Community Government Health & Wellness

State’s solution to its budget deficit could cost hospitals millions of dollars

Posted on April 22nd, 2025 By: Conor Wilson

Virginia Mason Franciscan Health, which owns both hospitals on the Kitsap Peninsula, is bracing for the fallout from Washington’s multi-billion dollar budget deficit and the impacts it could have across its network of Puget Sound hospitals.

State hospitals have lost millions of dollars and struggled to regain profitability since the pandemic. Now, they estimate they could lose around $280 to $330 million over the next two years under some proposals being considered by the Legislature. And that doesn’t include possible federal cuts.

Washington faces a roughly $14 billion budget deficit. Legislators are attempting to fill that gap before the 2025 session ends on April 27.

Impact on hospitals

One option is to raise taxes on business operations and payroll, which could impact large hospitals.

Hospital administrators are also concerned about legislation to cap reimbursements for care they provide to state employees and teachers. The bill, SB 5083, aims to lower health care costs for public employees. Hospitals argue that it shifts the burden off the state and would lead to more financial strain on the medical system.

Any losses would puncture the state’s already battered medical system. Chad Melton, CEO of St. Michael Medical Center in Silverdale, said impacts to the Vrigina Mason system could be enormous.

In the last three years, Virginia Mason — which operates 10 hospitals and more than 230 clinics in Western Washington — has lost more than $263 million, Melton said. Additional cuts would force Virginia Mason to consider reductions to get back on track financially.

“This is going to potentially force us to do additional reductions, staff reductions and look at service locally and across the region that we can no longer afford to provide,” he said. “Everything is on the table right now.”

Many hospitals operate at a loss

Hospitals provide many critical services at a financial loss. Providers lose money on all Medicare, Medicaid and Tricare patients due to insufficient reimbursement rates that do not fully cover the cost of care.

Melton did not specify how these changes could directly impact care on the peninsula. He did say all hospitals would feel some impact.

St. Michael and St. Anthony in Gig Harbor remain profitable, Melton said. But as part of the Virginia Mason system that includes other hospitals in King and Pierce counties, they subsidize facilities that operate in the red.

“Part of the way in which VMFH works is that we have several locations that don’t make money,” Melton said. “Our mission is to provide care in those communities, so we work together as a team.”

The uncertainty at the state level adds to the chaos for medical providers as they also prepare for changes to Medicaid, the state-federal insurance program for people with low incomes that is a financial lifeline for most hospitals.

A Republican-controlled Congress appears poised to make changes or cuts to the government insurance program, putting many hospitals in a perilous position that could force service reductions.

“The health care system in Washington state is facing challenges on multiple fronts and each of them will hamper the ability of our communities to access critical health care services,” State Hospital Association President and CEO Cassie Sauer said in a statement.

Apple Health, the state’s version of Medicaid, covers about 1.8 million people in Washington. That includes 24% of people in Washington’s Sixth Congressional District, which includes Gig Harbor, Kitsap County, the Olympic Peninsula and part of Tacoma, according to a snapshot report put out in February by U.S. Sen. Maria Cantwell, D-Wash.

More uncompensated care

Uncompensated care likely would increase dramatically if Medicaid is cut, as many people suddenly find themselves without insurance. That could make it more difficult for hospitals to remain profitable – particularly in rural areas where hospitals have thinner profit margins and patients are more likely to be uninsured.

Scrutiny of federal Medicaid spending has already resulted in job losses at Valley Medical Center in Renton. That hospital laid off 101 nonclinical employees, the Seattle Times reported, after the federal government delayed payouts of the Safety Net Assistance Program.

Melton said funding from the safety net program is one way hospitals cover the cost of caring for patients on government insurance, amid poor reimbursement rates. The funding, representing about $72 million for the Virginia Mason system, is still being held up.

“Typically, if those dollars aren’t realized by the end of our fiscal year, at the end of June, then we have to take that reduction,” he said