Medicaid Expansion Benefits Hospital Margins

A new study from the Urban Institute shows that hospitals in Medicaid expansion states have more revenue, lower uncompensated care costs and fatter operating margins.

Hospitals in Medicaid expansion states increased Medicaid revenue an average of $5.2 million in 2015, reduced uncompensated care by $3.2 million, and improved operating margins by 2.5 percentage points, according to a new report from the Urban Institute.

"This study was an update from an earlier analysis that looked at the effects in 2014, so these changes have not been a one-time effect. These findings have been robust over the past two years," says Frederic Blavin, a senior research associate at the Urban Institute.

According to the University of North Carolina Rural Health Research Program, there have been 78 rural hospital closures across the nation since the Affordable Care Act was passed in 2010, and more than 75% of those closures were in non-expansion states.

The Republicans' American Health Care Act, which died in the House last week before a vote could be taken, would have repealed the state option to expand Medicaid under the ACA. With the ACA emerging intact, Blavin says states that did not expand Medicaid now have the chance to reconsider.

"Particularly for states with large rural populations and small rural hospitals, these findings really indicate that those types of hospitals would gain most financially under Medicaid expansion and would see significant improvements in their profit margins," he says.

"For states that are still considering Medicaid expansion, these findings offer strong evidence that expansion can improve hospitals' payer mix and overall financial outlooks."

Hospitals' Survival May Hinge on Medicaid
Blavin says the 2.5 percentage point average margin bump attributed to the Medicaid expansion could determine whether or not a hospital survives. "Operating margins are basically how profitable it is for hospitals to provide patient services," he says.

"There aren't any estimates in terms of what a given percentage point change in operating margins means for hospital quality, but I imagine that it does provide a lot of financial relief for hospitals and it could potentially free up additional resources for hospitals to provide high quality care."

The Medicaid margins could be even more important for smaller rural hospitals.

"Those hospitals are probably at more financial risk in general than larger hospitals," Blavin says. "They tend to face a lot more challenges than larger hospitals or metro hospitals. They tend to have a larger percentage of uninsured populations. So, really having them see a large change in their payer mix, in terms of a change from uninsured to Medicaid covered patients, really helped those kinds of hospitals that were at risk prior to the ACA."

Urban Institute had initially intended to use its updated report as a response to the AHCA's provisions to repeal the Medicaid expansion, but the AHCA bill died a quick death, and Blavin says Urban Institute revised its focus.

"Originally the findings were the same, but the framing of the analysis was a little different. It was more framed in terms of what would be the implications if the ACA were to be repealed and potentially replaced that could weaken the Medicaid expansion," Blavin says.

"The focus of this study is more on 'OK. Now that the ACA is for now intact, what are the implications for states in terms of moving forward with the Medicaid expansion?'"

While this study does not address the potential stress on state budgets that could come with the Medicaid expansion, Blavin says other studies have suggested that expansion is financially prudent because the federal government picks up about 90% of the expansion cost.

A 2016 Urban Institute/Kaiser Family Foundation study found that non-expansion states end up spending a significant amount of money on the patients who otherwise would have qualified for Medicaid under the expansion.

"From the state budgetary perspective it depends upon the specific states, what their budget situation looks like, what potentially would be at risk for cuts if they had to spend the additional 10%. But obviously the 90% match is significantly higher than the match they would receive for other Medicaid patients," Blavin says.

"States are paying a portion of uncompensated care costs for these individuals. From that perspective it doesn't make a lot of sense, looking at the economics of it, for them to turn down this money. It seems like the economic case against expansion seems to be relatively weak.