Lawmakers hear unanimous alarm: HR 1 will sharply constrain provider taxes and directed payments, threatening hospitals and county safety nets
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Summary
LAO and DHCS told the committee that HR 1’s new federal rules on proportionality, provider tax revenue limits and directed‑payment caps will reduce future MCO tax and hospital fee revenue streams; hospital groups and counties urged state bridge funding (examples: $500M for public hospitals, $1.9B initial county package) to avert closures and service cuts.
The Subcommittee spent a large portion of the hearing on how HR 1 will reshape Medi‑Cal financing mechanisms that many hospitals and counties rely on.
LAO summarized three federal changes under HR 1 that will reduce state flexibility: tighter proportionality rules (states must generally charge the same on Medicaid and non‑Medicaid services), a lowered cap on revenue from provider taxes, and a reduced cap on directed payments (moving the ceiling toward Medicare rates). "The changes are somewhat complex, but in effect they limit the state's ability to get waivers from proportionality," LAO told the committee.
DHCS described a multiyear hospital value strategy intended to adapt payments to the new federal framework and to redesign state directed payments where necessary. Tyler Sadwith (DHCS chief deputy director) said the department is engaging stakeholders and expects CMS reviews to take multiple quarters. He warned that some 2025 fee adjustments will be reviewed by CMS and that redesign options are still preliminary.
Hospital and county leaders testified about recent closures and layoffs and the compounding risk posed by HR 1‑driven reductions. Adam Dorsey of the California Hospital Association noted nine hospital closures since 2020 and urged a near‑term boost to the distressed hospital loan program (~$300M) and a targeted $500M general‑fund appropriation to stabilize public hospitals; county representatives and CSAC asked for a multiyear county package (CSAC request: ~$1.9B in 26‑27 and $4.5B in 27‑28) covering indigent care, county hospitals, eligibility staff and behavioral health.
LAO and DHCS emphasized that exact fiscal impacts remain uncertain and subject to federal guidance and that some impacts are 'missed opportunities' (planned increases the state can no longer lawfully pursue) while others will be direct revenue reductions.
Why it matters: HR 1 is likely to constrict revenue streams that pay for supplemental hospital and county programs; stakeholders warned that reductions could mean fewer inpatient services, reduced maternity coverage in 12 counties, and more uncompensated care costs shifted to local systems.
Next steps: DHCS will continue negotiations with CMS on 2025/2026 fee filings and pursue a hospital value strategy. Legislators signaled urgency about near‑term bridge funding for public hospitals and county safety nets while longer‑term redesign options are developed.
