- Issue: Safety-net hospitals play a vital role in delivering health care to Medicaid enrollees, the uninsured, and other vulnerable patients. By reducing the number of uninsured Americans, the Affordable Care Act (ACA) was also expected to lower these hospitals’ significant uncompensated care costs and shore up their financial stability.
- Goal: To examine how the ACA’s Medicaid expansion affected the financial status of safety-net hospitals in states that expanded Medicaid and in states that did not.
- Methods: Using Medicare hospital cost reports for federal fiscal years 2012 and 2015, the authors compared changes in Medicaid inpatient days as a percentage of total inpatient days, Medicaid revenues as a percentage of total net patient revenues, uncompensated care costs as a percentage of total operating costs, and hospital operating margins.
- Findings and Conclusions: Medicaid expansion had a significant, favorable financial impact on safety-net hospitals. From 2012 to 2015, safety-net hospitals in expansion states, compared to those in nonexpansion states, experienced larger increases in Medicaid inpatient days and Medicaid revenues as well as reduced uncompensated care costs. These changes improved operating margins for safety-net hospitals in expansion states. Margins for safety-net hospitals in nonexpansion states, meanwhile, declined.
Through their missions or legal mandate, safety-net hospitals provide care to all patients, regardless of their ability to pay.1 They include public hospitals, which are often providers of last resort in their communities; academic medical centers, which combine their teaching function with a mission to serve vulnerable populations; and certain private hospitals.
Safety-net hospitals deliver a significant level of care to low-income patients, including Medicaid enrollees and the uninsured, typically providing services that other hospitals in the community do not offer — trauma, burn care, neonatal intensive care, and inpatient behavioral health, as well as education for future physicians and other health care professionals. They are also an important source of care to uninsured individuals who are ineligible for Medicaid or subsidized marketplace coverage because of their citizenship status.2
Several studies have suggested major reductions in uncompensated care and improved financial status at safety-net institutions in states that expanded Medicaid compared to those in states that did not expand.3,4 However, these results were based on interviews with a limited number of safety-net health system executives and staff. Our analysis expands on this research by examining changes in key financial metrics — that is, uncompensated care, Medicaid costs and revenues, and total hospital margins–across safety-net hospitals nationally using standardized data.
When compared to other short-term acute care hospitals, hospitals that met our safety-net hospital criteria had substantially higher Medicaid revenue and uncompensated care levels than non-safety-net hospitals. Safety-net hospitals, however, had lower operating margins (Exhibit 1).
Below we discuss findings on the impact of the Affordable Care Act’s (ACA) Medicaid expansion on safety-net hospitals’ financial status. The ACA allowed states to expand Medicaid eligibility to nonelderly adults with incomes up to 138 percent of the federal poverty level. The reduction in the number of uninsured under the ACA coverage expansions was expected to reduce the uncompensated care that hospitals provide, thus improving their financial status. As of 2015, 31 states and the District of Columbia had expanded Medicaid, while 19 states had not.5
We measure changes in the financial status of safety-net hospitals in states that expanded Medicaid prior to 2015 (326 hospitals) versus safety-net hospitals in states that did not expand or expanded in 2015 or after (268 hospitals). (See “How We Conducted This Study” for complete methods.)
Our analysis of Medicare cost report data for federal fiscal years 2012 and 2015 shows a sizable contrast in financial performance between safety-net hospitals in states that expanded Medicaid under the ACA and those in states that did not. Performance metrics included the following:
- Hospital operating margins.6 Operating margins improved for safety-net hospitals located in Medicaid expansion states compared with declines for those in states that did not expand. From 2012 to 2015, operating margins for safety-net hospitals in Medicaid expansion states increased from –3.2 percent to –2.1 percent in 2015 (Exhibit 2, Appendix A). In contrast during the same period, operating margins for safety-net hospitals in nonexpansion states declined from 2.3 percent to 2.0 percent. Largely accounting for this difference were increased Medicaid revenues and reduced uncompensated care costs. Even after expansion, safety-net hospitals’ operating margins in Medicaid expansion states were lower than those in nonexpansion states.
