number only represents the federal portion of the
revenue hospitals receive from SDPs. Total revenue losses could be
higher or lower due to other policy changes within the budget law as
well as how states and hospitals respond to those changes.
IHA, however, estimates the loss to Illinois hospitals will be about $3
billion over five years, starting in 2028 when the new caps start to be
phased in.
[to top of second column]
|
Hospitals in Illinois stand to lose billions of dollars in revenue
over the next several years due to upcoming changes in how they are
paid by Medicaid. (Capitol News Illinois photo by Peter Hancock)
Other Medicaid cuts
In addition to cutting state directed payments, the budget
reconciliation bill also orders reductions in healthcare provider taxes,
a major source for financing states’ share of Medicaid costs. Those are
taxes levied on hospitals, nursing homes and MCOs. The revenue generated
is used to draw down federal Medicaid matching funds.
Currently, federal rules cap the amount states can raise from provider
taxes at 6% of net patient revenue. But under a provision of the budget
law that only applies to states like Illinois that expanded Medicaid
eligibility under the Affordable Care Act, that 6% cap will gradually be
cut starting in Fiscal Year 2028 until it reaches 3.5% in FY 2032.
“Both policy changes really work in tandem,” Winick said. “The hospital
provider tax is used primarily to finance the state-directed payments.”
According to the Governor’s Office of Management and Budget, the cuts in
provider taxes will have ripple effects throughout the Medicaid program,
extending far beyond hospital payments.
In a Feb. 6 memo, GOMB Director Alexis Sturm warned the new caps on
provider tax revenues will result in a total $4.5 billion reduction in
Medicaid funding by fiscal year 2031. That includes $1.7 billion from
the reduction in provider taxes and $2.8 billion in federal matching
funds.
“It should be noted that these amounts show the impact of H.R. 1 only
through fiscal year 2031,” Sturm wrote. “The total annual impact to the
Medicaid program after full phase-in of the rate caps will be $6.1
billion by fiscal year 2033 — $3.8 billion of which is lost federal
support.
Hospitals most at risk
Gross and Winick said all hospitals will feel the effects of the policy
changes, but two classes of hospitals in particular — critical access
hospitals and safety net facilities — are the most vulnerable. Those are
the hospitals that have few other sources of revenue besides Medicaid
and Medicare, and they account for about half of all hospitals in
Illinois.
Critical access hospitals are generally small facilities located in
small towns and rural communities. They are defined in federal
regulations as facilities that have fewer than 25 acute-care inpatient
beds. They are located more than 35 miles from another hospital,
although that requirement can vary depending on the terrain, and they
operate 24/7 emergency rooms.
Safety net hospitals are those that serve higher volumes of Medicaid and
uninsured patients. Although there is not one standard definition for
them, they tend to be located in urban areas and have open-door policies
requiring them to treat any patient regardless of their insurance status
or ability to pay.
On a statewide basis, Gross said, Medicare and Medicaid make up 30-40%
of all hospital revenue. But for safety-net and critical access
hospitals, they make up more than half. In 2025, according to state
data, Medicaid covered 3.2 million people in Illinois, or about a fourth
of the state’s population. Another 2.4 million were covered by Medicare
in 2024, according to KFF.
“So if you think about where Medicare patients show up, they show up in
these rural hospitals, these critical access hospitals,” Gross said.
“And of course the Medicaid patients show up largely in part in our
safety net hospitals. So those two groups of hospitals are really going
to be challenged.”
Capitol News Illinois is
a nonprofit, nonpartisan news service that distributes state government
coverage to hundreds of news outlets statewide. It is funded primarily
by the Illinois Press Foundation and the Robert R. McCormick
Foundation. |
