41% of rural hospitals in red ahead of Medicaid policy shift

Financial performance among rural hospitals is  on an upswing, but upcoming health policy changes could undermine these improvements, according to a new report from Chartis.

In this year's "Rural State of the State" report, Chartis reported a national median operating margin of 2% for rural hospitals. This puts about 41% of all rural hospitals in the U.S. operating in the red, the healthcare consulting firm reported.

While this state of financial performance is still dire, it marks an improvement from last year's report, when 46% of all rural hospitals were operating in the red.

Researchers attributed this improvement to stronger financial performance of rural hospitals in states that expanded Medicaid. Rural hospitals in expansion states had a median operating margin of 2.9%, with about 35% operating in the red. In 2025, the median operating margin was 1.5% and about 43% were operating in the red.

Meanwhile, rural hospitals in non-expansion states faced a median operating margin of -0.7% and approximately 52% are in the red. Chartis reported similar financial performance among these hospitals last year.

Medicaid expansion has been linked to improved hospital financial performance. Evidence shows that hospitals in Medicaid expansion states have reduced uncompensated care costs and increased revenue from a shift in uninsured to Medicaid-covered patients. This has led to higher operating margins, particularly for rural and small hospitals.

However, upcoming changes to Medicaid policy could threaten this upward trajectory for many rural hospitals, the report stated.

Public Law 119-21, enacted on July 4, 2025, and commonly known as the One Big Beautiful Bill Act (OBBBA), includes significant Medicaid reforms that will shift payer mix for rural hospitals. These reforms include capping federal financing for Medicaid, introducing mandatory Medicaid work requirements by 2027 and imposing cost-sharing in expansion states by 2028.

The Congressional Budget Office estimates over 10 million people to lose health coverage by 2034 under OBBBA, with the majority of these people losing Medicaid coverage. Medicaid expansion states are slated to face the brunt of these changes.

Chartis reported that over 10 million rural Americans rely on Medicaid. Consequently, Medicaid accounts for almost 10% of rural hospitals' total net revenue.

Rural hospitals will have to manage Medicaid-related cuts from OBBBA, the report stated, alongside other policy-driven reimbursement cuts. For example, hospitals are still facing Medicare sequestration, an annual 2% cut to Medicare reimbursement, which Chartis reported will cost hospitals about $540 million this year.

The report also stated bad debt reimbursement will see an annual 35% reduction from charity care payment cuts, eliminating another $148.4 million for hospitals.

Rural America may see fewer hospitals in the coming years. The report indicated that 206 rural hospitals either closed or converted to models that exclude inpatient care since 2010. These closures have particularly affected certain states, including Texas, Tennessee, Oklahoma, Kansas and Mississippi.

Another 417 rural hospitals across the country are also vulnerable to closure due to their financial standing.

However, rural hospitals could see a boost from federal funds. CMS is injecting $50 billion into rural healthcare over the next five years through the Rural Health Transformation (RHT) program. The program authorized by the OBBBA seeks to offset some of the financial challenges from health policy changes in the law by providing approved states with grants to implement initiatives to achieve certain goals, such as improving sustainable access to care, adopting technology and attracting a robust workforce.

The federal government's investment in rural healthcare is significant, but it is a little over a third (37%) of the estimated funding losses for Medicaid, KFF reported. Additionally, the grants are directed to the state and not all of the money will be used to stabilize rural hospitals, Chartis said.

"While this is a significant step forward, the [Rural Health Transformation] program may be too late to prevent more hospitals from closing their doors or removing service lines such as OB or general surgery," the firm stated.

Jacqueline LaPointe is a graduate of Brandeis University and King's College London. She has been writing about healthcare finance and revenue cycle management since 2016.