Health care faces ongoing regulatory scrutiny

ARTICLE | March 27, 2025

Authored by RSM US LLP

Health care providers will face a complex and uncertain regulatory environment in the coming months. With consumer medical debt on the rise and legislators focusing on health care affordability, providers are contending with unpredictable revenue reimbursements. In addition, private equity transactions and industry consolidation in health care are under greater scrutiny, requiring enhanced regulatory compliance. Meanwhile, nonprofit providers must provide sufficient community benefit and access to quality care to justify their tax-exempt status.

Complexity and uncertainty

Regulatory oversight in the health care industry introduces both complexity and uncertainty. The new administration is seeking revenue sources to fund its policy initiatives. According to Modern Healthcare, the Ways and Means Committee’s reconciliation report outlines $260 billion in savings from eliminating hospitals’ nonprofit status, $146 billion from Medicare site neutrality and up to $696 billion from reduced subsidies and eligibility for Affordable Care Act (ACA) enrollees over the next decade. The House budget resolution directed an $880 billion reduction in the House Energy and Commerce Committee budget. With Medicaid expenditures comprising 93% of the Committee’s budget according to the Congressional Budget Office, there is little room to achieve this cut without reductions in Medicaid funding.

Health care providers must collaborate with advisors to navigate these challenges, making strategic decisions to mitigate uncertainty. This strategy is essential to enable business expansion, meet patient care needs, provide community benefits and maintain revenue while controlling costs.

Heightened scrutiny of tax-exempt status

The tax-exempt status of almost 3,000 nonprofit hospitals has been under intense scrutiny by Congress and the media for several years. Rising consumer medical debt and the challenge of affordable health care have intensified the focus on whether hospitals are justifying their tax-exempt status, valued at about $28 billion in 2020, through the provision of charity care. Consequently, Congress has urged the IRS to enhance its monitoring and enforcement efforts to ensure hospitals comply with regulations, specifically Internal Revenue Code section 501(r), and provide community benefits to maintain their tax-exempt status.

The emphasis on charity care is deemed crucial in addressing the escalating costs of health care and the growing burden of medical debt on consumers, ensuring that access to care remains a priority. A comparison of for-profit health care systems and tax-exempt systems raises the question of whether the latter are truly earning their exempt status through the provision of charity care.

In response, the IRS has incorporated hospital 501(r) examinations into its compliance initiatives, with a strong focus on financial assistance policies and collection actions to ensure that patients eligible for financial assistance receive the support they need.

To help fulfill their exemption requirements, hospitals must conduct a community health needs assessment, address the needs identified in that assessment and document their efforts to provide access to care and increase their community benefits. Reporting to stakeholders and ensuring that financial assistance policies and collection practices are adhered to by the admissions team and collections department are essential steps in maintaining compliance with regulations and preserving tax-exempt status.

The need for transparency in community benefits has drawn consistent bipartisan support. In recent years, legislation has been proposed to formalize the calculation of community benefits provided by hospitals. Given this bipartisan backing, the emphasis on hospital charity care is expected to persist. Hospitals must be prepared to communicate their community impact effectively through Form 990 and other public channels.

Impact of regulatory changes on M&A activity

Private equity’s involvement in the health care sector has a long history of scrutiny, particularly for its impact on access to care and service quality. Over the past decade, PE firms have ramped up their investments in health care, with transactions soaring from 75 deals in 2012 to 484 deals in 2021, raising alarms about the consequences of such consolidations.

A recent bipartisan congressional investigation, spearheaded by Sens. Chuck Grassley and Sheldon Whitehouse, spotlighted the negative effects of PE ownership on health care quality. The study found that patient care deteriorated in hospital systems acquired by PE firms, while investors enjoyed substantial financial gains. The investigation revealed that PE ownership often leads to cost-cutting measures, understaffing and a decline in patient care quality, echoing academic research findings.

Regulatory bodies such as the Federal Trade Commission and the Department of Justice have traditionally overseen PE acquisitions to prevent anticompetitive practices and ensure patient welfare. State regulators have also expanded their oversight of mergers and acquisitions in the health care industry. The recent bipartisan study has bolstered the argument for legislators to maintain vigilance and regulatory oversight to protect patients and uphold care standards.

The FTC has also overhauled the Hart-Scott-Rodino Act’s premerger notification rules. These updated regulations introduce heightened scrutiny for numerous transactions while offering a more structured and predictable regulatory framework. The new administration has not indicated any immediate plans to rescind these rules.

Anticipation of potential loosening of restrictions in the health care sector may also encourage more PE deals in the sector in 2025. This could involve policy changes that currently regulate PE investments and hospital operations. Changes in regulatory oversight may be balanced with the perception of stability or instability of the macroeconomic environment to determine deal flow. As these changes unfold, health care providers must have robust plans to ensure the continuity of care.

Alternatively, regulatory oversight may lead to delays in finalizing deals and result in closures of struggling hospitals, potentially hindering access to care and efficient health care delivery. Regulators aim to preserve geographical competition among providers, which helps control health care service pricing.