- Medicaid inpatient days. From 2012 to 2015, safety-net hospitals in Medicaid expansion states experienced larger growth in Medicaid utilization than those in nonexpansion states (Exhibit 3). During the study period, Medicaid inpatient days in expansion states rose 13.5 percent. In comparison, Medicaid inpatient days in nonexpansion states fell slightly, by 0.9 percent.
- Medicaid revenues and costs.7 The rise in use of safety-net hospitals in Medicaid expansion states resulted in these hospitals’ increased Medicaid revenue and costs compared to a slight decline in nonexpansion states (Exhibit 4). From 2012 to 2015, safety-net hospitals’ Medicaid revenues as a share of net patient revenues rose 12.7 percent in Medicaid expansion states. In contrast, during the same period, safety-net hospitals’ Medicaid revenues as a share of net patient revenues declined 1.8 percent in nonexpansion states. However, safety-net hospitals’ profit margins on Medicaid patients fell from 6.8 percent to 0.7 percent in expansion states, suggesting that the revenues received for newly eligible patients did not keep pace with the higher cost of treating these patients.
- Uncompensated care costs.8 In 2012, safety-net hospitals’ uncompensated care costs as a percent of total hospital operating costs equaled 6.7 percent in expansion states compared to 5.7 percent in nonexpansion states (Exhibit 5). By 2015, however, the safety-net hospitals’ share of uncompensated care declined to 3.5 percent in expansion states, or a reduction of 47.4 percent. By comparison, in nonexpansion states that year, uncompensated care costs as a share of total hospital operating costs fell to 5.3 percent, a 7.8 percent reduction.
These data suggest that the Medicaid expansion created by the ACA had a significant positive financial impact on safety-net hospitals in states that expanded Medicaid eligibility relative to those in states that did not expand. Safety-net hospitals in expansion states saw larger increases in Medicaid patient volume and revenue, reduced uncompensated care, and improved financial margins compared to safety-net hospitals in nonexpansion states. Although our study’s results are specific to safety-net hospitals, other studies have found similar trends across all hospitals in expansion and nonexpansion states.9
The improved financial stability of safety-net hospitals could allow these hospitals to continue expanding outpatient capacity, invest in strategies to improve care coordination, hire new staff, and develop better infrastructure to monitor costs.10 Such investments can also help prepare hospitals for new payment arrangements that may require them to assume more financial risk for patient care and outcomes. Improvements not only benefit the institutions and Medicaid patients but the communities these hospitals serve.
Current attempts to repeal the ACA aim to eliminate the Medicaid expansions over time and curtail Medicaid spending by more than $800 billion over 10 years. The Congressional Budget Office estimates that about 14 million people could lose their Medicaid coverage by 2026, which would have an adverse effect on safety-net hospitals in those states. Specifically, safety-net hospitals’ gains in reduced uncompensated care and improved overall financial margins could be lost in the future.
This week, Senate Republicans announced that they plan to pay for their tax cuts for large corporations and millionaires not only by imposing tax increases on the middle-class but also by undermining people’s access to health care. Specifically, they have proposed eliminating the Affordable Care Act’s (ACA) individual mandate, which helps keep premium costs affordable by ensuring that both healthy and sick people have health insurance.
Repealing the mandate would drive up premiums by 10 percent in 2019 and lead to 13 million fewer people having health insurance by 2025. A Congressional Budget Office (CBO) report also revealed that the similar House version of the tax bill would result in $25 billion in cuts to Medicare in fiscal year 2018 and hundreds of billions of dollars of cuts to the program overall. Taken as a whole, the tax bill would not only increase taxes for millions of middle-class families but would also have disastrous effects on people’s health care.
A typical middle-class family buying individual market insurance would see premiums increase nearly $2,000
The Senate tax bill would substantially increase premiums in the individual market for health insurance, and middle-class families would bear the brunt of the price hike. The bill would eliminate the individual mandate—the requirement that people maintain health coverage or pay a penalty. Without the mandate, people would only purchase coverage when they needed it, resulting in adverse selection that would drive up premiums. The CBO estimates that premiums would increase about 10 percent as a result of this adverse selection.
