One Big Beautiful Bill Act Puts UNC Health Southeastern, Community Health Systems, Other Medicaid-Reliant Healthcare Providers Under Pressure

The recently enacted budget reconciliation law known as the One Big Beautiful Bill Act, or OBBBA, contains provisions that stand to significantly reduce the flow of Medicaid funds to healthcare providers, spelling potential trouble for healthcare systems, hospitals and senior living facilities that rely heavily on Medicaid reimbursements for cash flow. The Congressional Budget Office, or CBO, estimates that the law will reduce federal Medicaid spending by over $1 trillion through 2034.

OBBBA includes a sweeping overhaul of Medicaid financing and eligibility rules, imposing new limitations on provider taxes, establishing “community engagement requirements” for able-bodied adults, requiring more frequent eligibility reviews and tightening restrictions on certain state-directed payments.

Downstream effects of the law could include hundreds of billions of dollars in cuts to federal Medicaid funding through statutorily mandated sequestration, according to the CBO.

Once implemented, the cumulative effect of the law’s provisions is expected to put downward pressure on Medicaid-reliant providers, who are often already stressed or distressed. Within the Octus coverage universe, UNC Health Southeastern and several other municipal bond borrowers that attribute a high percentage of their patient service revenue to Medicaid or report a Medicaid-heavy payor mix stand out as providers that may be particularly affected by OBBBA. On the corporate debt side, Medicaid revenue and other factors give Community Health Systems more exposure to OBBBA-related risk than other hospital operators in the high-yield index. These borrowers are discussed in further detail below.

OBBBA’s full impact will not be felt immediately because many of its Medicaid-related provisions will not be implemented until the end of 2026. Key dates include the following, according to KFF:

• July 4, 2025: Cap on state directed payments implemented;
• Dec. 31, 2026: States required to redetermine eligibility for Medicaid expansion enrollees every six months instead of annually;
• Jan. 1, 2027: Work and community engagement requirements begin; and
• Oct. 1, 2027: Provider tax limitations for Medicaid expansion begin, reducing safe harbor cap for providers of 6% of net patient service revenue by 0.5% per year until reaching 3.5% in 2032.

The implementation of these provisions could occur simultaneously with a scaling back of the Medicaid disproportionate share hospital, or DSH, program, which provides supplemental payments to hospitals that have a large number of patients on Medicaid or uninsured people. The DSH program is slated to be cut by $8 billion per year over the next three years, beginning Oct. 1, according to the American Hospital Association, or AHA.

The implementation of OBBBA’s Medicaid-related provisions would also follow the expiration at the beginning of 2026 of enhanced Affordable Care Act, or ACA, exchange premium tax credits created by the American Rescue Plan Act and the Inflation Reduction Act, which itself could create stress for providers, as exchanges have been a source of volume growth and have better payment rates than Medicaid (and in some instances, Medicare).

The delayed implementation of certain of the law’s provisions also leaves time to repeal, amend or mitigate them. One such effort is the proposed Protect Medicaid and Rural Hospitals Act, introduced by Sen. Josh Hawley, R-Mo., just weeks after the OBBBA was enacted. The proposal would repeal OBBBA’s provider tax limitations and state-directed payment restrictions. It would also double the funding for a $50 billion Rural Health Transformation Program established under OBBBA to $100 billion and extend its duration to 10 years.

Octus will be hosting a webinar on Sept. 17 at 11 a.m. ET to discuss OBBBA’s Medicaid provisions and their potential effects. Click HERE to register.

Reactions and Ripple Effects

Industry reactions during the legislative process and after President Donald Trump signed the bill into law in July signal serious concerns for healthcare providers. In remarks emblematic of the response, Universal Health Services CEO Marc Miller stated on a July 29 investor call that based on conversations the company was having with “people down in D.C.,” there appears to be recognition that the law “simply can’t be left as is” because of the expected detrimental effects from the law’s Medicaid provisions, especially for nonprofit hospitals.

Providers in rural areas, where residents are more likely to rely on Medicaid than in metro areas, are likely to be particularly affected, according to a report issued by Georgetown University’s McCourt School of Public Policy. Many of those providers are already in financial distress. The University of North Carolina’s Cecil G. Sheps Center for Health Services Research reports that 89 rural hospitals have closed since 2010 and a further 64 have undergone “converted closures” and no longer offer inpatient care.

