Indiana officials on Friday rolled out what they described as a first-in-the-nation Medicaid financing overhaul designed to pressure hospitals to lower commercial healthcare prices while directing more state and federal money toward rural and lower-cost providers.
The changes — approved by federal regulators early this month — will revamp how Indiana taxes hospitals and distributes supplemental Medicaid payments.
At the core of the plan is a new payment structure that ties Medicaid reimbursement increases to providers’ average commercial prices, using state dollars to pressure high-cost systems to lower rates over time.
Hospitals with lower commercial rates will receive larger Medicaid payment increases under the new structure, while systems with higher prices will receive smaller increases.
Gov. Mike Braun and top state Medicaid officials framed the effort as part of a broader, ongoing push to address Indiana’s high healthcare costs and rapidly growing Medicaid spending.
“Affordability has been a priority for my administration from day one, and every reform we pursue has to move Indiana toward a healthcare system that works for Hoosier families — not against them,” Braun said in a statement. “By aligning Medicaid payments with real-world pricing behavior, Indiana is rewarding hospitals that keep care affordable and sending a clear signal that high commercial prices must come down.”
‘Focused on affordability’
The federal Centers for Medicare and Medicaid Services approved Indiana’s revised Hospital Assessment Fee program on April 28 with a retroactive effective date of July 1, 2025, according to Indiana Family and Social Services Administration officials. CMS separately approved the state’s new State Directed Payment program on May 1.
The payment changes take effect Jan. 1, 2026.
The State Direct Payment program will distribute up to $1.866 billion in supplemental Medicaid payments next year across Indiana hospitals participating in the Healthy Indiana Plan, Hoosier Healthwise and Hoosier Care Connect.
“This is the first time Medicaid has ever been used like this,” FSSA Secretary Mitch Roob told the Indiana Capital Chronicle in an interview. “The governor put his financial authority into use in the commercial market. We’re using our financial authority in the Medicaid market to influence the commercial market.”
The new model comes as Braun and Hoosier lawmakers have increasingly targeted Indiana hospital pricing practices.
In 2025, legislators approved healthcare law changes that set new hospital price caps tied to Medicare rates and gave state officials additional oversight tools aimed at reducing costs over time.
The Indiana Hospital Association, which represents hospitals and health systems statewide, said Friday that the changes reflect a yearslong effort by state officials and providers to address Medicaid reimbursement shortfalls and draw down additional federal funding.
“Today’s announcement marks an important step forward for Hoosier patients,” IHA President Scott Tittle said in a statement. “This action provides a critical lifeline, underscoring a simple reality: base Medicaid rates do not cover the cost of care.”
He added that while Indiana’s “specific approach is unique,” the state is joining more than 40 states using supplemental Medicaid payment programs to address what hospitals view as chronic underpayment in the Medicaid system.
“This funding is certainly significant; however, it does not fully close the gap, and more work remains to ensure Medicaid reimbursement is sustainable long-term,” Tittle continued. “Importantly, this approach relies on hospitals stepping up — paying enhanced fees to draw down additional federal matching funds — while continuing the progress Indiana hospitals have made to lower prices and improve affordability.”
Roob repeatedly pointed to Indiana’s commercial hospital prices — among the highest in the country — as justification for the changes.
“We and the governor are really focused on affordability,” Roob said. “(Braun) wants to make healthcare affordable again, and part of that is making sure that hospitals are held accountable for their commercial rates.”
Still, the IHA has pointed to recent analyses showing prices have trended downward in recent years. A state-commissioned report released earlier this year found Indiana’s five largest nonprofit hospital systems averaged commercial prices at 252% of Medicare rates in 2024 — below the 285% benchmark established in state law.
Under the approved payment structure, hospitals will be divided into classes based largely on their average commercial rate, or ACR.
Public rural hospitals, critical access hospitals and hospitals previously subject to federal consent decrees will receive the highest reimbursement increase — up to 158% of current fee schedules.
Hospitals with commercial rates below 265% of Medicare rates will receive 155% reimbursement levels. Hospitals with progressively higher commercial rates will receive smaller increases, with the highest-priced hospitals receiving increases capped at 125%.
Psychiatric hospitals and certain hospitals without calculated ACRs will receive 120%.
Roob said the structure is intentionally designed to direct more money toward lower-cost and rural providers while creating financial pressure on higher-priced hospital systems.
FSSA documents provided to the Capital Chronicle emphasize that the structure is designed to funnel larger reimbursement increases toward lower-cost and rural providers while creating “sustained financial incentives” for higher-priced systems to reduce commercial charges over time.
“We have a new covenant,” Roob said. “That new covenant says, ‘you will keep your commercial prices low, or we will lower your Medicaid reimbursement to cajole them into creating a more affordable healthcare delivery system.’”
Braun’s administration also announced an additional $177 million in support for rural hospitals through the new financing model, on top of roughly $1 billion Indiana previously received through the federal Rural Health Transformation Program.
Roob said rural hospitals were intentionally insulated from some of the pricing pressure embedded in the model.
“The governor wants to figure out how to help rural hospitals,” he said. “If you live in rural Indiana, you ought to take some comfort that the governor is trying to funnel dollars there so healthcare in your community can remain affordable.”
Tittle likewise said the hospital association plans to continue working with state officials during implementation “to ensure the policy works as intended for all hospitals, including independent and rural providers,” and that the reimbursement structure is based on “accurate data that reflects operating realities across Indiana’s diverse healthcare landscape.”
Medicaid spending pressures
The changes also come as Indiana continues grappling with long-term Medicaid spending growth.
Roob noted that Medicaid costs in Indiana have been increasing by roughly 9.5% annually — far outpacing the state’s general revenue growth.
“You’re cannibalizing teacher pay. You’re cannibalizing higher ed — all the stuff that the general fund pays for,” Roob said. “Our goal is to get that to the point where we can have Medicaid grow at a 2% rate.”
The revamped Hospital Assessment Fee structure will maximize Indiana’s hospital tax up to the 6% federal limit and shift the assessment formula from hospital patient days to total net patient revenue.
County hospitals will be exempt from paying the tax directly and instead contribute through intergovernmental transfers equivalent to what their assessment otherwise would have been.
Roob acknowledged that the financing structure is complicated and that hospitals had raised concerns throughout negotiations over the plan.
State officials originally proposed a different framework after the 2025 legislative session, but hospital systems pushed back and later helped develop the final model.
“We would like them to provide fantastic care and charge us nothing. Well, that’s unrealistic,” he said. “They would like to get paid enormous quantities of money. So we reach a workable compromise.”
Hospital officials are expected to receive assessment notices next week, with payments due June 1.
The higher assessment rates currently are approved only through Oct. 1, but Roob said Braun and others are working with federal officials to extend the arrangement.
Roob said the state also is exploring additional affordability measures in future years, including possible “commercial givebacks” tied to hospital pricing behavior.
“We have actual accountability for what they are doing,” he said. “For the first time, their government — led by their governor and legislative leadership — has taken real steps to contain the cost growth trajectory of healthcare.”
Indiana Capital Chronicle is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Indiana Capital Chronicle maintains editorial independence. Contact Editor Niki Kelly for questions: info@indianacapitalchronicle.com.