The Center for American Progress estimates that this premium increase translates to an extra $1,990 for benchmark plan coverage for an unsubsidized middle-class family of four. Families with incomes above 400 percent of the federal poverty level (FPL)—more than $98,400 for a family of four in the lower 48 states—are not eligible for premium tax creditsto reduce the cost of marketplace coverage. The 10 percent increase would be an even greater financial burden for families in states with higher premium levels, increasing costs by $2,900 in Alaska, $2,350 in Maine, and $2,060 in Arizona.
13 million more people would be uninsured by 2025
The CBO estimates that repeal of the mandate would result in 4 million fewer people having coverage in 2019 and 13 million fewer with coverage by 2025. As a result, about 16 percent of the nonelderly population would not have health insurance by 2025, compared with about 10 percent currently.
The individual mandate is necessary because of the consumer protections put in place by the ACA. The ACA banned discrimination by insurance companies against people with pre-existing conditions, required that people be charged the same amount regardless of health status, and eliminated annual and lifetime limits on coverage. But these protections would also make it easy for people to game the system by only buying health insurance once they needed it. To address this concern, the ACA coupled these reforms with an individual shared responsibility provision, also known as the individual mandate, which requires that everyone maintain health insurance coverage so that the overall insurance risk pool is healthy and premium rates are kept in check.
Repeal of the mandate would have two effects on the individual market. First, people who expect to be healthy would avoid purchasing coverage until they need it. As a result, the remaining enrollees in the individual market would be sicker on average, and insurance companies would need to raise rates to cover the increased average cost. Second, the resulting higher premiums would discourage additional people from purchasing coverage through the individual market. Those who become uninsured would no longer have financial protection against catastrophic medical costs, and hospitals and other providers would be forced to provide more uncompensated care.
Medicare would be cut by $25 billion in 2018
In addition to its frontal assault on health care for the middle class, the Senate bill would also secretly cut Medicare. Because the tax cuts for the wealthy in the proposed bill are not fully paid for, they would increase the deficit by more than $1.4 trillion over 10 years. But the little-known Statutory Pay-As-You-Go Act of 2010 requires that any deficit-increasing legislation be offset with cuts to other mandatory programs, including Medicare. The CBO has estimated that the offsetting spending reductions for the similar House version of the tax bill would cut Medicare by about $25 billion in fiscal year 2018. Given that similar cuts would be required in subsequent years, the total cost imposed on the Medicare program would be hundreds of billions of dollars over the next decade. This would have a particularly harmful effect on rural hospitals with thin margins, which could be at risk of closure as a result.
Asking millions of middle-class families to pay more in taxes so that corporations and the wealthy few can pay less in bad enough. But to use those cuts to also undermine health care for middle-class families is unconscionable. Once again, the congressional majority seems to be doing everything in its power to make life harder for everyday Americans, just so it can provide giveaways to the wealthy few.
Our estimated reduction in coverage in 2025 due to repeal of the mandate is based on national projections by the CBO. The CBO estimates that 13 million fewer people will have coverage in 2025, including 5 million fewer people with Medicaid, 5 million fewer people with individual market coverage, and 3 million fewer people with employer-sponsored insurance. We used data from the 2016 American Community Survey Public Use Microdata Sample (ACS PUMS), available from the IPUMS-USA to tabulate the number of nonelderly people in each state by primary coverage type using a coverage hierarchy. We then assumed that each state’s reduction in coverage was proportional to its share of the national total for each of those three coverage types. For more on the IPUMS-USA data set, see Steven Ruggles and others, “Integrated Public Use Microdata Series: Version 5.0” (Minneapolis: Minnesota Population Center, 2010).
We made two adjustments to our ACS PUMS tabulations to account for potential effects of Medicaid expansion in Maine, given voters’ recent approval of expansion. We increased the number of Medicaid enrollees in Maine by 51,000 based on projections by the Urban Institute. We also decreased the number of people with coverage through Maine’s individual market by 20 percent to account for the fact that some enrollees will lose access to marketplace premium subsidies when they become Medicaid eligible under expansion. Enrollment data from the Centers for Medicare and Medicaid Services (CMS) show that 27 percent of 2017 marketplace plan selections were by people with family incomes between 100 and 150 percent of the federal poverty level.
