States' push to limit healthcare costs adds to pressure on healthcare issuers

Bloomberg News

For years, the high cost of healthcare and health insurance has been a frustration for Americans and their state governments.

It's no surprise, then, that states have enacted a variety of attempts to limit healthcare costs. 

Add these state efforts to the myriad of fiscal and regulatory pressures that healthcare issuers face. With a worsening federal environment, issuers will be tested. But analysts say it's unlikely to drive hospitals to bankruptcy.

It's easy to understand why states want to curb healthcare costs, Fitch Ratings analyst Kevin Holloran said. 

"Compared to other countries of our same socio-economic likeness, we pay a lot more, and we don't necessarily get better outcomes," Holloran said.

Connecticut is one of nine states that have created benchmarks to try to rein in hospital cost growth since 2013, according to a study from the RAND corporation. However, like many of the states in the study, just notifying health systems of benchmarks didn't curb costs. 

Connecticut moved to cap hospital cost growth earlier this year. 

The new regulations require hospitals to keep their annual cost growth below 3.9%, beginning in 2029. If hospitals don't comply, the state will have the option to request a "corrective plan." If growth still exceeds the cap, the state can require hospitals to pay up to $400,000 in local "community health investments."

Connecticut is far from the only state seeking to curb the cost of healthcare. 

California has asked healthcare providers to limit cost growth and is considering steeper penalties for providers who don't abide by the caps. 

Indiana has implemented several regulations on the cost of healthcare over the years. Its most recent rule dictates that large nonprofit hospitals which don't bring prices down by 2029 could lose their nonprofit status. 

Delaware and Vermont also have programs to cap hospitals' cost growth. Many other states target insurers to regulate healthcare costs and others cap prices for state employee health programs.

Many of these were passed or augmented within the last five years and are still phasing in.

Maryland is somewhat of an outlier; it has regulated healthcare costs since 1974 in partnership with the Centers for Medicare and Medicaid Services. 

Maryland's comprehensive model, often called a global payment system, gave the state the authority to regulate hospital costs for every payer in the system, including private insurance, Medicare and Medicaid. 

Maryland is now in a period of change. The old regulatory framework expired at the end of 2025, and the state has had to negotiate the new system with the Trump administration while planning around the administration's healthcare cuts. 

In the new regime, the federal government will regain control over Medicare and Medicaid rates in 2028, so the state is planning to hike premiums for private insurers.

A variety of approaches

Connecticut's model is unlikely to have much impact according to Zack Cooper, the director of Yale University's Health Care Affordability Lab.

"$400,000 to a big hospital system — say to Hartford or to Yale — probably could be found if you shook some mattresses hard enough," Cooper told the Connecticut Mirror. "That to me just doesn't feel particularly scaled or proportional to the struggle that residents are feeling day to day with healthcare costs."

There is wide variance in states' models, and in their impacts on issuers and costs. The outcomes of the models are also difficult to measure, because of limited sample sizes and the confusing nature of the healthcare industry, Holloran said. 

Speaking of the Maryland model, Holloran said "it can suppress margins — there's absolutely no doubt about that — and make it a little bit hard to grow balance sheets when you put a cap on revenues."

Vermont has a system Fitch analyst Mark Pascaris described as "Maryland Lite." But Vermont is a somewhat unusual state, he said, as most of its patients use the same health system, University of Vermont Health. 

Many other states have an attorney general or governor who will try to intervene if a health system's prices are too high, or if a proposed merger would drive up costs, Pascaris said. 

With the exception of Maryland, states "have not been individually successful in really changing the direction of healthcare costs," Moody's analyst Daniel Steingart said.

The healthcare system is too big for individual state policies to make a big difference, Steingart said — but the policies can impact individual healthcare providers.

Cost controls and issuers' credit

For more recent policies like Connecticut's, the impact is difficult to predict, Moody's analyst Joanna Reitz said. States will need to determine how they will measure prices and review projects and budgets.

"To date, we have not generally viewed state healthcare cost-containment initiatives as a primary driver of credit quality across the healthcare provider sector," said S&P Global Ratings analyst Thomas Zemetis. "Healthcare organizations continue to face broader operating pressures, including labor costs, inflation, and reimbursement-related challenges."

"It doesn't necessarily affect ratings per se," Holloran said, noting that all of the Maryland healthcare issuers Fitch rates are investment grade.