In an interview with Octus, Jack O’Connor of Levenfeld Pearlstein, which has advised rural hospitals and their suppliers to prepare for financial distress, suggested that even currently healthy suburban and urban providers could still be put under stress by the law’s downstream effects. A closure or reduction in service for a rural hospital automatically means that other providers in the region will see an increase in patient volume, O’Connor explained.

“People are still going to get sick and need to see healthcare providers, it will just shift the burden of who’s actually serving those communities,” said O’Connor, adding that emergency rooms at urban and suburban providers would see a spike in volume. This, in turn, may put more strain on the system in terms of staffing shortages and vendor contract negotiations, creating a cascading effect on the overall healthcare system in the region surrounding the closed hospital.

Such outcomes are unlikely to be welcomed by employees at providers that have undertaken staffing cuts, including the 68 hospitals and health systems nationwide that have made workforce reductions or job cuts this year through Aug. 29, according to Becker’s Hospital Review.

Additional downstream effects of the law include potential cuts to the Medicare program under the Statutory Pay-as-You-Go-Act of 2010, or the S-PAYGO Act. “PAYGO,” which stands for “pay as you go,” is a budget rule requiring tax cuts to be offset by tax increases or cuts in mandatory spending. A May analysis by the CBO, based on a hypothetical 10-year period and a $2.3 trillion budget deficit increase driven by OBBBA, indicated that Medicare could be cut by 4%, or $45 billion, for fiscal year 2026 under S-PAYGO. The analysis indicated that additional reductions could total approximately $491 billion over the 2027 to 2034 period.

Current CBO estimates of OBBBA’s 10-year effect on the budget deficit range from a $380 billion decrease to a $3.4 trillion increase.

O’Connor noted that S-PAYGO-driven cuts to Medicare would be “an additional cause for concern for hospitals but also forge potential opportunities in the restructuring space.”

Although much of the focus on OBBBA’s potential effects has centered on hospitals and healthcare systems, reductions in federal Medicaid support could also affect segments of the senior living sector. Continuing care retirement communities, or CCRCs, typically attract wealthy residents who can afford sizable entrance fees by selling their homes before moving in, but 65% of nursing home residents in rural counties are covered by Medicaid, according to a June report by the AHA. As a result, the OBBBA could lead to an expansion in the ranks of the 126 distressed senior living projects currently tracked in Octus’ senior living database.

Market participants have already begun to react to the law, as reflected in the offering memorandum for a recent $248.8 million municipal bond issuance for New York City’s Mount Sinai Hospital, which cited Medicaid cuts under the law as a risk factor for bondholders.

OBBBA’s enactment also prompted Insight Health to end negotiations regarding a proposed lease-to-purchase agreement with the San Benito Healthcare District, which operates the distressed Hazel Hawkins Memorial Hospital in Hollister, Calif. A press release announcing the decision specifically cited “unprecedented uncertainty” caused by the OBBBA and $137 billion in reductions expected to “directly impact rural healthcare.”

Potentially Vulnerable Companies

UNC Health Southeastern

Lumberton, N.C.-based UNC Health Southeastern, or UNCHS, is in rural southeastern North Carolina in a town with about 19,000 residents, according to the U.S. Census Bureau. It is the only hospital in the surrounding county, Robeson, which comprises just under 950 square miles and has an estimated population of 120,000. The estimated 2023 median household income in the county was $40,966.

UNCHS reported net operating income of $9.3 million for the first three quarters of FY 2025 after incurring operating losses in fiscal years 2022 through 2024 and returned to covenant compliance in FY 2024 after failing to meet its debt service coverage ratio requirement and receiving going-concern notes from its auditors in FY 2023 and FY 2022.

UNCHS is funded by $140.8 million of Series 2021 and Series 2022 hospital revenue refunding bonds issued by Wisconsin’s Public Finance Authority, and it relies heavily on revenue from Medicaid. As a result, OBBBA’s cuts could prompt the hospital’s return to budgetary struggles and distress.

According to audited financial statements for the fiscal year ended June 30, 2024, UNCHS and its related organizations derived $105.8 million, or 34.3%, of their patient service revenue from Medicaid in FY 2024 and $85.6 million, or 30.7%, of their patient service revenue from Medicaid in FY 2023. The Medicaid figures accounted for 31.2% of their total operating revenue and other support in FY 2024 and 27.1% in FY 2023.

