An outside view of Texas Children’s Hospital’s $200 million expansion to its Pavilion for Women, in Houston, Monday July 27, 2026.
Jacob Lujan/Houston Chronicle
Children’s hospitals have spent the past year bracing for the fallout from roughly $1 trillion in Medicaid cuts included in a sweeping spending bill that President Donald Trump signed into law last year.
Now the federal government has proposed additional restrictions on Medicaid funding, and children’s hospitals worry the financial harm to pediatric healthcare could be even worse than expected.
Children’s hospitals in Texas and nationwide are asking the Centers for Medicare and Medicaid Services to scale back a proposed rule that would dictate how states will implement cuts to a key source of Medicaid funding, known as state-directed payments. Any changes will have an outsized impact on children’s hospitals because more than half of their patients are covered by Medicaid.
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The changes proposed by CMS could cost children’s hospitals across Texas up to $2.5 billion annually once they are fully phased in, according to an estimate from the Children’s Hospital Association of Texas. The organization said that total is much higher than it had anticipated.
Children’s hospitals would be forced to make some “hard decisions” at a time when Texas should be investing more in healthcare to keep pace with a growing population, CHAT President Christina Hoppe said.
“We’re one of the few states with a growing child population,” Hoppe said. “So the idea that we would have fewer resources in the future to take care of those kids is very concerning.”
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Texas Children’s Hospital also expressed concern over CMS’ proposed rule in a letter it submitted to federal officials earlier this year. The hospital said the proposal would have a “significant” impact on funding it relies on to provide high-quality treatment.
“State-directed payments help bridge the gap between Medicaid reimbursement and the cost of providing highly specialized pediatric care, ensuring children continue to have access to the expert teams and services they need across Texas,” the hospital said in a statement.
Medicaid funding for children’s hospitals
Medicaid cuts put a greater strain on children’s hospitals for several reasons, Hoppe said.
The program covers more than half of patients at children’s hospitals, a rate that is more than double the average for acute-care hospitals. As a result, children’s hospitals are more reliant on Medicaid than commercial health insurance and other sources of funding.
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Kids who are treated at children’s hospitals also tend to be sicker and have more complex healthcare needs. Many require specialized treatment or long-term care, which significantly raises overall costs.
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“A lot of the things children’s hospitals do are very expensive,” Hoppe said. “When children are in a children’s hospital, there’s usually something pretty serious going on.”
Historically, though, Medicaid payments have been lower than the true costs of healthcare services. Medicaid covers less than 80% of the costs that children’s hospitals incur while providing healthcare, according to the national Children’s Hospital Association, which has also asked CMS to reconsider the proposed rule.
For that reason, most states use state-directed payment programs to steer additional Medicaid dollars to providers.
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“We like the idea of these excellent children’s hospitals, but I don’t think we have a very good way of supporting them,” said Katherine Hempstead, a senior policy officer at the Robert Wood Johnson Foundation. “So they end up relying on things like state-directed payments.”
Changes to Medicaid payments
The law passed last year, known as the One Big Beautiful Bill Act, shifts some of the financial burden of Medicaid away from the federal government and onto the states and healthcare providers.
Children’s hospitals began raising alarms earlier this year after CMS projected that its proposed rule would result in about $510 billion in cuts to state-directed payment programs over a 10-year period. The Congressional Budget Office had projected a much lower total of $149 billion before the One Big Beautiful Bill Act was passed.
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Alice Burns, the associate director of the program on Medicaid and the uninsured for the health policy organization KFF, said the different totals were calculated with different data over different time frames. The $149 billion projection did not factor in a host of state-directed payment programs that CMS had approved but had not listed on its website by early 2025.
“It’s difficult to know how much of the difference in the numbers are coming from these new restrictions, versus just the fact that there was really limited information available about the extent of state-directed payments when the law was signed,” Burns said.
What children’s hospitals are saying
Children’s hospitals in Texas and nationwide are asking CMS to reconsider several aspects of its proposed rule, and potentially exempt children’s hospitals from the most burdensome changes.
For example, the proposed rule includes language that would quicken the pace of the cuts to state-directed payment programs, Hoppe said. Children’s hospitals are asking for more time to prepare for those cuts.
“I think CMS needs to take a more measured approach on how deep their cuts are and how long they’re implementing them so that providers have a chance to think about what options might be on the table,” Hoppe said.
If CMS adopts the proposed rule without any changes, children’s hospitals would need to find alternative funding sources to avoid any disruptions. Hempstead believes some states could step in to offer support if a children’s hospital was struggling.
“I don’t think people would just do nothing,” Hempstead said. “I think state leaders would respond.”
Hoppe is hopeful CMS will opt to protect children’s hospitals, which represent only 5% of hospitals across the U.S. Exempting them from the most burdensome restrictions would help to maintain access to pediatric healthcare without significantly increasing Medicaid costs for the federal government, she said.
“My hope is that CMS gets enough feedback that they finalize the rules in a way that doesn’t disproportionately impact us,” Hoppe said.