Recent legislation, like the One Big Beautiful Bill (OBBB), has introduced considerable policy changes to Medicaid eligibility and financing, at both federal and state levels1. The Congressional Budget Office (CBO) estimates that these reductions will culminate in a $911 billion reduction in federal Medicaid financing over a ten-year period2. While the full impacts of these policy changes remain unknown and are subject to change, this brief explores the potential impacts of the OBBB on hospital margins across the US, particularly in the state of NC.
Between 2022 and 2023, aggregate hospital operating margins rebounded significantly from 2.3% to 6.4%. Nevertheless, 39% of hospitals still failed to turn a profit, illustrating that margins vary significantly from hospital to hospital and that a considerable portion of healthcare facilities are vulnerable to closure should they fail to recoup their losses in the long-term3. Rural hospitals, which disproportionately serve Medicaid and uninsured patients, are overrepresented among hospitals operating in the red. Over the past decade, rural hospital operating margins have declined significantly, with nearly 46% of rural hospitals now operating at a loss. Furthermore, 432 rural hospitals are currently at risk of closure due to financial instability4.
To remain solvent, hospitals depend upon Medicaid, Medicare, and commercial insurance reimbursements for services, which constitute the majority of their revenue streams5. Given that reimbursement rates vary greatly across insurers, payer mix—the percentage breakdown of a hospital’s patients by insurance type (Medicaid, Medicare, commercial insurance, and uninsured)—plays a critical role in determining a hospital’s revenue potential. Likewise, any changes to the nature of reimbursement rates or the insurance breakdown of a hospital’s patient population (e.g., if a hospital with a 30% Medicaid payer mix sees 10% of those patients become uninsured the following year) threaten the financial stability of healthcare facilities across the country. The table below provides a snapshot of the percentage of hospital discharges in North Carolina that were covered by Medicaid, highlighting the significance of Medicaid to the revenue of facilities across various regions across the state.
Before examining recent policy changes that may affect hospital margins, it is important to first define how operating margin is calculated. Operating margin represents operating income as a percentage of operating revenue. As a key measure of hospital profitability, this metric will be used throughout the brief to evaluate hospitals’ financial stability. The figure below highlights operating margin trends for Novant, Duke, and UNC Health from FY2020 to FY2023, which will serve as reference points for analysis later in this brief.
Among the changes in the OBBB that will primarily impact hospital margins are adjustments to the provider tax statute and eligibility criteria, most notably in Affordable Care Act (ACA) expansion states.
As a jointly funded program, Medicaid relies on both federal and state revenues. States generate their share through state, local, and provider taxation, the latter of which made up 17% of state funding in 2018, according to a 2025 report by The Commonwealth Fund6. Provider taxes are state-levied fees on healthcare institutions that serve as an important funding mechanism for Medicaid. Proponents of provider taxes assert that without them, states would face considerable hurdles financing Medicaid. As a result, states would have to turn to other revenue streams, such as increasing state taxes or enforcing stricter regulations on Medicaid enrollment and service offerings7. Opponents of provider taxation argue that states abuse the tax to increase their federal match, considering that the federal government’s payout to states is proportional to the amount states raise through taxation. For example, if the federal match rate is 50%, a state that generates $100 million in provider tax rates as opposed to $50 million would accrue a larger sum from the federal government.
Prior to the implementation of the OBBB, states were permitted to issue uniform, broad-based (i.e., states cannot disproportionately tax certain providers over others) provider taxes of up to 6% of hospitals’ net patient revenues8. According to the OBBB, non-expansion states can maintain existing provider taxes at the same threshold of 6% or less, but newly introduced taxes will be set at 0%. Expansion states, however, must decrease provider taxation rates by 0.5% annually until provider taxes reach 3.5%, with the exception of long-term care facilities which can continue to sustain taxes of up to 6%. These provisions were effective immediately upon passage of the OBBB in July 2025, although states have up to three years to transition away from preexisting agreements that are now unlawful.
The effect of provider tax regulations on states is multiplied: states will not only accrue fewer revenues from provider taxation but will also receive a smaller sum in federal match dollars. States are likely to absorb these losses through apportioning smaller provider tax reimbursements to hospitals and making adjustments to Medicaid eligibility, which may result in an expansion of the uninsured population. Over the next 10 years, hospitals will face an estimated $191 billion reduction in provider tax reimbursements, potentially resulting in hospital closures, staff reductions, and the discontinuation of services associated with low reimbursement rates, such as mental health treatment9. Rural hospitals, which serve a disproportionately large number of Medicaid patients, are especially vulnerable to the impacts of these reductions. Compared to commercial insurance, Medicare and Medicaid reimbursement rates are significantly smaller and, in many cases, fail to fully compensate for the total cost of care. As such, hospitals rely on the higher reimbursements of commercial payers to recoup their losses. Because the patient population of rural healthcare facilities often overrepresents Medicaid enrollees, rural hospitals benefit less from commercial insurance and depend more on Medicaid reimbursements. To offset these reimbursement differentials, the state of North Carolina implemented the North Carolina Healthcare Access and Stabilization Program (“HASP”), a state-directed payment that compensates participating hospitals at a higher rate than what is specified by Medicaid. However, due to new regulations on SDPs under the OBBB, which cap the reimbursement rate to 100% and 110% of the Medicaid rate in expansion and non-expansion states respectively, rural hospitals are further at risk10.
