On April 27, the last day of the legislative session, the Legislature passed its final budget for the 2025-2027 biennium. The legislature has now officially adjourned.

The final 2025-2027 biennial budget (SB 5167) funds $77.9 billion for the state general fund (GFS) and $150.4 billion (total) in state services. The state assumed a large four-year deficit, which required both cuts and new taxes to balance. This budget was not without controversy in the overall approach to taxes and cuts. Hospitals are often impacted by both and WSHA focused its advocacy on minimizing negative impacts to patients.  This document covers the cuts and taxes most impactful to hospitals and health systems.

WSHA will provide a more comprehensive budget review in the next couple of days.

Hospital and Health System Priorities 

The following budget and policy items will directly impact hospitals and health systems. **The hospital impact estimates are based on calendar year, not state fiscal year.**

PEBB/SEBB payment cuts (SB 5083) – Enacted but impact reduced
This bill applies to public employee benefit board and school employee benefit board health plans. It reduces acute care hospital reimbursement to the lesser of contracted rates or 200% of Medicare rates beginning in January 2027.

  • Through WSHA’s advocacy, the bill was amended to remove a mandate to contract and an automatic step-down to 190% of Medicare in 2029. It also now exempts independent sole community and critical access hospitals.
  • Removal of the step down to 190% saves $17 million per year in cuts.

Total estimated impact to hospitals: -$100 million/year

Increase Medicaid professional fees through directed payment program (HB 1392 – known as Medicaid Access Program). – Enacted
Once approved by CMS, Medicaid professional fees paid on fee schedule will be increased to be similar to Medicare levels – most likely effective in 2028. The program is funded by per-enrollee assessments/taxes on insurance carriers and Medicaid managed care organizations.   

Total estimated impact to hospitals: $200 million/year once implemented
 

Sales tax on services (SB 5814) – Enacted but impact reduced
This measure made several services newly subject to sales taxes. The services that would have impacted hospitals the most included a tax on temporary staffing, digital automated services (which would have included telehealth), custom software (including EHRs), IT consulting services and IT support services. WSHA strongly advocated for relief from this new tax burden.

  • Hospitals are now exempt from the tax on temporary staffing in Sec. 101(3)(k), avoiding $80 million in new taxes.
  • Telehealth is now exempt from new digital automated services tax in Sec. 201(3)(b)(xi).
  • Tax on IT consulting services in Sec. 101(3)g) is now removed from the bill entirely.
  • Tax on custom software services in Sec. 101(6) remains in the bill for all entities subject to the bill. WSHA estimates a $27 million/year impact on hospitals in aggregate.
  • Tax on IT training services and technical support in Sec. 101(3)(h) remains in the bill for all entities subject to the bill. This is challenging to estimate because it depends on the way IT services are characterized/categorized. We estimate around a $53 million per year aggregate impact.

Total estimated impact to hospitals: -$80 million/year
 

Business and Occupation (B&O) tax surcharge on businesses with >$250 million in revenue and increase on professional services B&O tax (HB 2081) – Enacted:
WSHA strongly advocated against this new surcharge/tax, which adds an additional .5% B&O surcharge on taxable revenue above $250 million from Jan. 1, 2026 – Dec. 31, 2029.

  • The surcharge was reduced from the originally proposed 1% to .5%.
  • Hospitals and health systems deduct Medicare and Medicaid net revenue to calculate taxable revenue. For taxable revenue below $250 million, the tax rate remains 1.5%. For taxable revenue above $250 million, the tax rate becomes 2% – a surcharge of .5%. WSHA believes the surcharge will have an estimated aggregate impact of $60 million/year.

This bill also increases the B&O tax on professional services from 1.75% to 2.1%.

  • WSHA estimates that hospitals pay about 50% of the B&O tax on professional services. All hospitals would be impacted with an estimated aggregate impact of $17 million per year.

Total estimated impact to hospitals for new surcharge and professional services: -$77 million/year
 

Ancillary hospital payments for patients during administrative day stays – Enacted
This bill removes payment for ancillary services for complex discharge Medicaid patients during administrative day stays.  WSHA developed and successfully advocated for this payment in 2023. We are disappointed it is eliminated.
Total estimated impact to hospitals: -$4.7 million
 

Continue low-volume labor & delivery funding – Funded at reduced amount
This budget item, originally developed and advocated by WSHA, provides small grants to low-volume labor and delivery units in financially distressed hospitals.
Total estimated impact to hospitals: $300,000

Harmful Proposals that Failed

WSHA successfully advocated against these proposals that would have had a substantial negative impact on hospitals. WSHA successfully avoided cost increases to hospitals of $293 million per year.
 
Payroll tax (SB 5796) – Failed
WSHA strongly advocated against this new tax, as hospitals employ highly skilled employees, many with wages above the tax threshold. Hospitals cannot move out of state like other businesses with highly skilled workforces. This bill would have added a 5% tax on the amount of payroll expenses above the Social Security threshold — currently $176,100 per year—for companies with $7 million or more in payroll expenses.
Total estimated impact to hospitals: Would have been -$160 million/year
 
Raising tax on hospitals for Safety Net Assessment Program (SNAP) (Governor’s budget) – Not included in budget
This budget item, proposed in both Governor Inslee’s and Governor Ferguson’s budgets, would have effectively reduced the amount of increased reimbursement under the SNAP by $50 million per year when fully implemented.
Total estimated impact to hospitals: Would have been -$50 million/year
 
Facility fees cut (Governor’s budget) – Not included in budget
This budget item, proposed in Governor Ferguson’s budget cuts exercise, would have reduced off-campus outpatient facility fees in the Medicaid program.
Total estimated impact to hospitals: Would have been -$58 million/year

Important Health Care Budget Items Not Directly Impacting Hospitals 

These budget items do not directly impact hospitals and health systems, but these cuts will have a detrimental impact on the health care system as a whole and may be indirectly passed along to hospitals.
**These numbers are state budget impacts shown in state fiscal year biennia.**

MCO behavioral health rates – ($9.2M GFS/$27.7M Total)
Behavioral health capitation rates for Medicaid managed care organizations (MCOs) are reduced by 1%.
 
MCO physical health capitation rates – ($32.1M GFS/$106.2M Total)
Physical health capitation rates for MCOs are reduced by 1% effective Jan. 1, 2026.
 
Long-Term Civil Commitment Beds – ($33.4M GFS/32.5M Total)
Funding is reduced for individuals on 90-day to 180-day civil commitment orders who are served in community settings.
 
Closure of Rainier School, serving individuals with developmental disabilities – ($7.2M GFS/15.2M Total)
 
Laboratory rates – ($10.5M-GFS/$33.5M Total)
Reduces Medicaid fee-for-service and managed care laboratory fee schedule to 80% of the corresponding Medicare rates effective Jan. 1, 2026.  It is unclear to what degree this will impact hospitals.