Changes in federal tax provisions and funding stemming from the recently passed reconciliation tax bill, the One Big Beautiful Bill Act (OBBBA), are expected to significantly impact the healthcare industry. Going forward, organizations need to consider the near- and long-term effects of the OBBBA, including Medicaid funding cuts that impact patient populations and reimbursement, altered tax provisions that could influence financial planning, and increased compliance needs stemming from heightened regulatory scrutiny of fraud and abuse.
The changes place tax and financial plans, operational strategies, and care models in flux, and healthcare organizations will need to adjust their strategies to continue delivering quality patient care.
Medicaid Funding Cuts
Over the next few years, the OBBBA’s spending reductions will impact patient access and care, as well as healthcare systems’ bottom lines.
Up to 16 million people are expected to lose eligibility for Medicaid by 2034, according to the Congressional Budget Office (CBO), potentially creating new gaps in healthcare access and straining the financial viability of organizations that serve these communities. Sixty-three percent of those served by skilled-nursing facilities use Medicaid, so tightening eligibility requirements will limit access and affordability for patients. This may cause a reduction in patient volume below what’s needed for these facilities to operate sustainably, while also creating potential delays in discharges at hospitals and increased costs.
The OBBBA also has implications for healthcare funding. Many organizations operate on razor-thin margins. Medicare Disproportionate Share Hospital (DSH) reimbursements are designed to help compensate hospitals for the higher costs associated with treating low-income patients, particularly those on Medicare and Medicaid. With forecasted Medicaid eligibility reductions, hospitals that rely on DSH reimbursements may encounter funding issues. Additionally, many rural hospitals rely on the 340B drug pricing program — which allows certain covered entities to purchase outpatient drugs from pharmaceutical manufacturers at a discounted price — to maintain operations. Qualification for the 340B program includes a determination of how many Medicaid patients an organization serves. With fewer patients receiving Medicaid, some organizations could lose access to this program and the significant funding it provides.
The OBBBA does not affect Medicare in the same manner as it does Medicaid, but the legislation could indirectly trigger reductions in Medicare reimbursements. The Pay-As-You-Go Act (PAYGO) requires that when new legislation adds to the deficit, the new spending must be offset through spending cuts or additional revenue. Sequestration reductions could lead to a 4% automatic cut to most Medicare spending if Congress does not act to prevent it. The CBO has estimated this impact to be $45 billion in 2026 and growing to over $500 billion through 2034.
By scenario-modeling potential cuts now, healthcare leaders may be able to mitigate the effects on patient access, reimbursement, and funding changes. Health systems may even consider shifting to value-based care models, which could allow for more control over costs while improving patient outcomes.
To see if your organization is prepared to make a shift to value-based care, read our insight on Overcoming Hurdles to Successful Value-Based Care Implementation.
Tax Planning
In addition to planning for funding cuts, healthcare organizations will need to consider the impact of several key tax OBBBA provisions.
Reinstatement of 100% Bonus Depreciation
Investments in property and equipment placed in service after January 19, 2025, are once again fully deductible the year they are placed in service, which could reduce tax burdens and increase investments in new technology and medical equipment for healthcare systems. It’s important to model the implications of this provision, as taxpayers can still elect out of bonus depreciation on a class-by-class basis, and increased depreciation deductions can sometimes negatively affect other tax attributes and calculations.
Restored Expensing of Research Costs
Healthcare organizations no longer need to amortize research and experimentation costs and can once again expense them for tax years beginning after 2024. Taxpayers can also elect to claim unused amortization deductions incurred in 2022, 2023, 2024, in the first tax year after 2024, or ratably in the first two tax years after 2024. Modeling implementation and capitalization options can help identify beneficial strategies. The treatment of research costs will affect other calculations, including net operating losses and the limit on the interest deduction.
Interest Deduction Change
The OBBBA permanently removes amortization and depreciation from the calculation of adjusted taxable income (ATI) for tax years beginning after 2024. This favorable change may help many healthcare organizations reduce their effective tax burden and improve cash flow. Highly leveraged organizations, such as private-equity-backed healthcare systems, should pay special attention to this provision, as they may still be affected by the limit. There may be opportunities to capitalize interest to other assets before the OBBBA shuts down this planning strategy in 2026.
Changes for Tax-Exempt Organizations
The OBBBA expands the group of individuals covered by the Section 4960 excise tax on compensation over $1 million paid by certain tax-exempt organizations. Under the act, all employees and former employees of an organization are now subject to Section 4960 — not just the top five highly compensated employees in the current year or prior years. The act keeps the language in Section 4960 that limits the group of individuals covered to those who were employees of the organization during taxable years beginning after December 31, 2016. It also keeps the exclusion of licensed medical professionals providing medical services from the tax. The amendments to Section 4960 will apply to tax years beginning after December 31, 2025.
The OBBBA also includes changes to energy tax credits and charitable giving that may impact healthcare organizations as well. For more information on those organizations that may be affected by these changes, read our insight.
Compliance Challenges
As Medicaid eligibility narrows, healthcare organizations should expect increased regulatory focus on fraud and abuse. Reduced reimbursements and staffing shortages, combined with added scrutiny from regulatory agencies, could leave organizations more susceptible to billing and coding errors and the enforcement penalties that follow.
Now more than ever, healthcare organizations should maintain active compliance programs and chart audits and agreements accordingly. Cost pressures due to funding and reimbursement changes may have implications for staffing levels; therefore, leaders should take time now to model the potential effects of these changes and assess how they could impact coding and compliance errors.
To support proper billing and coding, healthcare organizations may consider integrating artificial intelligence (AI) into their operations. Automating tasks can alleviate administrative staff burdens and create new efficiencies, if done correctly. Learn more about how your organization can mitigate compliance risks with intelligent automation in our recent insight.
Looking Ahead
Leading healthcare organizations are taking quick action to review the impact of the OBBBA on their patients, finances, and operations. CFOs should run scenarios now that cover the next three years before funding cuts take effect, planning for alternative revenue sources when necessary. Healthcare leaders may even consider a shift to value-based care to reduce costs while maintaining high-quality care.
BDO can help you evaluate your value-based care readiness and guide your organization in beginning the transition. As you plan for what comes next, our teams can help design financial margin frameworks and introduce cost containment initiatives and AI-enabled solutions that empower you to strengthen your financial resilience.
Is your organization ready for the impact of the reconciliation tax bill? Contact us to begin your scenario planning now.