Hospitals nationwide are preparing for a projected $149 billion reduction in Medicaid state-directed payments (SDPs) over the next decade, a change expected to hit rural and safety-net providers the hardest. The cuts stem from the federal government’s push to rein in what it calls unsustainable spending and redirect funding under the One Big Beautiful Bill Act, passed earlier this year.
According to Healthcare Dive, SDPs—created in 2016 to allow states more flexibility in Medicaid financing—ballooned from $10 billion to $76 billion annually in just six years. They have become a critical funding stream for hospitals, particularly those serving large Medicaid populations. The Centers for Medicare and Medicaid Services (CMS) has flagged SDPs as opaque and prone to abuse, prompting the Biden administration to target them for reform before the Trump administration enacted sweeping cuts this year.
Local Impacts Emerging
- Idaho: State officials had anticipated adjustments to federal Medicaid payments, but the scope of SDP cuts caught them off guard. As the Idaho Capital Sun reports, Idaho hospitals worry the sudden loss of funds will limit their ability to support workforce retention and rural access programs.
- Ohio: Rural hospitals, already operating on razor-thin margins, fear closures and service reductions. As WOUB notes, smaller systems in Appalachia and other underserved regions could see “irreversible harm” if alternative funding mechanisms are not introduced.
- Colorado: Leaders expect cuts to destabilize safety-net hospitals, where Medicaid patients account for up to half of inpatient discharges. The Colorado Sun warns that without a transition plan, systems could reduce community health programs or eliminate specialty care for Medicaid beneficiaries.
Policy and Legal Considerations
Some states have leaned heavily on SDPs to support value-based care arrangements, channeling dollars into provider networks designed to improve quality outcomes. Legal experts writing in JD Supra caution that the cuts may derail these efforts and invite litigation if hospitals argue that the rollback violates state-federal agreements.
What Hospital Leaders Should Do Now
Hospital executives must act now to understand their financial exposure to SDP cuts, collaborate with state Medicaid leaders on replacement strategies, and advocate for policies that protect rural and vulnerable populations.
- Assess financial exposure: Identify what portion of your Medicaid revenue comes from SDPs and model the impact of reductions.
- Engage with state Medicaid agencies: Partner on alternative financing strategies, such as supplemental payments tied to quality outcomes or workforce stabilization programs.
- Strengthen advocacy efforts: Work with hospital associations to communicate risks to rural access, maternal health, and behavioral health services.
- Explore operational efficiencies: While policy negotiations continue, prepare contingency plans to protect mission-critical services.
The Medicaid SDP cuts represent one of the most significant shifts in hospital financing in a decade. Without proactive planning and strong state-federal advocacy, health systems
