For-profit hospitals in expansion states obtained the biggest decreases in uncompensated care costs.

Aug. 23—Whether a hospital’s home state opted to expand Medicaid eligibility likely determined whether the hospital’s uncompensated care costs decreased in 2014, according to new research.

One of the first examinations of changes in hospitals’ uncompensated care burden following the Affordable Care Act’s (ACA’s) coverage expansion found that reductions in uncompensated care costs almost exclusively occurred in states that expanded Medicaid eligibility, as authorized by the law.

Uncompensated care costs in Medicaid expansion states fell from 4.1 percentage points of operating costs to 3.1 percentage points. In non-expansion states, uncompensated care costs continued close to their existing trend, remaining at about 5.7 percentage points of hospitals’ operating costs.

“Individuals most likely to gain Medicaid coverage were least likely to face the coverage penalties and to be eligible for exchange subsidies,” wrote David Dranove, professor of strategy at the Kellogg School of Management, Northwestern University, and colleagues. “Overall, we took this as overwhelming evidence that the Medicaid expansions were in fact responsible for the decreases in uncompensated care.”

The findings followed a March 2015 estimate that the ACA cut hospital uncompensated care spending by 21 percent, according to the Office of the Assistant Secretary for Planning and Evaluation for the U.S. Department of Health and Human Services (HHS).

In June, a Kaiser Family Foundation analysis concluded that hospitals’ uncompensated care costs declined by 17 percent, or nearly $6 billion, in 2014, with almost all of the decrease occurring in Medicaid expansion states.

The new findings, which were based on Medicare hospital cost reports spanning 2011 to 2014, defined uncompensated care costs as the sum of losses on charity care and bad debt. The study data was limited to 1,249 hospitals after excluding hospitals without full-year cost reports and those in states with large eligibility expansions prior to 2014, among other criteria.

The authors found that the 2014 reductions in uncompensated care costs in Medicaid expansion states were driven by hospitals that had the highest levels of uncompensated care in 2013. Because the largest reductions occurred in hospitals with the largest uncompensated care costs, the variation in uncompensated care costs across hospitals in expansion states decreased relative to pre-ACA data.

The study also found that reductions in expansion-state uncompensated care costs from 2013 to 2014 were greatest in areas where more people gained Medicaid eligibility.

“Taken together, this evidence suggests that the decreases in uncompensated care were in fact driven by the Medicaid expansions, not by other factors,” Dranove and colleagues wrote.

Hospitals Affected

Among other study findings, for-profit hospitals in expansion states obtained the biggest decreases in uncompensated care costs. That result may have stemmed from “differing changes in policies toward uninsured patients,” the authors wrote.

The differing results by hospital type stemmed from large reductions in bad debt among for-profit hospitals, while uncompensated care reductions on the part of not-for-profit hospitals and government-owned hospitals stemmed “almost exclusively” from reductions in charity care expenses, the authors wrote.

Another finding was that government-owned hospitals continued to bear “a disproportionately large burden” of uncompensated care in both expansion and non-expansion states.

Mixed News

The findings carried both concerning and hopeful news for hospital finances, the authors noted.

The lack of a decrease in uncompensated care costs in non-expansion states indicated that the ACA’s individual mandate and the expansion of coverage through government-operated health insurance marketplaces have had “little effect on the uncompensated care burden faced by hospitals,” the authors noted.

In a more hopeful sign for hospitals in the 19 states that have not yet expanded Medicaid, the study authors predicted that uncompensated care costs in non-expansion states would have dropped by nearly 30 percent in 2014 if those states had expanded Medicaid eligibility.

On a related note, the study found that expansion-state hospitals with larger amounts of uncompensated care before the 2014 eligibility expansion also increased their profit margins after the expansion. Meanwhile, hospitals in non-expansion states that had larger uncompensated care costs had lower profit margins in 2013.

“This suggests that if non-expansion states decided to expand Medicaid, then uncompensated care would fall more at hospitals with lower profit margins,” the authors wrote.

DSH Implications

The study authors noted that although expansion-state hospitals continue to provide large amounts of uncompensated care costs—even after accounting for the effects of the coverage expansions—the ACA requires ongoing reductions in disproportionate share hospital (DSH) payments. For instance, the ACA is slated to cut Medicaid DSH payments by $2 billion in 2018 and increase the annual reduction to $8 billion by 2025. The law is expected to cut $43 billion from the program from 2018 to 2025.

The results of the study could help inform HHS calculations regarding how to implement Medicare DSH cuts in 2016 and beyond, the authors wrote. The Centers for Medicare & Medicaid Services (CMS) issued a proposed rule in April 2016 to consider using DSH hospitals' actual uncompensated care costs as the basis for making Medicare uncompensated care payments. 

The federal government provides about $50 billion in annual uncompensated care support to hospitals incurring costs for services provided to uninsured and low-income patients, according to a recent Government Accountability Office report.

The increased revenue from more Medicaid-covered patients and fewer uninsured patients has not been all good news, given that Medicaid reimbursements generally are less than the costs of medical services. Medicaid payments to hospitals amounted to 90 percent of the costs of patient care in 2013, according to estimates by the American Hospital Association.

Additionally, the authors called for policymakers to consider expanding the charity care requirements for not-for-profit hospitals, given the reductions they found in those hospitals’ uncompensated care costs.

Such recommendations have drawn opposition from not-for-profit hospitals, many of which report major ongoing financial struggles even after the ACA’s coverage expansions. For instance, the 275 member-hospitals of America’s Essential Hospitals (AEH) still posted a slight operating loss, on average, in 2014, according to an AEH report

 “We’ve made progress under the ACA, especially in states that expanded Medicaid, but we still have a long way to go,” Bruce Siegel, MD, MPH, president and CEO of AEH, said in a release. “Vulnerable patients and their hospitals continue to need strong funding support.”

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C. office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Tuesday, August 23, 2016