California may forgive hospital loans as Medicaid cuts loom

San Benito Health Care District

The Trump/GOP Medicaid cuts mean California may have to activate the loan forgiveness trigger for all 18 hospitals that received loans through the state's distressed hospital loan program, state officials said.

The U.S. hospital sector was largely recovering from the twin blows of labor shortages and pandemic costs, but now faces uncertainty from looming cuts to Medicaid.

HR 1, the Republican tax and spending cut bill President Donald Trump signed July 4, slashes Medicaid spending by nearly $1 trillion over the next 10 years and will leave nearly 10.9 million Americans without healthcare coverage, according to the Congressional Budget Office, an independent nonpartisan agency.

While larger hospital systems may have the deep pockets to muddle through, smaller already struggling hospitals, like the 18 who received loans from California's distressed hospital program, may not be so fortunate.

The state launched a zero-interest loan program for distressed hospitals in 2023 to try to save hospitals on the verge of insolvency or in danger of closing.

It issued 18 loans through its distressed hospital loan program in 2024; and they have all said their situations are tenuous, said State Treasurer Fiona Ma, who chairs the California Health Facilities Financing Authority, which runs the loan program.

All but three have already been approved for 12-month loan extensions, according to data published by CHFFA.

The distressed loan program has a loan forgiveness aspect to it, said Carolyn Aboubechara, CHFFA's executive director. "In early 2026, we might entertain applications for loan forgiveness," Aboubechara said.

"They are all going to be applying," Ma said. "The hospitals took only COVID-19 patients [at the height of the pandemic], so they fell behind on cash flow and the loans just helped them get up to date."

The hospitals also have deadlines to make earthquake retrofits that they are unlikely to meet, she said.

On the whole, the healthcare sector has been on the upswing, according to Fitch Ratings.

Its annual report evaluating the strength of the not-for-profit healthcare sector based on 2024 year-end audits reveals a tripling of operating margins and an all-time high of days cash-on-hand of roughly 215 days for the rated portfolio, said Kevin Holloran, Fitch's sector lead for not-for-profit healthcare.

"Leverage is down, capital spending is up, and cash to debt ratios have improved, painting a relatively strong picture," Holloran said. "It's what we expected to see: 2024 is better than 2023, and all things being equal, we expected 2025 to continue down that path of improvement."

But new legislation, including HR 1, the One Big Beautiful Bill Act that cuts Medicaid, and the potential for tariffs to spike costs are introducing a "shakier picture" for the sector, he said.

Holloran said the "rated universe" that Fitch tracks tends to perform better, because the hospitals likely to get sub-investment grade ratings tend not to seek them, and instead go after private loans.

Moody's Ratings, S&P Global Ratings and Fitch Ratings all maintained their sector outlooks at stable after Trump signed the bill into law.

Rating analysts said there is a long runway before any material credit rating shifts are expected from the cuts to Medicaid, because the cuts take place between 2026 and 2028.

Holloran described the sector as trifurcated, a concept that expands on the traditional "haves and have-nots" dynamic.

Beyond the top-performing 5-10% (mainly in growth areas like Texas, the Carolinas and Florida) and those that are struggling, there's a segment "muddling along," Holloran said.

Factors like high salaries, or situations like a shortage of skilled nursing facilities in the Pacific Northwest, which pressures hospitals when patients ready to be released are occupying beds, can challenge even high-growth areas, Holloran said. Conversely, he said, some hospitals in stagnant economies are performing well due to effective management.

California's size makes it a bit of a microcosm for the country. It has large hospital systems that are expanding, and smaller, individual hospitals in both rural and urban settings that are struggling.

"Hospitals, especially smaller and rural ones with high concentrations of Medicaid/Medicare patients are really worried," Ma said.

Many rural hospitals are highly reliant on Medicaid payments, KaufmanHall, a hospital consultancy, said in its second quarterly report.

For hospitals with 25 or fewer beds, operating margins were down 12.3% year-over-year as of May 2025, the KaufmanHall report said. There have been 196 closures or conversions of rural hospitals to reduced services since January 2005, according to the Cecil G. Sheps Center for Health Services Research at the University of North Carolina.

The largest concentration of rural hospital closures, according to the UNC center's data, has been in the south and central states. Since 2015, California has only had one hospital close and another convert to reduced services, while Texas had 13 hospitals close or experience reduced services and Florida had four.

To add to the challenges for California hospitals that tapped the state's distressed loan program, Ma said, a plan by lawmakers to extend the deadlines on earthquake safety requirements was vetoed by the governor.

Under existing regulations, hospitals will be forced to close if they don't finish required earthquake safety work "to be fully operational following an earthquake" by a 2030 deadline. A spokeswoman for the California Hospital Association told The Bond Buyer last year that a good two-thirds of hospitals in the state aren't on track to meet that deadline, though 96% met the 2020 deadline to be structurally sound.

The hospitals who applied through the distressed loan program were struggling to cover operational expenses, so they don't have money set aside for earthquake retrofits, Ma said.

The full impact on bond issuance and capital improvement programs for hospitals as a whole in California is uncertain with Medicaid cuts delayed to 2026, she said.

Fitch's initial assessment is the impact may not be as dire as initially feared, because the states may step up to bridge revenue gaps, Holloran said.

Analysts will be tracking the rollout of the new enrollment requirements for Medicaid, because there's a risk that only the "sickest of the sick" will re-enroll, potentially leading to lost savings if healthier individuals don't re-enroll, Holloran said.

One aspect of the Medicaid changes is that adult enrollees have to re-enroll or re-qualify every six months. Plus, there are requirements that participants either work or volunteer in the community a set number of hours.

Trump's tariffs could also be an issue, because they could affect supply costs.

With labor and supplies accounting for 75% of hospital expenses, Holloran said, a projected average 30% jump in supply prices due to tariffs could directly erode operating margins. Hospitals are unlikely to pass these costs directly to patients, or immediately to insurers, due to multi-year contracts, meaning they will initially have to absorb the increases, he said.

Despite these challenges, the hospital sector has made strides in addressing labor shortages, which severely impacted profitability in 2022, Holloran said. While permanent employees are now paid more, the prohibitive costs of agency and traveler nurses have fallen, leading to a reduction in overall labor expenses. Additionally, successful contract renegotiations with payors have contributed to improved financial stability, he said.

Fitch noted in the report that while only 64% of its rated portfolio reported a positive operating margin in 2024, this is an improvement from 50% and indicates a positive trend. The stability of ratings, despite lower margins, is attributed to strong balance sheets.

Fitch downgrades in the sector outpaced upgrades three to one in 2022 and 2023. The trend improved to 1.7 to 1 in 2024 and is currently at 1 to 1 for 2025. This, coupled with improving margins and affirmations, explains Fitch's stable or neutral outlook on the sector, Holloran said, despite the brewing headwinds from HR1 and other legislative changes.

While the sector faces ongoing challenges, the progress made in managing expenses and stabilizing balance sheets provides a degree of resilience against the evolving policy and economic landscape, Holloran said.