A Kodiak Solutions analysis projects that a significant shift of Medicaid patients to self-pay status could cause an average hospital's net income to plummet by 71%, erasing millions in net revenue.
The "One Big Beautiful Bill" Act (OBBBA) will trigger a devastating financial impact on hospitals, according to a new report.
Kodiak Solutions' most recent quarterly analysis finds that the legislation will cause a significant shift of Medicaid patients to self-pay status, which would cause the average hospital's new income to plummet by 71%.
For revenue cycle leaders, this analysis indicates a stark financial forecast, showing how a shift in payer mix from Medicaid to self-pay could erase millions in net revenue and put pressure on already thin operating margins.
The analysis includes data from 2,100 hospitals, which shows that the average hospital faces a potential annual net revenue loss of between $1 million and $4 million, depending on the severity of Medicaid disenrollment in their state.
Modeling the Payer Mix Shift
Medicaid accounts for about 16% of gross charges and has a collection rate of 15.4%, according to the baseline for an "average hospital" established in the report. Meanwhile, self-pay accounts have a collection rate of just 6.1%.
So, what happens when a percentage of those Medicaid charges shifts to the much lower-yielding self-pay category? The four scenarios addressed in the Kodiak report project the impact of 5%, 10%, 15%, and 20% shifts of Medicaid gross charges to self-pay.
- 5% Shift: The average hospital's net revenue would decline by over $1 million.
- 10% Shift: Over $2 million.
- 15% Shift: Over $3 million.
- 20% Shift: In the worst-case scenario, the average hospital's net revenue would drop by nearly $4 million.
The Impact on Operating Margins
While the top-line revenue numbers are concerning, the report's most alarming finding is the impact on net income. For an average hospital with about $278.3 million in net revenue and a 2% operating profit margin, the consequences are immense.
In a worst-case scenario, a 20% shift of Medicaid patients to self-pay, the average hospital's net income would fall by more than 71%, dropping from approximately $5.6 million to just $1.6 million. This would mean a 70% reduction in operating profit margin, from 2% to just 0.6%.
This scenario is not far-fetched, according to the Kodiak report, which points to a recent Fitch Ratings analysis showing that the median operating profit margin for not-for-profit hospitals was just 1.1% last year.
"Few businesses in any industry could manage a 70% drop in margin," the Kodiak report warns.
Action Steps for Revenue Cycle Leaders
Given that many of the OBBBA's provisions will take effect as early as next year, Kodiak urges revenue cycle leaders to begin scenario planning now. The report recommends three key actions to mitigate the potential financial damage:
- Renew Focus on Medicaid Enrollment: Dedicate resources to helping patients meet eligibility requirements and get them enrolled or re-enrolled as quickly as possible.
- Expand Preventive Care for the Uninsured: Help uninsured patients manage their health to avoid costly emergency department visits and hospitalizations down the line.
- Reduce Operating Costs: Prepare to offset the inevitable drop in net revenue by identifying operational savings elsewhere in the organization.
Luke Gale is the revenue cycle editor for HealthLeaders.
KEY TAKEAWAYS
A 20% shift of Medicaid patients to self-pay status could cause an average hospital’s net income to fall by more than 71%, with the operating profit margin dropping from 2% to just 0.6%.
Depending on the severity of disenrollment, an average hospital faces a potential annual net revenue loss of between $1 million and $4 million as patients move from a 15.4% collection rate under Medicaid to just 6.1% as self-pay.
To mitigate the financial damage, revenue cycle leaders should focus on expanding preventive care for the uninsured and proactively identify operational cost savings.