In 2024, approximately 20% of UNC Health Chatham patients were covered by Medicaid so our hospital could carry a significant burden from these changes. For many of our patients, any loss in coverage means a loss of preventative care or disease management, often resulting in additional visits to our emergency room with more advanced – and costly – health services.
Jeff Strickler, President UNC Health Chatham
In recognition of these foreseen impacts, the OBBB allocated an additional $50 billion toward rural health facilities. Nevertheless, this amount may not fully offset the projected $155 billion reduction in Medicaid funding to rural hospitals over the next 10 years11.
The OBBB contains multiple provisions that redetermine Medicaid eligibility. Reversing prior legislation that prohibited such measures, it mandates states to impose work requirements for coverage. Work requirements mandate that certain Medicaid enrollees work a minimum of 80 hours a month to receive coverage. While these requirements are projected to save $326 billion in federal spending, evidence suggests they may have limited impact on employment among Medicaid enrollees12. In 2023, approximately 64% of Medicaid enrollees were already employed, while 36% were unemployed. Among the unemployed, 81% reported barriers such as schooling, disability or illness, or caregiving responsibilities, with the remainder citing retirement, difficulty finding a job, or other reasons13. Given these circumstances, work requirements may reduce coverage more than they increase employment, potentially limiting projected savings. A CBO case study in Arkansas in which work requirements were in effect found that the mandates had a negligible impact on employment but resulted in a 25% decrease in the insurance rate among the study population14. These findings align with a report from the Kaiser Family Foundation (KFF) indicating that work requirements create confusion among enrollees, leading some to lose coverage despite remaining eligible. As such, the projected savings from work requirements are likely to stem from administrative barriers to enrollment rather than from disenrolling individuals who are ineligible for Medicaid. The implementation of work requirements is also burdensome, as it requires states to develop new systems and expand staff to handle the added administrative workload. Georgia’s Pathways to Coverage, which enforces work requirements for 8,000 enrollees, has cost more than $100 million since July 2023, with only $26 million directed toward actual health benefits15
In addition to work requirements, the OBBB requires states to make eligibility redeterminations every six months, although enrollees in non-expansion states can continue to renew enrollment annually. The OBBB also mandates that enrollees verify their eligibility annually before re-enrollment, a policy that effectively terminates the current policy of autoenrollment15. These provisions align with the administration’s aim to root out Medicaid fraud and will generate an estimated $63 billion in savings16. Critics of the removal of autoenrollment and changes to eligibility determinations assert that these provisions will create a higher administrative burden for insurers who will likely pass on these costs to consumers in the form of increased premiums. Increased premiums may further drive uninsurance rates.
Changes to Medicaid eligibility requirements and provider tax statute in ACA expansion states under the OBBB will have important implications for hospitals’ bottom line. Lower revenues from provider tax reimbursements will exert downward pressure on hospital margins. Although hospitals may be able to account for these losses in the short term, the projected ten-year increases in the uninsurance rate are likely to further drive hospital operating costs. According to STAT, the uninsured population is likely to increase by 10 million due to policy changes specified by the OBBB, such as work requirements and eligibility changes17. Additionally, another 5 million people may become uninsured due to the expiration of enhanced premium tax credits at the end of 2025, which offer discounted coverage for health plans on the ACA marketplace18.
Given that hospitals rely on payer reimbursements to recoup their losses, a significant increase in the uninsured population may have drastic impacts on hospitals. Over the next ten years, hospitals are projected to witness an increase of $63 billion in uncompensated care19. This figure is likely underestimated as it does not factor in the impact of expired enhanced premium tax credits on the insurance rate. Traditionally, federal and state governments reimburse hospitals for these losses, although they often do so partially, such as in 2017 when hospitals received only 79.2% of the total uncompensated care costs20. Should state and federal governments fail to step in and cover these losses, hospitals may be forced to close their doors.
Impacts of the OBBB will be most pronounced in the case of rural hospitals, such as UNC Health Chatham, a 25-bed rural hospital operating in Siler City, NC. Since the expansion of Medicaid in North Carolina in December 2023, UNC Health Chatham’s percentage of uninsured patients fell from 12% in 2022 to 7% in 2025. Similarly, the percentage of Medicaid patients rose from 16% to 19%.
Nevertheless, the policy changes introduced by the OBBB are likely to reverse these changes not only for Chatham patients but for the 600,000 North Carolinians who obtained coverage under Medicaid expansion in 2023.
According to the Advisory Board, operating margins for large health systems are projected to decrease between 8% to 14% by 2028. The magnitude of these changes at individual hospitals will predominately depend on payer mix. Hospitals with a high proportion of Medicaid enrollees are likely to sustain more significant reductions in their operating margins, while hospitals with a moderate-to-low share of Medicaid patients are expected to face smaller reductions. The figure below shows the projected changes in operating margins for Duke, UNC, and Novant Health, using FY2020–FY2022 operating margin data as the historical baseline.
Based on increased expenses from a range of policies including increased uncompensated care and tariffs as well as reduced revenue from Medicaid cuts, Medicaid sequestration, and sunsetting ACA subsidies…we expect a 16-percentage point impact on operating margins for health systems with between $1 billion and $2 billion in revenue.
The Advisory Board20
OBBB may impact hospitals in the following ways:
To overcome these challenges, hospitals must find creative ways to cut their operating costs, which are likely to result in staff reductions and the prioritization of high-reimbursement services. Should these reductions result in a lower standard of care administered by healthcare facilities across the country, public and private payors should expect to see long-term increases in per capita expenditures.
Associate Director, Research, Center for the Business of Health; UNC Kenan-Flagler Business School
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