Medicaid Expansion Puts Bottom Line on Borrowed Time

Now that the smoke has cleared from the U.S. Supreme Court's June ruling on the Patient Protection and Affordable Care Act, what's the upshot for financial leaders? It appears the only thing healthcare CFOs can count on is that they will have to slash costs.

For starters, most states are taking a hard look at Medicaid eligibility to determine if they'd like to participate in the expansion program. While each state tries to determine the pros and cons of participation (both political and financial), hospitals and health systems need to figure out the consequences of any path their state chooses.  

To join in the expansion, states must identify the newly eligible, assess how eligibility will be determined, and then streamline the process and coordinate enrollment across Medicaid, the Children's Health Insurance Program, and the state health insurance exchanges—and complete the process by January 1, 2014. (You thought Usain Bolt was fast? Now that's a sprint.)

Currently the Medicaid component of PPACA calls for the federal government to pay 100% of the Medicaid expansion for the first three years. The proposed federal match levels are 100% in 2014, 2015, and 2016; 95% in 2017; 94% in 2018; 93% in 2019; and 90% in 2020 and thereafter. Then the funding begins to drop to 90%, forcing states to pick up the tab for the difference for a program having more members than ever before. No one knows for sure how many people will qualify for enrollment, so quantifying the ultimate cost to each state is challenging.

Once federal funding levels decline, states must figure out how to pay for all those newly enrolled individuals, which could be costly. But if states wait to participate in the expansion, they could also miss out on the three years of full federal funding—also a significant amount of money. To help get states off the fence on participation, only last week the feds announced that states could expand their Medicaid programs to 138% of the federal poverty level for some period of time, and then drop out.

Whether this approach will work is unclear. However, with an estimated 30 states, including Texas and Florida, already declining to participate in Medicaid expansion, and other states reportedly awaiting clarifications before making a decision, the federal government had to do something to garner greater interest and participation.

In addition to the decision states are making on Medicaid expansion, there's another matter CFOs need to pay attention to: a substantial number of employers could drop insurance coverage altogether in your state. Already, 10% of employers have dropped insurance coverage in the last decade for no other reason but cost, and another 10% could drop it in the next ten years, says Paul H. Keckley, PhD, executive director at the Deloitte Center for Health Solutions in Washington, D.C. That means more people will have to find insurance coverage on their own or through the federal insurance exchange program. That can come out hospitals' bottom line. People seeking independent coverage tend to select high-deductible, high-copay plans that put a large chunk of hospital or health systems money at risk for going unpaid. Bad debt isn't good for the balance sheet.

Regardless of which path a state takes on Medicaid expansion or the rate at which state insurance exchanges reimburse for coverage, ultimately CFOs must count on cutting costs and proving value for their organizations to survive and thrive.

"We have to demonstrate quantifiable value for the consumer and the employers now. Folks aren't happy with their care and the costs are running away," says Keckley. "I tell [executives] we're living on borrowed time … to fix this we're going to have to go big or get out. People need to develop new models to fix this, and they must be ready to throw out the sacred cows to find savings."