By Jonathan Weil

Republican budget hawks blinked in their campaign to curtail Medicaid spending, and hospital chains led by Universal Health Services rallied on the news. Now attention will shift to the longer-term prospects for what has been a lucrative cash stream.

UHS shares gained 5% on Monday, while Tenet Healthcare rose 4% and HCA Healthcare rose 3%. House Republicans late Sunday released their plan to reduce Medicaid spending's growth, and it wasn't as punitive to hospital operators as some feared. A hearing is scheduled for Tuesday, and the legislation's language could change.

Two provisions stood out. The plan released by the House Energy and Commerce Committee includes a moratorium on new "provider taxes," which are taxes in name only. Under this system, the states collect taxes from healthcare providers and use those amounts to qualify for higher federal matching funds. Then the states return the taxes to the providers, along with higher Medicaid payments made possible by the matching funds.

The committee's proposal would freeze existing provider taxes at current rates and prohibit states from establishing new ones. The halfway measure was good news for hospital stocks. "We see the capping (and not cutting) of provider tax programs as a win for hospitals," TD Cowen analysts led by Ryan Langston wrote in a note Monday.

Another idea House Republicans considered was to limit state-directed Medicaid payment rates so they don't exceed Medicare rates. The House committee's proposal calls for new regulations to do that prospectively. However, payment programs that federal regulators already approved could stay at the higher rates. Critics of so-called supplemental Medicaid payment programs have complained that they often have pushed payment rates for patient treatments above Medicare rates and up to commercial rates.

UHS is the most prominent example of a hospital chain that relies heavily on these mechanisms. Last year $1 billion, or 68%, of UHS's pretax income came from supplemental Medicaid payment programs, including state-directed payments. UHS is forecasting $1 billion in such payments for this year, as well. Those payments look safe for now, but their growth prospects have dimmed.

State-directed payments require annual approval by the federal agency that oversees Medicare and Medicaid. It is an open question whether the Trump administration will be looking for ways to slash spending on these programs through regulatory action later. But for now, UHS and its peers appear to have won the day.

Write to Jonathan Weil at jonathan.weil@wsj.com

(END) Dow Jones Newswires

May 13, 2025 06:30 ET (10:30 GMT)

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