The history of PE scrutiny in health care, coupled with recent bipartisan findings, highlights the ongoing challenges and the need for strategic planning to mitigate the negative impacts on patient care. It is essential to have a well-thought-out post-transaction plan to preserve community benefits and identify factors that would prompt regulators to prohibit consolidation. Plans should leverage consolidation to control overall administrative costs and create efficiencies to prevent increases in the cost of patient care.

Expansion of site-neutral payments

Site-neutral payments aim to standardize reimbursement rates for specific services, regardless of where the services are provided. This approach seeks to reduce health care costs and eliminate financial incentives for providers to perform services in more expensive settings, such as hospital outpatient departments, when the same service could be delivered in less costly environments like physician offices or ambulatory surgical centers.

The Congressional Budget Office’s fiscal year 2021 budget estimated that expanding site-neutral payments to hospital-owned physician offices located off-campus would save $39.1 billion over 10 years. Applying these policies to certain procedures at on-campus departments could yield savings of around $102.3 billion. As the new administration looks for revenue sources to fund tax-cut extensions and other programs, site neutrality may be a key revenue raiser. There is bipartisan support for current proposals to advance site-neutral expansions and remove certain exemptions. These proposals include measures for financial assistance from a portion of the savings generated by the new provisions.

Expanding site-neutral payments could lead to reduced reimbursements for providers or closures of hospital facilities already operating at a loss, potentially limiting care in distressed areas. The policy shift could result in an average annual reduction of over $15 billion per year over the next decade.

Providers must be proactive and start planning for revenue reductions from site-neutral expansions. They should monitor factors contributing to revenue reductions while following proposals for exemptions from the new law. Understanding the differences among various reimbursement rates is crucial for identifying potential losses. Providers should assess which services would be most affected by site-neutral payment reforms and consider scenarios for consolidating or restricting service lines to optimize profitability.

Uncertainty around ACA subsidies and reinstatement of Medicaid work requirements

The Affordable Care Act (ACA) subsidies are set to expire at the end of 2025, creating uncertainty for nearly 24 million enrollees and providers. If these subsidies are not extended, millions may lose coverage, leading to a possible revenue reduction for the health care industry.

ACA-related coverage enrollment surged to 45 million, driven by enhanced subsidies and other measures, during the Biden administration. The Urban Institute estimates that 4 million people will go without insurance and health care spending will decline by $8.2 billion if the subsidies are not extended. While the ACA reimbursement rate is lower than the rates for commercial plans, it is higher than Medicare and Medicaid rates, making any significant decrease in ACA enrollments a significant revenue loss for providers.

The subsidies are unlikely to be extended as-is, given the Congressional Budget Office’s estimate of a $335 billion net impact on the federal budget over 10 years and a potential lack of support from key members of Congress. The revenue increase from ending the subsidies may be used to offset expenses for other policy proposals, including the extension of tax cuts from the Tax Cuts and Jobs Act, set to expire at the end of 2025.

In February 2025, a draft bill was introduced by U.S. House of Representatives mandating a minimum work requirement for certain Medicaid enrollees. Reinstating these requirements could drastically reduce eligibility, increase the number of uninsured, and exacerbate medical debt and health care affordability issues. The CBO estimates that reinstating work requirements would reduce federal spending by $109 billion over the 2023-2033 period. The CBO projects a reduction of approximately 2.2 million adults from Medicaid enrollees. Studies highlight increased medical debt among those losing coverage, with 49.8% facing serious repayment difficulties and delaying necessary care and medications due to cost.

Providers must proactively plan for more uninsured patients, higher uncompensated care costs and lost opportunity costs for those avoiding necessary care. These factors must be integrated into annual financial forecasts to maintain fiscal stability. Providers should ensure that individuals eligible for financial assistance are billed according to policy guidelines and develop robust plans to enhance charity care and community benefits.

Implementing comprehensive strategies to identify and support patients in need of financial assistance is crucial. This involves adhering to existing policies and expanding outreach efforts to ensure all eligible patients can access available resources. Providers should also explore innovative solutions to manage the financial impact of increased uncompensated care, such as partnerships with community organizations, leveraging technology to streamline financial assistance processes and advocating for policy changes that support sustainable health care funding.

The takeaway

A regime change has ushered in new or extended policies aimed at raising revenue and modifying behaviors through taxes and tariffs, all while maintaining a strong focus on health care cost and quality. Providers can navigate these changes by concentrating on key areas:

• Understand regulations and policy focus areas: Assess how new regulations impact internal policies and procedures and identify opportunities for adjustments.
• Forecast policy changes: Integrate policy changes into annual budgets and long-term strategic plans to prepare for various outcomes.
• Mitigate supply chain cost pressures: Conduct vendor assessments and enhance efficiencies to manage cost pressures.
• Focus on patient care and revenue diversification: Prioritize patient care and diversify revenue streams to mitigate changes in reimbursements.