Minnesota hospitals miss out on Medicaid windfall after Trump’s budget bill passes

Minnesota won’t gain the full $1 billion windfall in federal Medicaid dollars that officials hoped would stabilize hospitals across the state.

The federal budget bill President Donald Trump signed Friday clamps down on so-called directed payment programs where hospitals pay special taxes to states to unlock much larger federal Medicaid reimbursements. Minnesota on Thursday filed an application to join more than 40 states that have already used the financing mechanism, but state leaders are no longer optimistic it will shore up their hospitals.

The changes under the budget “will severely limit us in Minnesota,” said Joe Schindler, vice president of finance policy for the Minnesota Hospital Association, in an interview Monday.

State hospital leaders scrambled last month after the Minnesota Legislature gave them permission to apply for the federal directed payment program. They believed they had until last Friday, when Congress was expected to advance federal budget legislation that would ban any more states from applying. But the final budget went much further than just setting a deadline: It also made dramatic cuts to future directed payments.

Minnesota was hoping to collect about $800 million annually in taxes from hospitals, based on the number of patients treated, and funnel the money through Medicaid managed care providers in a way that triggered $1.8 billion in federal reimbursements in return. The net $1 billion gain would have offered a dramatic turnaround in some instances in Minnesota, where more than 30 hospitals are financially distressed because they have routinely lost money on operations.

Mayo Fairmont was singled out during federal budget deliberations as a hospital at risk for closure. The southern Minnesota hospital lost $2.2 million on operations in 2023, according to the most recently available public data, but was projected to gain almost $4 million per year under the state’s proposed directed payments program.

Others might have only recouped some losses. Mille Lacs Health System in Onamia posted an operating loss of $4 million in 2023, and was estimated to gain about $3 million in yearly Medicaid directed payments.

More than 40 states have created directed payment programs to solve a fundamental problem: Medicaid has been a growing source of health coverage for the nation’s low-income and disabled individuals, but the government-funded program only reimburses hospitals and medical providers at pennies on the dollar.

In Minnesota, Medicaid is known as Medical Assistance and provides health benefits to more than 1 million people. The program reimburses providers about 70 cents for every dollar they spend on patient care, Schindler said.

Medicaid is funded partly by states but mostly by the federal government. Taxes collected from hospitals basically simulate the state’s share of reimbursements if Medicaid actually paid at or above the cost of medical care. Those elevated payments trigger above-cost payments from the federal government, more than paying hospitals back.

The federal budget bill changed that calculation as part of the Trump administration’s effort to cut Medicaid spending in favor of tax cuts and other priorities.

The federal government will switch and base its directed payments on Medicare, the government-funded health care program for senior citizens that also reimburses providers below the cost of care. Schindler said basing directed payments on below-cost Medicare instead of above-cost commercial insurance means that Minnesota hospitals might gain $350 million instead of $1 billion.

“It’s helpful, but not getting us out of the red, so to speak,” Schindler said.

The budget bill also will gradually reduce the amount over the next five years that Minnesota can collect from hospitals in taxes, from 6% of patient revenue to 3.5%.

Minnesota already is taxing hospitals on about 2.5% of patient revenue to finance graduate medical education of doctors and nurses and the MinnesotaCare program that provides health benefits for low-income individuals who make just above the income limits to qualify for Medicaid. The new low cap will only allow the state to collect about 1% of taxes from hospitals to help them maximize federal Medicaid payments.

Federal lawmakers sought late last week to soften the impact of these budget moves by creating a $50 billion fund to support rural hospitals. That could mean another $100 million to $200 million in yearly support for Minnesota hospitals.

The fund is earmarked for rural hospitals, though, and won’t help urban hospitals that also are struggling. North Memorial Health’s chief executive earlier this year warned that the urban trauma center in Robbinsdale could close without the additional support of directed payments.

Hennepin Healthcare received special permission three years ago to collect directed payments from Medicaid to support its operations as a trauma center and safety-net hospital in downtown Minneapolis. The changes under the federal budget are likely to cut its reimbursements too.