Hospitals under federal-funding risk

Hospitals are being squeezed from both sides: rural systems say Medicare underpays them, while some larger systems are cutting services to avoid risking federal dollars. (mageenews.com) On April 22, Senator Cindy Hyde-Smith told Health and Human Services Secretary Robert F. Kennedy Jr. that Medicare’s Area Wage Index is “destabilizing hospitals” in low-wage states like Mississippi. Kennedy said at the Senate Labor-Health and Human Services-Education Appropriations hearing that “the change has to come from Congress,” though he said the administration wants to work on a budget-neutral fix. (mageenews.com) The Area Wage Index is the formula Medicare uses to adjust inpatient hospital payments for local labor costs. Under federal law, those payment changes must be budget neutral, so giving more to low-wage hospitals usually means taking money from hospitals elsewhere. (cms.gov, medpac.gov) Hyde-Smith said Forrest General Hospital in Hattiesburg loses about $8 million a year under the current formula and warned that the strain reaches a 19-county network serving roughly 700,000 people. She also pointed to a 2019 Trump administration policy for low-wage-index hospitals that was later struck down in court. (mageenews.com, hfma.org) The pressure is broader than Mississippi. Chartis said in its February 2025 rural hospital report that 46% of rural hospitals had negative operating margins, 432 were vulnerable to closure, and 18 rural hospitals closed or converted in the prior year, bringing the total since 2010 to 182. (chartis.com) At the same time, federal policy fights have turned Medicare and Medicaid participation into a live compliance risk for hospital executives. On April 20, Washington Attorney General Nick Brown said a federal judge permanently blocked an HHS attempt to threaten providers with exclusion from Medicare and Medicaid for treating youth with gender dysphoria. (atg.wa.gov) The court said Kennedy’s December 18 declaration exceeded federal authority, skipped required rulemaking steps, and interfered with states’ power to regulate medical practice and design Medicaid plans. The Washington-led coalition included 22 states and the governor of Pennsylvania. (atg.wa.gov) Even before that ruling, hospitals had already been reacting to the funding threat. STAT reported on Feb. 5 that more than 40 hospitals or health systems had paused or ended some gender-affirming care for young people since January 2025, and at least nine had stopped hormones or puberty blockers after proposed federal rules in December threatened Medicare and Medicaid funding. (statnews.com, federalregister.gov) Those decisions were often framed as legal-risk management, not just clinical policy. STAT quoted Harvard law professor Carmel Shachar saying some hospitals likely did not want to become “the example” when enforcement began, while state attorneys general argued the federal government was using funding threats to force policy changes it had not lawfully adopted. (statnews.com, atg.wa.gov) That mix of thin margins and federal exposure helps explain why hospital buyers are leaning toward vendors that promise compliance help without adding operational friction. The American Hospital Association says rural hospitals already face compounding problems in payment, workforce, geography, and access to capital; when reimbursement is fragile, any service tied to audits, billing, or eligibility gets judged through a funding-risk lens. (aha.org, mageenews.com) The next test is whether Congress and the administration can change Medicare’s wage formula without triggering a fight from hospitals in higher-wage markets. Until then, hospitals are still operating as if one reimbursement rule or one federal declaration can change their finances overnight. (mageenews.com, cms.gov)