The financials also note that UNCHS recognized $36.1 million in Healthcare Access and Stabilization Program, or HASP, funds as net patient service revenue in FY 2024 and $26.2 million in FY 2023. The HASP program is funded through provider taxes, and the North Carolina Healthcare Association contends that a reduction of provider taxes to 3.5% of net patient revenue under OBBBA would “virtually eliminate[]” the benefit of HASP in the state.

State-level Medicaid cuts could also add to the stress caused by OBBBA’s federal cuts. In August, North Carolina passed a stopgap budget law for the current fiscal year and the fiscal year beginning July 1, 2026, that North Carolina Department of Health and Human Services, or NCDHHS, Secretary Devdutta Sangvai said would underfund the state’s Medicaid program by at least $319 million. Sangvai subsequently issued an open letter to state legislators stating that as a result of the funding gap, “[e]very provider will sustain a minimum of a 3% rate cut, with some services absorbing substantially larger cuts,” according to local news reports.

In addition, the state’s expansion of Medicaid under the ACA, which did not occur until December 2023, faces the possibility of termination if its underlying funding fails to meet certain criteria. The 2023 law that created the expansion program, known as NC Health Works, provided for the program’s termination if the program’s federal medical assistance percentage, or FMAP, drops below 90% or the nonfederal share of the program’s costs cannot be funded from a list of prescribed sources.

Although OBBBA did not directly reduce the ACA’s FMAP for expansion programs, NCDHHS Deputy Secretary Jay Ludlam has indicated that provider tax limits and costs to states associated with work verification under the law have the potential to trigger termination, according to North Carolina Health News.

Making matters worse in the event that Medicare cuts are required under the S-PAYGO Act, UNCHS and its related organizations derived $119.8 million, or 38.9%, of their patient service revenue from Medicare in FY 2024 and $111.8 million, or 40.1%, in FY 2023. These figures represented 38.9% of their total operating revenue and other support in FY 2024 and 35.4% in FY 2023.

Other Municipal Borrowers

Because nonprofit providers and providers in underserved areas are often funded through municipal debt, other borrowers with outstanding municipal bonds are also worth watching. The following providers have reported significant reliance on Medicaid in recent years:

• Brooklyn’s Maimonides Medical Center attributed 31.5% of its FY 2024 net patient service revenue to Medicaid and Medicaid HMO;
• Mount Sinai Hospital reported that Medicaid accounted for 29% of its payor mix by discharges in FY 2024;
• Oroville Hospital reported that Medi-Cal, as the state’s Medicaid program is known, and Medi-Cal Managed Care accounted for 40.7% of its payor mix by discharges in FY 2024 and 35.3% of its payor mix by patient days;
• OU Medicine Inc., dba OU Health, reported that Medicaid accounted for 32% of its gross patient service revenue in FY 2024;
• Watsonville Community Hospital, which was sold to the Pajaro Valley Healthcare District and funded with new bonds in 2024, “gets about half of its patient income from Medi-Cal,” according to Santa Cruz Local; and
• Westchester Medical Center in Valhalla, N.Y., reported that Medicaid accounted for approximately 24% of its net patient service revenue in FY 2024.

Community Health

On the corporate side, Community Health Systems is more exposed to OBBBA risks relative to other hospital operators within the high-yield index because:

• At least 16% of Community Health’s first-half 2025 revenue was derived from Medicaid (46.9% of revenue is derived from managed care and other third-party payors, which include managed Medicaid). Ardent Health, HCA, Universal Health Services and Tenet derive about 10% of revenue from Medicaid on average;
• In 2024, about 16.7% of Community Health’s revenue came from Indiana, an ACA expansion state that is vulnerable to cuts under OBBBA;
• If there is an economic downturn, Community Health could be more vulnerable than other operators within the high-yield index because most of Community Health’s hospitals are in non-urban service areas whose local economies rely on a small number of employers. In some instances, the lack of economic diversification could result in accelerated commercial volume declines if unemployment is higher; and
• Community Health’s pro forma net leverage as of July 28 was about 7.8x (when accounting for distributions to noncontrolling interests), compared with average peer net leverage of 3.6x and average peer EV to LTM EBITDA multiples of 8x.

About 56% of Community Health’s debt matures before 2032. The debt maturing before 2032 has an average cost of 5.8%, compared with an average cost of 10.4% for debt maturing after 2032. The current dynamic suggests that Community Health’s interest burden will likely increase over time. Community Health’s current capital structure is set forth below:

In a more challenging and uncertain regulatory environment marked by revenue and margin declines, Community Health may struggle to generate free cash flow.