The Financial Benefit to Hospitals from State Expansion of Medicaid
Timely Analysis of Immediate Health Policy Issues
March 2013
In Summary
• U
nder the Patient Protection and Affordable Care Act (ACA), states can
expand Medicaid to adults with incomes up to 138 percent of the federal
poverty level (FPL). If all states implement this option, hospitals will obtain
$293.9 billion in additional Medicaid revenue from 2013 to 2022—a 22.8
percent increase above what they would have received without the ACA.
• E
xpansion moves some patients from private insurance to Medicaid, which
pays hospitals at a lower rate. However, hospitals’ resulting loss of revenue
is more than offset by the many uninsured patients who gain Medicaid
coverage. Altogether, for each dollar lost from private insurers, expansion
increases hospitals’ Medicaid revenues by $2.59. Medicaid expansion also
lets hospitals use the ACA’s new presumptive eligibility option to obtain
payment for a significant proportion of the uncompensated care that would
remain, even after expansion.
• T
he ACA funds coverage expansion, in part, through major cuts to Medicare
fee-for-service hospital payments and reimbursement for Disproportionate
Share Hospitals (DSH), which serve many low-income and uninsured
patients. In the ACA’s original design, before the Supreme Court changed
the Medicaid expansion from mandatory to optional, these cuts were
premised on offsetting boosts to hospital revenue when millions of formerly
uninsured patients enrolled in Medicaid and other subsidized coverage. Now
that the Supreme Court has made the Medicaid expansion optional, some
states may not expand eligibility. In those states, hospitals will experience
all of the ACA’s pain but lose out on much of the legislation’s promised,
offsetting gains.
Background
The ACA commits roughly $1.5 trillion from 2012-2022 to cover millions of
low- and moderate income Americans who are uninsured. The law provides for
expanding Medicaid to all adults making less than 138 percent of the FPL. It
also provides subsidies to help consumers with incomes too high for Medicaid
to purchase coverage in health insurance exchanges. Reduced reimbursements
to hospitals help finance these new subsidies, and in return, the ACA’s coverage
expansion offers hospitals revenue from newly insured patients.
Over the next 10 years, Medicaid funding for DSH hospitals across all 50 states
and the District of Columbia will be reduced by $22 billion, and Medicare
DSH funding will fall by $34 billion. Over the same time period, Medicare
fee-for-service payments are cut by $260 billion. Conversely, the Medicaid
expansion provides hospitals with an additional $293.9 billion in revenues, and
hospitals receive additional funds from newly insured patients covered through
subsidies in exchanges. However, revenues from the Medicaid expansion are
not guaranteed. The Supreme Court ruling allowing states to opt out of the
expansion leaves hospitals in states that fail to expand with the responsibility
to fund the coverage expansion happening nationally without the offsetting
revenues created by newly eligible Medicaid patients.
Expansion Greatly Affects Coverage and
Hospital Revenues
Many hospitals contend that the expansion is necessary to cover the loss in
revenues they face in helping pay for the new coverage subsidies. Many also
For more information, read the full report funded by the Robert
Wood Johnson Foundation and prepared by researchers at the
Urban Institute.
stress that if their state does not expand Medicaid, a portion of the population
will stay uninsured, and hospitals will still have to foot the bill for uninsured
patients who have no means to pay for care they receive. If all 50 states expand
Medicaid, hospitals will gain $293.9 billion from 2013 to 2022 in revenues
from new Medicaid patients. Furthermore, if all states expand Medicaid,
the proportion of the population with no insurance declines by 48 percent,
compared to a drop of just 28 percent if no state opts into the expansion,
meaning fewer patients receiving uncompensated care.
Expansion Lowers Private Insurance Payments
to Hospitals
Other hospitals contend that, as some patients move from private to public
coverage, expansion will cost them payments from private insurers, which are
more lucrative than those from Medicaid. If all 50 states expand Medicaid,
hospitals stand to lose $113.6 billion in private payments.
This loss in private payments stems from two sources. First, Medicaid expansion
makes patients ineligible for subsidies to purchase private insurance in the
exchange if they have incomes between 100 and 138 percent of the FPL.
Second, past experience shows that Medicaid enrollment increases lead to a
modest reduction in employer-sponsored insurance and individually purchased
coverage. Both factors have the effect of moving people from private insurance
to public coverage, therefore reducing hospitals’ overall private insurance
revenues.
New Revenues from Expansion Exceeds Hospitals’
Loss of Private Payments
With Medicaid expansion, some patients will shift from private coverage to
more poorly reimbursed public coverage, so hospitals’ private insurance revenue
will decrease. On average, private payment rates are 38 percent higher than
Medicaid payment rates. However, the expansion creates many more insured
patients. When compared nationally, the amount hospitals stand to gain if all
50 states opt into the expansion ($293.9 billion) is more than 2.5 times the
revenue lost from private insurance payments ($113.6 billion).
Moreover, nearly half (46 percent) of all hospital uncompensated care that
remains after Medicaid expansion would be furnished to patients with incomes
low enough for Medicaid. The ACA’s new hospital-based presumptive eligibility
can pay for many if not most of these patients in states that implement the
Medicaid expansion.
Conclusion
Medicaid expansion will yield tremendous financial gains for most hospitals,
despite modest offsetting losses in private revenues. The Supreme Court’s
decision to make the Medicaid expansion optional for states jeopardizes the
ACA’s implicit bargain with hospitals—namely, significant payment cuts in
exchange for significant increases in the number of patients with insurance.
Regardless of what states decide, hospitals nationwide must help finance the
ACA’s coverage expansion through reduced federal payments. Hospitals located
in states opting out of the expansion will not receive the full measure of
offsetting, promised revenues and thus will be at a relative disadvantage when
the ACA is fully implemented in 2014.