Indiana’s hospital systems could face hundreds of millions of dollars in annual Medicaid reimbursement cuts if the rates they charge to employer-provided insurance plans are higher than thresholds set by Gov. Mike Braun’s administration.
The proposed change—which the state has sent to federal regulators for approval—is aimed largely at the so-called “Big Five” health care systems in Indiana, which Braun has criticized for driving up health care costs for employers.
The unusual move is meant to pressure those hospitals into charging less to patients with insurance by threatening to reduce Medicaid rates, which pay for the care of low-income patients and make up a significant portion of hospital revenue.
The Indiana Hospital Association, which lobbies on behalf of the state’s hospitals, said the changes would result in a potentially $1.1 billion reduction in Medicaid reimbursement for the state’s five largest health systems—Indiana University Health, Ascension St. Vincent, Community Health Network, Franciscan Health and Parkview Health.
Other hospitals, however, could receive additional Medicaid revenue under the plan because they charge less to employer plans.
Mitch Roob, secretary of Indiana’s Family and Social Services Administration, known as FSSA, said action is needed to address the high cost of health care as well as the ballooning cost of Indiana’s Medicaid program.
“The governor, during the course of the campaign and the legislative session, was pretty clear that he felt that hospital rates were too high,” Roob told IBJ. “We wanted to address that. And this was a mechanism, not the only mechanism, by which we are addressing the high price of commercial health care.”
He said he hopes the hospitals “appreciate the fact that we believe that they have created a business model that we can no longer afford. I don’t know that they do.”
Unusual tactic
The General Assembly addressed the issue of nonprofit hospital prices and Medicaid funding and reimbursement earlier this year with a law that could strip hospitals of their nonprofit status, starting in 2029, if their prices exceed state averages for individual procedures.
The FSSA proposal is a separate but related move.
The proposed Medicaid reimbursement change drafted by FSSA takes the rare step of linking the level of government money hospitals receive for taking care of needy patients on the Medicaid program to the rates those hospitals set for patients covered by insurers such as Anthem Blue Cross and Blue Shield and UnitedHealth Group.
Hospitals say the proposed changes threaten their financial health and could lead to reduced services and other problems.
The Indiana Hospital Association said the statewide average Medicaid reimbursement under FSSA’s proposal would be 42 cents for every dollar in costs to treat patients. That’s compared to a statewide average of 57 cents today.
“FSSA’s approach to tying commercial rates to Medicaid reimbursement is highly problematic,” Dr. Greg Johnson, chief physician of executive growth and emerging markets at Fort Wayne-based Parkview Health, said in an email. The proposal “risks destabilizing access and jobs across the state given health care is the second-largest employer in the state and one of two industries creating jobs nationwide at this time.”
He said the plan is also “contrary to the policy pursued in most states to reduce the unfunded care costs for Medicaid patients to enable lower cost shifting to employers.”
“Given the amount of undercompensated care we provide to Medicaid patients, this change would push us into a negative operating margin,” he said.
Scott Tittle, CEO of the Indiana Hospital Association, said his group estimated that the loss from the proposed Medicaid changes would be about $940 million statewide. That’s less than the $1.1 billion impact on the Big Five hospitals because some smaller hospitals will see increased funds.
But Tittle said the net effect could be to force hospitals “to make some really difficult decisions about service lines in the future, maybe even some closures.”
He added that hospitals often increase commercial rates to offset low Medicaid rates that don’t cover costs. The plan is “going to cost-shift to the commercial side,” Tittle said.
Indiana’s biggest nonprofit hospital system, IU Health, hasn’t said anything publicly about the proposed Medicaid changes. IU Health spokesperson Lisa Tellus generally declined to answer IBJ’s questions about the plan but said, “I can tell you that IU Health continues to discuss the proposal with state leaders and study the impacts of such a change.”
Roob said the state must take steps to reduce its Medicaid costs. State appropriations are expected to increase to $4.97 billion in 2027, up 134% since 2017.
