What You Don't Know About Medicaid Expansion

Hospital and health system leaders see clear financial benefits from Medicaid expansion. But that's not the whole story. A deeper look reveals that Medicaid expansion is a critical, but perhaps not vital component of post-PPACA financial viability.

Depending on whether your state has expanded Medicaid, your hospital or health system likely either has sharply better financials or the same old bad ones. But the decision on whether or not to expand, though not in their control, is weighing heavily on hospitals.

In a side conversation at a recent HealthLeaders Media Roundtable, I asked a group of CFOs the consequences to their bottom lines of states' decisions either to expand Medicaid eligibility—and insure federal funding for the lion's share of the cost for the first few years—or decline that opportunity.

As of the end of August, 28 states had accepted Medicaid expansion, and two more, Utah and Indiana, were still debating whether to join. That leaves plenty of hospitals in states that have opted to forego expansion.

Medicaid expansion has two clear benefits to the bottom line, according to the CFOs I've talked with:

• Charity care drops immediately and significantly.
• Bad debt drops significantly.

But here's the surprising thing: revenue and net income pretty much hold steady. What gives?

Well, for one thing, it's early. Enrollments can be expected to extend to a greater share of the previously uninsured as time passes.

For another, uninsured or not, these patients are going to come to hospitals for treatment. In the past, such hospitals may have erred on the side of an admission, for example, because it was going to be paid for, so that revenue is going away—a negative, financially.

But the huge difference is now there's a payer—even if it's a poor one—where before there was none, for those who truly do need an inpatient admission. So far, for some, the net is near zero, but the hopeful takeaway is that people are likely being treated more appropriately.

What's clear is that the classification of revenue has changed, however. That has real impact.

A Tale of Two Systems
One CFO who has hospital operations in 20 states, seven of which have expanded Medicaid, says 80% of his previously self-pay patient population is now Medicaid-eligible, and 20% is now health insurance exchange-eligible. So the expansion of Medicaid has become a very important component of reducing the self-pay population of those hospitals to potentially almost nothing.

Think about the time and effort that used to go into collecting those balances which is now freed up.

Even though he says adoption rates into the health insurance exchanges were initially low—about 25–30 percent of the population, and eligible Medicaid expansion adoption is far from 100%, it has led to a real reduction in the self-pay population.

For this CFO and his system, that translates to revenue that falls directly to the bottom line and benefits cash flow. In real terms, that means this health system has seen a 60% reduction in self-pay ED visits and a 67% reduction in self-pay admissions. Folks, that's real progress both financially and likely in clinical effectiveness.

Moving the Needle?
Anecdotally, I have heard from other providers who say they have seen increases in volume, but that's occurring mostly on the outpatient side, and even where it is growing, inpatient admissions, generally, are increasing only to a small degree.

But does it move the needle, in terms of whether a hospital or health system feels it can survive without strategic partners in the long term?

For one health system CFO, the answer is no.

This organization, which has $750 million in annual revenue, sees itself as besieged with local competition, and with capital needs for its hospitals, its EMR, and equipment. Therefore a Medicaid expansion (that still has not yet come) could have deferred the decision to seek a strategic partner for as much as 18 months, but wouldn't have really changed the underlying equation.

It would have helped, but it wouldn't have gotten the organization to a 4% annual operating margin, which is the minimum its leaders feel it needs to continue in its current organizational structure.

So Medicaid expansion is a critical, but not necessary, component for thriving in the post-PPACA world.

Expect more upheaval.