September 17, 2025  – A sweeping new federal law is set to dramatically limit the financial lifeline many hospitals rely on to treat Medicaid patients, prompting concern from rural health leaders and healthcare advocates nationwide.

Enacted as part of the One Big Beautiful Bill Act, the legislation places strict caps on state-directed Medicaid payments starting in 2028. These payments, designed to help offset the cost of care for low-income patients, have become a vital tool in 41 states and the District of Columbia, where Medicaid managed care organizations (MCOs) are used to deliver services. Without them, many hospitals, especially in rural regions, face steep funding shortfalls.

Under the new law, states will be required to gradually reduce these payments until they align with Medicare reimbursement rates. For states that expanded Medicaid under the Affordable Care Act, the cap is set at 100% of Medicare rates. Non-expansion states, such as Kansas and Mississippi, will be allowed to pay up to 110%.

The Congressional Budget Office estimates the cuts will reduce federal Medicaid spending by $149 billion over the next decade. KFF projects that as many as 31 states will experience reductions in provider payments. According to the Commonwealth Fund, Medicaid payments to hospitals could decline by at least 20% in 19 of 25 states where data is available.

Healthcare leaders have voiced alarm over the consequences for rural hospitals. “This is all on top of an already pretty strained financial situation for rural hospitals,” said Alexa McKinley Abel of the National Rural Health Association. She warned that essential service lines, including obstetrics and cancer treatment, may be among the first to be eliminated. 

In Kansas, a state that did not expand Medicaid, the situation is especially dire. Cindy Samuelson of the Kansas Hospital Association noted that 87% of rural hospitals in the state are operating in the red. “Over time, commercial payers are paying less and less,” she said, “Many hospitals in our state are at risk of closure.”

In response to the outcry, Congress included a $50 billion Rural Health Transformation Fund in the bill to support hospitals from 2026 to 2030. Still, this is only little over one third (37%) of the estimated loss of federal Medicaid funding in rural areas. Funds will also be distributed by CMS “equally among all states with an approved application,” which suggests that each state with an approved application would receive the same amount from this pool regardless of the size of its rural population, the number of rural hospitals or other providers in the state, the financial standing of its rural hospitals, or other factors. This means that if approved for funding, Connecticut with 3 rural hospitals based on one definition, could receive the same amount as Kansas, which has 90 rural hospitals.

As the clock ticks toward implementation, rural hospitals and Medicaid-serving providers are left grappling with a future of uncertainty. Without meaningful adjustments to funding distribution or sustained policy innovation, the very hospitals that serve as lifelines in underserved regions may find themselves on life support.