When States Reject Medicaid Expansion, Providers, Businesses Will Pay

States that reject Medicaid expansion under the Affordable Care Act will subject the hospitals and employers within their borders to a considerable financial hit, separate analyses show.

At last count, 14 states have said that they would reject Medicaid expansion and three other states are leaning that way despite the federal government's assurances that it would pay 100% of the cost for the first three years of the expansion, and 90% of the cost after that.

An analysis from Moody's Investors Services found that safety net hospitals in states with high numbers of uninsured residents will suffer a double-whammy hit if the Medicaid expansion is rejected.

Under the ACA, disproportionate share payments will shrink by $17 billion each year by 2019 because of the assumed reduction of charity care that the federal government said will occur with Medicaid expansion. However, states that opt out of Medicaid expansion won't get the additional funding to offset the DSH payments cuts.

That will leave opt-out states with a choice of whether to compensate hospitals for the shortfalls with state money, which would strain state budgets, or leave hospitals to absorb the costs on their own, which would squeeze margins and increase rating pressure on the hospitals, Moody's said in its analysis, Reduction of Medicaid & Medicare Disproportionate Share Hospital Payments a Looming Challenge for States and Hospitals.

"It does beg the question, 'why not expand if the federal government will be paying for initially 100% of this and then down to 90% of it a few years out?'" Lisa Goldstein, associate managing director at Moody's, told HealthLeaders Media.

"One could scratch his head and say 'I don't get it.' To a certain extent, they are leaving money on the table. If you peel back one more layer it becomes political and a fundamental belief of what the role of government is as it becomes a political party issue."

Goldstein says the soon-to-be-operational health insurance exchanges present another great unknown that could negatively impact finances at safety net hospitals.

"When the insurance exchanges are up and running (on January 1, 2014) we have heard anecdotally that we don't know what those contracts will be between hospitals and private payers," she says. "Are they going to be at Medicare rates or somewhere between Medicare and Medicaid? Are they going to be near commercial rates, which would be the best from a debt repayment perspective? That is an unknown."

And while many small businesses are expected to shuttle employees to the exchanges, Goldstein says it's not clear if big corporations will do the same. "What if a big corporation says 'healthcare costs are unaffordable, we aren't providing healthcare. You 2,000 employees go to your exchanges. Here are your vouchers.' You can see for hospitals that the with composition payer mix of their revenues, there could be a new slice of the pie called exchanges and depending upon what those negotiated rates are that could further suppress revenues."

"So, you've got DSH drying up and an unknown on Medicaid expansion. We know Medicare rates are going down, that is a given, and as we have been saying top line revenue is under pressure," Goldstein says. "Hospital revenues are still in critical condition."

Meanwhile, a separate study examining the effect of the ACA on employers found that states that opt out of the Medicaid expansion will expose businesses within their borders to tax penalties and a higher "shared responsibility" for providing healthcare coverage for employees.

According to the analysis from Jackson Hewitt Tax Service Inc., the associated costs to employers could total anywhere from $876 million to $1.3 billion in the 22 states that are either opting out of the expansion, or are leaning that way. In Texas, for example, federal tax penalties on the state's employers would increase from $299 million to $448 million each year.

"Any projections of the 'net' costs of Medicaid expansions should reflect the very real costs of the shared responsibility penalties to employers in any particular state," the analysis said.

Brian Haile, senior vice president for Health Policy Jackson Hewitt, and the author of the study, says states and businesses must make sure they understand the consequences of forgoing Medicaid expansion funding.

"The tax code is incredibly complex but in light of the Supreme Court's decision making Medicaid expansion optional you have some unanticipated results," Haile told HealthLeaders Media. "Folks who are very concerned about taxes might in some senses favor expanding Medicaid. You usually can't say that in the same sentence but you can in some instances say that here."