The U.S. Senate just passed legislation that would devestate hospitals and health care in Virginia. At the heart of this proposal is a rollback of Medicaid-directed payments—funding mechanisms that help offset the substantial shortfalls hospitals face when caring for Medicaid beneficiaries.
Virginia’s hospitals are the backbone of the Commonwealth’s health care infrastructure, serving millions of residents in communities across the state, including rural, economically disadvantaged, and medically underserved areas. Medicaid-directed payments are a critical tool that sustains this care. These payments are made possible through a state-federal funding partnership in which Virginia hospitals contribute provider assessments to the state, which are then matched by federal Medicaid dollars. This structure not only supports Virginia’s Medicaid expansion—currently covering more than 700,000 Virginians—but also enhances Medicaid reimbursement rates through the state’s Directed Payment Program (DPP).
This program has been a financial lifeline, enabling hospitals to recover a portion of the otherwise unreimbursed costs associated with caring for Medicaid patients. The enhancement of Medicaid rates under DPP has significantly reduced hospital losses and helped preserve access to care for the state’s most vulnerable populations.
Should the Senate bill become law, the dramatic reduction in federal matching funds could dismantle this system, with devastating consequences for patient access and hospital operations throughout the Commonwealth.
How the Provider Tax Supports Medicaid and Hospitals
Under 42 CFR §433.68, the federal “safe harbor” cap allows states to assess a provider tax up to 6% of net patient revenue.
<ul>
<li>Virginia’s acute care hospitals pay the 10% state share for Medicaid expansion, approximately 2% of which qualifies under the 6% federal safe harbor and is used to fund the state’s 10% share of Medicaid expansion.</li>
<li>Since expansion, Virginia hospitals have contributed over $3 billion toward this match and are expected to contribute over an additional $6 billion over the next decade.</li>
<li>The remaining ~4% of the provider tax is used to support Medicaid Directed Payments (DPPs) - supplemental payments that help offset Medicaid’s historically inadequate reimbursement rates.</li>
</ul>
Why Medicaid Directed Payments Matter
Virginia hospitals depend on Medicaid-directed payments for financial stability:
<ul>
<li>On average, 16% of hospital revenue statewide comes from these payments.</li>
<li>For many rural and safety-net hospitals, and those in communities with a high economic distress index, up to 34% of hospital revenue comes from these payments.</li>
</ul>
Without these payments, the gap between Medicaid reimbursement and actual costs would widen dramatically.&nbsp;
What’s at Stake: The Senate Finance Proposal Threatens Access to Care
The Senate bill would reduce the federal provider tax cap from 6% to 3.5%, starting in 2028 with 0.5% annual reductions over five years. The proposal also ties directed payments to 100% of Medicare, with a 10% reduction each year. The combined impact of these changes would be devastating:
<ul>
<li>$25 billion in lost Medicaid directed payments to Virginia hospitals over FY28–FY37.</li>
<li>$42.7 billion in total lost Medicaid funding to Virginia, including both state and federal dollars.</li>
<li>The state will be unable to offset these losses, and Virginia hospitals will have to reduce services and staff, or close altogether, jeopardizing access to care across the Commonwealth.</li>
</ul>
The Financial Reality: 
<ul>
<li>Medicaid reimburses 78 cents on the dollar for inpatient care.</li>
<li>Medicare reimburses 87 cents, and commercial plans have dropped to 90 cents or less.</li>
<li>DPP payments help hospitals remain financially viable and continue to provide services, especially in rural and underserved communities.</li>
</ul>
Virginia hospitals utilize this funding to deliver essential services to Medicaid patients, particularly in rural and underserved communities. Your hospital and your patients are at risk.
✅ Take Action Now:
Send a message to President Trump and Congressional Leaders: Don’t Jeopardize Patient Care and Hospital Stability in Virginia. Contact your Representative and urge them to oppose the Senate bill and any reduction in the allowable provider tax cap. Let them know how vital the DPP is to your hospital and your patients.&nbsp;
Your voice matters. Stand up for Virginia hospitals and the communities we serve.

Action Alert: Protect Hospital Medicaid Funding and Patient Care in Virginia 

I write to express my serious concern regarding the efforts in the United States Senate to make significant changes to Medicaid funding in the budget reconciliation legislation. These provisions — passed by the Senate in H.R. 1 — would have immediate and devastating consequences for Virginia’s hospitals and the communities they serve.

The Senate bill proposes to fundamentally restructure the Medicaid Directed Payment Program (DPP) and significantly limit the ability of states to use provider assessments to support hospital funding. These changes stand in direct contrast to the House-passed version of H.R. 1, which wisely included “grandfather” protections to preserve Virginia’s existing DPP and provider tax structure.

Virginia’s DPP and provider assessment model enable the Commonwealth to draw down critical federal matching funds and support supplemental payments that help close the growing gap between Medicaid reimbursement rates and the actual cost of care.

The implications of the Senate proposal are staggering:

   •   Virginia hospitals stand to lose between $2.2 and $2.5 billion annually under the proposed changes.
   •   Supplemental payments account for an average of 12% of net revenue for Virginia hospitals, with some facilities relying on them for as much as 18%, and in a few cases, up to 34%.
   •  These cuts would jeopardize hospital viability statewide, particularly in rural and underserved communities, and could result in significant reductions in access to care, workforce losses, and disruption of essential services.

In addition, the Senate proposal would lower the federal cap on provider tax rates. In Virginia, 2.1% of our existing 6% provider assessment is used to fund the state’s share of Medicaid expansion. Capping the rate would severely constrain the Commonwealth’s ability to sustain this funding model. It would upend a carefully constructed system that currently delivers $3.5 billion annually in supplemental payments to 63 hospitals across the state.

The Senate bill also introduces several other sweeping Medicaid policy changes not contemplated in the House version, with limited time or guidance for states and providers to adapt. The scope, speed, and potential disruption of these reforms pose a profound threat to the stability of our health care system.

For all these reasons, I respectfully and urgently ask that you oppose the Senate version of H.R. 1. Specifically, we ask that you advocate for the retention of the House-passed “grandfather” provisions that protect Virginia’s Medicaid Directed Payment Program and provider assessment authority.

The stakes could not be higher. Without these protections, hospitals across the Commonwealth—particularly those serving our most vulnerable populations—will face catastrophic funding losses that put patient access, local jobs, and community health at risk.

Thank you for your continued leadership and your commitment to protecting health care access for all Virginians.