LFC: New Mexico hospital finances improved this year but HR1 and federal changes pose long-term risks to rural hospitals

Harry Rommel, a health and human services analyst with the Legislative Finance Committee, presented an overview of hospital financial trends and a model of how federal budget reconciliation (HR1) could interact with New Mexico’s Healthcare Delivery and Access Act (HDAA).

"We've gone from 18 hospitals operating in net loss in FY ’23 to 7 in FY ’24," Rommel told the committee, while cautioning that HDAA revenues will be recognized in hospital cost reports beginning in FY25. He said a Senate bill allocation of $50 million helped cash‑flow hospitals while HDAA implementation ramps up.

Why it matters: Rommel said many New Mexico hospitals rely substantially on Medicaid revenue and that the HDAA is designed to use a provider assessment (about 6% initially) plus federal matching dollars to bring Medicaid reimbursement closer to commercial levels. He warned that two provisions in HR1 could materially reduce HDAA revenues starting in FY28: (1) caps on state‑directed payments that would phase down some payments toward Medicare levels, and (2) a reduction in the allowable provider tax rate (projected step down from 6% to about 3.5%), both of which would erode the HDAA funding pool.

Key details and modeling: Rommel showed proxy FY25 estimates that — if HDAA revenues are realized as assumed — would move most hospitals from red to black in aggregate. However, his ten‑year model projects erosion of net patient revenues beginning FY28 under HR1 parameters, with disproportionate impacts on rural hospitals that have higher Medicaid payer mixes. He flagged an anticipated increase in uncompensated care if Medicaid rolls shrink and patients do not obtain private coverage.

Direct quotes: Rommel cautioned that CMS guidance is still forthcoming and that "we don't know all of the details" on how phased reductions will be timed and applied. He described an anonymous example of a small hospital losing roughly $13.5 million in net patient revenue by FY34 under the model and a large urban hospital losing about $35.35 million in the same period.

Policy levers and federal funding: Rommel noted a federal Rural Health Transformation Program (RHTP) created in the budget reconciliation package — about $10 billion per year nationally with a roughly $50 billion five‑year authorization — that will be distributed partly as a guaranteed floor to states with approved applications. He said HCA is preparing for the NOFO and that states should pursue transformative proposals; he estimated a potential New Mexico floor of roughly $100 million per year but emphasized that CMS NOFO details will determine actual awards.

Questions from lawmakers focused on anonymized versus identifiable hospital data, private‑equity ownership, whether 25% of HDAA redistribution may be used for reserves and capital, and how uncompensated care assumptions will change if people lose Medicaid but obtain private coverage. Rommel said some hospital data are proprietary and that the hospital association provided anonymized tables at its request; he offered to work with the association to provide lists and further projections to the committee.

What’s next: The committee asked LFC to provide a hospital‑ownership breakdown and finer hospital‑level modeling, and to track CMS guidance on HR1 implementation and the RHTP NOFO. Rommel said many of the HDAA effects take hold in FY28 and urged planning steps in the near term.

Ending note: Lawmakers emphasized the need to protect rural access, including FQHCs and nursing centers, and to avoid broad funding allocations that do not reflect hospital fiscal need or ownership structures.