The Financial Benefit to Hospitals from State Expansion of Medicaid

Timely Analysis of Immediate Health Policy IssuesMarch 2013Stan Dorn, Matthew Buettgens, John Holahan, and Caitlin CarrollThe Financial Benefit to Hospitals from State Expansion of Medicaid The ACA treated hospitals like many other parts of the health care system. Hospitals helped finance new subsidies to cover the low- and moderate-income uninsured. In return, the ACA’s coverage expansion offered revenue for newly insured patients. On June 28, 2012, the Supreme Court issued a landmark decision, National Federation of Independent Business v. Sebelius,1 which placed the future of this tacit bargain squarely in the hands of state-level leaders. Each state must now choose whether to implement the ACA’s expansion of Medicaid eligibility to 138 percent of FPL. Hospitals across the country have weighed in on this issue. Many have emphasized the need for Medicaid expansion to offset the IntroductionSummaryStates across the country are debating whether to expand Medicaid eligibility to cover adults with incomes up to 138 percent of the federal poverty level (FPL). Originally mandated by the Patient Protection and Affordable Care Act (ACA), this expansion was essentially transformed into a state option by the U.S. Supreme Court decision last June.Hospitals have emerged as key participants in the debate. Many argue that Medicaid expansion is essential to protect them from the effect of the ACA’s cuts to hospital reimbursement—above all, those involving payments to so-called “Disproportionate Share Hospitals” (DSH). Some disagree, contending that hospitals will not gain from Medicaid expansion, since it undermines more generously reimbursed private coverage.In this paper, we begin by reviewing Congressional Budget Office (CBO) estimates of the revenue sources used to pay for the ACA’s coverage expansion. According to CBO, the ACA will cut DSH funding by $56 billion during 2013-2022. However, the legislation will also reduce Medicare fee-for-service hospital payments by $260 billion—more than four times the amount of DSH cuts. By the end of the decade, the latter step alone is expected to lower hospitals’ Medicare reimbursement, relative to private levels, by 10.4 percent. We also use the Urban Institute’s Health Insurance Policy Simulation Model (HIPSM) to estimate both hospitals’ increased Medicaid revenue and private revenue reductions resulting from expansion. Altogether, Medicaid expansion would provide hospitals with an additional $293.9 billion from 2013 to 2022, representing 22.8 percent of what they would have received from Medicaid without the ACA. On the other hand, expansion could cost hospitals $113.6 billion in private payments, since expansion would shift some patients into Medicaid from subsidized private coverage in health insurance exchanges and from private employer plans. Put simply, a Medicaid expansion increases the number of patients for whom hospitals are paid, but some patients shift from private to more poorly reimbursed public coverage. The net result of these two factors greatly favors hospitals. Altogether, for each dollar in private revenue that a Medicaid expansion eliminates, hospitals’ Medicaid revenue rises by $2.59.Even with a Medicaid expansion, hospitals will continue to provide uncompensated care, 46 percent of which, according to this study, will go to patients with incomes at or below 138 percent of FPL. Medicaid expansion could let the ACA’s new provision for hospital-based presumptive eligibility cover a sizable portion of these remaining uncompensated care costs.The ACA’s implicit bargain was that, in exchange for major reductions, not just to DSH payments, but also to basic Medicare fee-for-service reimbursement, hospitals would receive increased revenue when formerly uninsured patients obtain health coverage. This was expected to result primarily from two factors: expanded Medicaid eligibility and new subsidies that help low- and moderate-income households buy coverage through health insurance exchanges. States cannot change what hospitals must pay toward the ACA’s coverage expansion. However, state decisions will greatly influence hospitals’ offsetting economic gains. Whether the ACA creates net economic pain or gain for hospitals will depend significantly on whether states add Medicaid expansion to the remainder of the federal legislation. 2Timely Analysis of Immediate Health Policy Issuesfinancial damage done by the ACA’s cuts to Disproportionate Share Hospital (DSH) payments,2 while others have also noted the role played by broader Medicare reductions to fee-for-service payments.3 Still others have argued that offsetting losses to private coverage could completely offset any financial gains from Medicaid expansion.4 To help hospitals assess their stake in the ACA’s Medicaid expansion, we begin by itemizing the financial contributions hospitals will make to support the ACA’s coverage expansion. We then analyze the Medicaid expansion’s potential impact on the number of un