In fact, the PowerPoint that Roob presented to the Indiana Hospital Association board in August featured a large Titanic-like ship dubbed the “S.S. FSSA.”
About 1.83 million adults and children are enrolled in Indiana’s Medicaid program, which receives $13.1 billion in annual federal funding, according to data from the Kaiser Family Foundation. The state must spend about 35 cents on Medicaid for every 65 cents it receives from the federal government.
Last year, the state budget allocated $3.7 billion for Medicaid, up from $2.9 billion in 2023, Roob said.
“Every dollar we send to a hospital is $1 we don’t send to a school,” he said.
The changes proposed by FSSA are in addition to Medicaid reductions that are part of what has become known as the federal One Big Beautiful Bill Act, which President Donald Trump signed into law in July.
Varied impacts
The FSSA proposal exempts certain hospitals, such as long-term-care facilities and psychiatric and rehabilitation hospitals.
FSSA categorizes other hospitals into three classes based on their roles and net patient revenue.
Class 1 hospitals include county hospitals, critical-access hospitals and rural hospitals. These would receive the highest tiered rate of Medicaid reimbursement under the plan. Class 2 hospitals are those with net patient revenue of less than $2 billion, and Class 3 hospitals are those with net patient revenue of $2 billion or more.
Class 2 and 3 hospitals would receive higher or lower reimbursement rates for Medicaid depending on how their average commercial rates compare to reimbursements for Medicare, the federal program that pays for health care for older Americans.
That comparison to Medicare reimbursement is a common benchmark that policymakers and analysts use to evaluate hospital pricing. And consumer and business advocacy groups, including the Indiana Chamber of Commerce and Hoosiers for Affordable Health Care, have said Indiana’s Big Five hospitals charge significantly more than hospitals in other states do when compared to Medicare benchmarks.
Under the state’s proposal, hospitals that charge rates to employer insurance programs that are relatively high compared to Medicare rates would receive lower Medicaid reimbursements than do hospitals that charge less when measured against those benchmarks.
But state health officials told IBJ the proposal is about more than just saving the state money. It’s also about making care more affordable overall to attack problems related to Indiana’s high maternal mortality rate and high rates of cancer-related deaths.
“If we are truly committed to making Indiana a healthier state, we must ensure that high-quality care is not only accessible, but also affordable for every Hoosier,” Gloria Sachdev, Indiana’s secretary of health and family services, which oversees FSSA, said in an email.
“This strategy, if approved by the federal government, will hold the large hospital systems with high prices accountable, while increasing funding for critical access and rural hospitals,” she said. “It’s a win-win for Hoosiers.”
Complex system
The debate over hospital prices highlights the complexities and rising costs of modern American health care.
Matt Bell of the advocacy group Hoosiers for Affordable Healthcare, which has been highly critical of prices at large nonprofit systems, said his group supports the Braun administration’s efforts.
“I believe that these are hospitals, particularly when we talk about the Big Five in Indiana, that are replete with financial resources that have the ability to make the choice to either lower their prices or to not operate with as much state funding as truly independent critical access rural hospitals,” Bell said.
He pointed to massive projects, such as IU Health’s $4.3 billion downtown Indianapolis hospital campus, slated to open in late 2027, as well as Parkview Health’s recently announced plans to build a $150 million hospital in Lebanon and a $200 million hospital in West Lafayette, far from its Fort Wayne base.
“The spending of the Big Five would suggest that preserving cash is not a priority at the moment,” Bell said.
Kelly Braverman, CEO of Boone County-owned Witham Health Services in Lebanon, said she appreciates the concern she has seen in the Braun administration for small hospitals.
Braverman, however, said she worries that the larger hospitals might see a decline in Medicaid patients as a result of reduced reimbursement, which could push more low-income residents to other hospitals or leave them without care.
She said Witham would likely not see reduced Medicaid reimbursement, according to the hospital’s initial calculations.
“But my bigger concern is when I have a patient in my hospital that is going to need higher-level care, and they’re [covered by] Medicaid, will I have someplace that takes them?” she said.
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