Michigan hospitals would take an estimated hit of more than $1 billion a year if a Medicaid cut proposed in the Republican-led U.S. Senate this week were to become law, according to the industry group that represents them.

Hospitals across Michigan already operate on average with a negative margin, and some ? especially rural facilities with higher shares of low-income patients on Medicaid ? are likely to reduce services and staff or even shut their doors under the proposal, according to the Michigan Health & Hospital Association.

“What’s in the Senate version, I want to be very clear, is specifically cutting Medicaid. It’s not addressing waste, fraud and abuse,” said Laura Appel, MHA’s executive vice president for government relations and public policy, in a dig at Republicans’ messaging on Medicaid reforms.

“It’s cutting the funding that Michigan uses ? as do 48 other states ? to support Medicaid,” the government health care program for mostly low-income residents.

Appel was referring to a provision in the Senate Finance Committee’s proposed version of President Donald Trump’s so-called “one big beautiful bill” that would gradually shrink states’ use of so-called provider taxes from a safe-harbor threshold of 6% to 3.5% by 2031. The Medicaid reforms are part of a larger tax cut and spending bill that is the cornerstone of Trump’s second-term agenda.

The $1 billion impact that the Michigan hospitals group has estimated is specific to the GOP-run Senate’s changes. It doesn’t account for a projected spike in uncompensated care that hospitals would encounter due to coverage losses as a result of other provisions in the legislation, such as expanded Medicaid work requirements and twice-annual eligibility assessments for Medicaid participants.

“We’re going to keep pushing right up until the very last vote to protect coverage and funding, because cutting funding is cutting coverage is cutting care,” Appel said. “We’re going to keep taking care of people. But it’s already hard enough. Let’s not make it harder for people to get the care that they need.”

Senate Majority Leader John Thune, a South Dakota Republican, said Tuesday that reducing the Medicaid provider tax rate that states may charge represents “important reforms.”

“We think they rebalance the program in a way that provides the right incentives to cover the people who are supposed to be covered by Medicaid,” Thune said.

“But we continue to hear from our members specifically on components or pieces of the bill that they would like to see modified or changed or have concerns about. And we’re working through that.”

Pressure to rein in Medicaid use

Medicaid is a health insurance safety net for low-income adults and children funded jointly by the states and the federal government. Every state except Alaska imposes provider taxes to help finance the state share of Medicaid costs.

Michigan uses provider taxes ? with federal approval ? on hospitals, nursing homes, ambulance companies and health insurers (managed care organizations) to generate 20% or $3 billion of the state’s share of Medicaid program costs. The extra tax leads to higher payments from the U.S. government, which critics argue is a loophole that lets states abuse the system and swell enrollment in the program.

In a report last month, the state health department said Michigan’s hospital provider tax was projected to generate enough revenue in fiscal year 2025 to support $5.84 billion in Medicaid payments to Michigan hospitals, including the federal matching funds that the tax revenue draws down.

But if the hospital provider tax were limited to 3%, reimbursement payments to Michigan hospitals would decline $2.33 billion, according to estimates by the Michigan Department of Health and Human Services. (The state hasn’t provided a revised estimate based on the 3.5% limit proposed by the Senate.)

Michigan is one of 22 states that could be required to lower their provider taxes on hospitals or health plans because their rates are currently more than 5.5% of patient revenues, according to an analysis by the Kaiser Family Foundation. So Michigan hospitals would feel the impact of the new limits almost immediately if the provision goes into effect in 2027.

The reduced provider tax limits only apply to states like Michigan that have expanded Medicaid. Some experts view the change as a way for Congress to pressure these states to drop their expansions, rather than face the drastic cuts to provider taxes that would devastate state budgets.

“States are going to be in a bind: Either raise other taxes ? income taxes, sales taxes ? or they’re going to cut other parts of the budget like K-12 education or most likely make big cuts to their Medicaid program,” said Edwin Park, a research professor and Medicaid policy expert at Georgetown University’s McCourt School of Public Policy.

“This is an attempt to really roll back the Medicaid expansion,” Park said. “The clear intent is to undermine financing of the program.”

Michigan expanded Medicaid eligibility under Republican Gov. Rick Snyder in 2014. The Medicaid program known as Healthy Michigan currently enrolls 749,000 low-income adults, according to state figures. Overall, Medicaid provides health care coverage to more than 1 in 4 people in Michigan, totaling 2.6 million beneficiaries, including 1 million children, according to state data.

Michigan House Speaker Matt Hall, R-Richland Township, last week embraced the proposed federal spending cuts to Medicaid and food assistance, despite their potential to blow a $3 billion hole in the state budget.

“I can’t force (Democratic Gov. Gretchen) Whitmer’s administration … to spend tax dollars wisely,” Hall said at the White House.

“But President Trump and the Congress can, because they’re the ones who are entrusting her with the dollars. So if they just pay out accurately and don’t pay out fraud, they won’t get penalized.”

That kind of language grinds on J.J. Hodshire, president and CEO of Hillsdale Hospital, who is “disgusted” by lawmakers claiming that the average Medicaid participant is a 27-year-old man playing video games in his parents’ basement. In his rural south-central Michigan community, Medicaid covers the pastor of a local church, farmers, pregnant moms and grocery-store workers ? the working poor, Hodshire said.

“This is me speaking as a Republican. This is me speaking as someone who has supported his party, but you’re also talking to someone who has been on the recipient side of Medicaid growing up one of seven children of my parents, when we were on Medicaid,” Hodshire said.