"Can a price cap push an otherwise struggling hospital over the edge? Yeah, it could," Pascaris said. "You're already highly regulated. It's like one less lever to pull."

But, Pascaris said, "would [a price cap] lead to more hospital failures, ultimately defaults and bankruptcies? I'm not so sure about that."

Issuers in the healthcare sector have to juggle countless, constantly shifting regulations, Pascaris said. There are federal and state regulations around staffing, pricing, and patient privacy, he added. In California, hospitals are required to be able to withstand earthquakes of a certain magnitude. 

"There's already a price cap on hospital operations with Medicare. So for most of our portfolio, about 46 or 48% of their patients, give or take, are Medicare patients," Pascaris said.

Adding price controls in the already highly-regulated environment of hospitals is just another pressure or headache for them to deal with, Pascaris said.

One possible unintended consequence of cost caps, Pascaris said, could be an uptick in hospital mergers. Although he hasn't seen evidence of this in states with stronger price controls, it's a common solution hospital operators turn to when they're under stress.

Sometimes a state's regulations are also supportive of healthcare entities. In Maryland, the cost constraints, also known as "payment corridors," are examples of this, Holloran said.

"These payment corridors, they sort of cap you on the top, but they protect you on the downside," Holloran said. "It's protective and limiting at the same time."

Maryland has other regulations to protect hospitals as well, Pascaris said, such as laws preventing for-profit or private equity hospitals from entering the market. The fact that very highly regarded health systems, such as Johns Hopkins and the University of Maryland medical system, are based in the state, shows that success is possible in an environment with comprehensive price caps, Pascaris said.

Hospitals are under pressure

Labor shortages and operating and EBITDA margins in the healthcare sector are better than they were three or four years ago, Pascaris said, but not back to pre-2020 levels. The sector is staring down a demographic cliff in 2030, when many younger baby boomers will simultaneously leave the workforce and need more healthcare.

Median expense growth for the sector was at 9% in fiscal year 2025, Reitz said — still elevated compared to the 6% median expense growth in 2019.

Hospitals are also still experiencing "tremendous inflation," Moody's analyst Lisa Martin said.

"They are struggling to absorb increases in pharmaceutical costs and other types of supplies, still struggling to on the labor front," Martin said. For a struggling hospital, cost caps "potentially [put] them in an even more challenging situation."

When hospitals close, it isn't sudden, Holloran said. Healthcare issuers tend to have a "slow bleed" before they're shuttered.

Healthcare issuers are resilient, Holloran said, and have demonstrated an ability to manage through new regulations and crises like COVID-19.

Fitch recently rated a healthcare issuer, Holloran said, "where the operating margin, for the last — I'm not making this up to make an exaggeration — seven years was break-even."

But the consistency of breaking even for seven years in a row actually connotes some credit strength, Holloran said. It exemplifies how healthcare organizations can learn to work within constraints on their revenue.

Medicaid cuts on the horizon

In 2025, the federal government passed the One Big Beautiful Bill Act, which contained a combination of cuts to Medicaid and regulations that will push people out of the program.

The policies are estimated to reduce federal Medicaid spending by $1 trillion over an eight-year period, Pascaris said.

Healthcare organizations have warned that the cuts will strain hospital budgets and force some closures. 

Lower federal Medicaid spending could drive up costs. People without health insurance are likely to delay seeking treatment for health problems until they have to go to the emergency room, where their now-acute problems could be more expensive to treat. Healthcare providers may also try to raise rates for people with private insurance to make up the loss of Medicaid funding. 

"Reductions in Medicaid funding could contribute to higher levels of uncompensated care and bad debt expense for some healthcare providers if coverage declines and uninsured rates increase," S&P analyst Anne Cosgrove said. "Providers with higher exposure to Medicaid reimbursement may face greater financial pressure than organizations with more diversified payer mixes."

Healthcare issuers could end up using the pressures from the OBBBA as a bargaining chip, Pascaris said. 

"A health system in a state that is contemplating a heavy-handed price cap control system," Pascaris said, could point to the OBBBA as an argument to persuade the state to hold off on regulations. 

Healthcare systems often advocate for funding by advertising what they will cut, Holloran noted. They'll say that they will have to scrap capital plans, shrink departments with low margins like obstetrics or psychiatry, or cut service hours.