“This notion that Medicaid is for the lazy or those that are refusing to work isn’t true,” he added.

Hodshire estimated that the Senate’s proposal to limit provider tax rates would result in his hospital losing $6 million a year in reimbursement payments. That amount would reduce services at Hillsdale Hospital, and he predicted that it would result in hospital or program closures in some communities.

“Board rooms across this country are gonna have to make tough decisions. One side might say, ‘They’re just fear-mongering that you’re going to lose your Medicaid. You’re not going to lose your Medicaid,’” Hodshire said. “That might be true. But where are they going to get those services if their local hospital is closed?”

More revenue losses

The Senate’s proposal keeps language that passed the U.S. House in late May that would freeze states’ provider taxes and prohibit certain types of taxes because of how they’re structured using variable rates.

Michigan’s Insurance Provider Assessment (IPA) tax generates about $450 million a year toward the state’s base Medicaid costs, according to the Michigan Department of Health and Human Services, and would be prohibited under the GOP’s proposal, posing another hit for the state budget.

The Michigan Association of Health Plans has estimated that changing the variable IPA tax to equalize the rate would result in a 300% tax increase on commercial insurance providers in the state ? something that would be passed along to customers through premium increases, said Dominick Pallone, executive director of the industry group representing health insurers.

However, the current bill text makes no provision for states to revise the tax to eliminate the variable rates that are no longer allowed, Georgetown’s Park said.

Michigan and other states are also barred under the legislation from creating a new provider tax or increasing existing taxes to replace the lost revenues.

“It’s a little bit like changing the speed limit and then giving a ticket to somebody who sped before you changed the speed limit,” Pallone said.

A proposed rule from the Centers for Medicare and Medicaid Services also seeks to bar certain provider taxes on managed care plans that lack uniformity in seven states, including Michigan. Neither the legislation nor the proposed rule would guarantee a transition period for the states to adjust.

While Michigan’s health plans would like to see the provider taxes continue, it’s “pretty clear” that Congress won’t allow them to operate as they have in Michigan, Pallone said.

“Now, we’re just really asking for a three-year timetable, so that we can have some very difficult conversations in Lansing about how deep and how broad the cuts to Medicaid will have to be,” Pallone said. “And giving us several years to get there would be helpful.”

On the insurer side, he said, the cuts would likely mean lower reimbursement rates paid to Medicaid providers, which would hit rural hospitals hard and could prompt closures. Health plans would also, where allowed, use more prior authorizations to “squeeze” out low-value care, Pallone said.

“It’s pretty dire consequences here of reducing this without being able to find revenue sources to offset it,” Pallone said.

Gabe Schneider, director of government relations for Munson Healthcare ? the state’s largest rural hospital system ? was in Washington, D.C., lobbying Michigan lawmakers this week, urging them not to support the changes by the Senate Finance Committee, he said.

Munson has eight hospitals across 24 counties in the northern Lower Peninsula — an area that includes 140,000 people who receive insurance through Medicaid, he said.

Schneider said he’s reminding lawmakers that Munson can’t turn away Medicaid patients just because their reimbursement rate is being slashed. That loss of revenue will hurt all patients, he said.

Munson’s medical facilities across northern Michigan include hospitals in Cadillac, Charlevoix, Frankfort, Gaylord, Grayling, Kalkaska, Manistee and Traverse City.

“We are the sole community hospital where we’re at, and so patients can’t just go down the road by 15 minutes and get to another hospital because there are no other hospitals,” Schneider said.

“In rural areas, this really has an outsized impact because we’re talking about services that are really critical for our patients and our communities that we serve.”

Nursing homes hit

Provider taxes on skilled nursing facilities and intermediate care facilities that care for people with disabilities would be exempt from the new limits.

However, Michigan’s provider tax on nursing homes wouldn’t be allowed under the prohibition against differential rates, said Melissa Samuel, president and CEO of the Health Care Association of Michigan, which represents nearly 370 nursing facilities in the state.

“If you’re a state that needs to fix your provider tax after May 1, 2025, you wouldn’t be eligible for the exemption,” Samuel said. “It’s clear that they’re directing us to fix it, but in doing so, it’s almost like you’re being penalized.”

Michigan’s skilled nursing facility tax generates $680 million toward the state budget, according to HCAM. The Senate’s new proposed limit would mean a $120 million cut in reimbursements to skilled nursing facilities, Samuel said.

She anticipated the cut would hit labor and benefits and potentially prompt owners to reduce hours or staff, which would in turn limit the number of patients who could be admitted and cared for.

Like Pallone, the Health Care Association is hoping for a transition period to restructure the provider tax so it can continue to be used in Michigan, Samuel said.

“I know there’s language around ‘fraud’ and ‘misuse’ of the provider tax. But the skilled nursing facility tax came in under (Republican Gov.) John Engler in the ‘90s. It’s very straightforward in the state of Michigan and goes directly into skilled nursing reimbursements,” she said.

“We assume that the restructuring of our provider tax is something we’ll have to do, because it was in both the House and Senate versions. That’s something we’re willing to do. But give us another glide path to do that, so then, how much do we have to close the gap?”

U.S. Sen. Gary Peters, D-Bloomfield Township, said he was “deeply frustrated” that GOP senators are pushing for cuts to Medicaid in their bill and said he’d oppose it.

“The bill would take away health care and food assistance from millions of Americans, and hundreds of thousands of Michiganders, in order to give a tax cut to billionaires,” Peters said in a statement.

“It would increase our nation’s deficit and put our country on worse financial footing, all while hurting hardworking families. I will never vote for a bill that does that.”