Our estimates of 2019 premium increases are based on the CBO projection that mandate repeal will increase individual market premiums 10 percent. We used the HealthCare.govplan information to calculate the 2018 average marketplace benchmark—second-lowest cost silver—plan in each state, weighting by the geographic distribution of current marketplace enrollment. We then inflated that premium to 2019 levels according to National Health Expenditure projections for per-enrollee cost growth. To calculate the 2019 average benchmark premium specific to a typical family of four, we borrowed the example family composition that the U.S. Department of Health and Human Services uses in its reports: 40-year-old and 38-year-old parents and two children. We estimated that the family would pay an additional 10 percent of that 2019 benchmark due to mandate repeal. Premium data were not available for all states.
Finally, our estimates of state-level cuts to Medicare in fiscal year 2018 divided the $25 billion total Medicare funding reduction projected by the CBO proportional to each state’s share of national Medicare spending as of 2014, the most recent year for which CMS National Health Expenditure data is available, using data published by the Kaiser Family Foundation.
Over recent years, numerous rural health insurance markets have teetered on the brink of collapse. Rural areas have long posed a special challenge to health care policymakers, but a poorly-designed system of subsidies for rural hospital care has turned this into a crisis. It has fostered a rural hospital market structure that has crippled the ability of private insurers to negotiate reasonable payment rates, without fully securing the provision of essential care. By refocusing federal assistance on emergency care, it should be possible to restore rural insurance markets to health, while improving the affordability and access to care available to residents.
Warren Buffett once famously observed that “you only find out who is swimming naked when the tide goes out.” As the Affordable Care Act’s reforms have placed the nongroup market for health insurance under acute strain, it is rural areas that have been most exposed. Of 650 counties that have only a single insurer offering plans on their exchange, 70 percent are rural. For Medicare Advantage, despite total revenues roughly twice as large as the individual market, the situation is even worse—with 140 (mostly rural) counties lacking private insurance coverage options altogether.
It is more challenging to deliver healthcare services in sparsely populated areas. Small communities are unable to support full-time physicians for many medical specialties, and the fixed costs of multi-million-dollar hospital equipment cannot be spread across so many patients. As only 24 percent of rural residents can reach a top trauma center within an hour, rural areas suffer 60 percent of America’s trauma deaths, despite having only 20 percent of the nation’s population.
During the 1990s, economic pressures forced 208 rural hospitals to close. As a result, Congress established the Flex program to boost Medicare payments to isolated rural hospitals. Facilities designated as Critical Access Hospitals under the Flex program were intended to be more than 35 miles by major road from other facilities, but states were allowed to waive that requirement. As a result, the number of such hospitals grew from 41 in 1999 to more than 1,300 in 2011 – covering a quarter of U.S. hospitals, before Congress eliminated the states’ waiver power. By that time, 800 facilities exceeding the 35-mile requirement had been designated as CAHs, and these were grandfathered in.
What makes CAH status so attractive to hospitals? Instead of being paid standard Medicare rates for services, CAHs are allowed to claim reimbursement for whatever costs they incur in the delivery of covered inpatient, outpatient, post-acute and laboratory services to Medicare beneficiaries. Medicare pays more to facilities with the most expensive cost structures and eliminates incentives to control expenses – encouraging all to increase spending on new infrastructure and equipment.
Eighty-one percent of CAHs now have MRI scanners, for which they bill Medicare an average of $633 per scan—double the normal fee schedule rates. From 1998 to 2003, payments per discharge for acute care at CAHs rose by 21 percent, while post-acute care costs per day almost quadrupled. This upward pressure on costs has compounded over time: The longer a hospital has been a CAH, the more its costs have grown.
To check the capacity of CAHs to inflate their overheads, Medicare rules limit them to 25 beds. This has transformed the rural hospital landscape. In 1997, 85 percent of rural hospitals had more than 25 beds; by 2004 only 55 percent did. This makes it very difficult for the best-managed and most cost-effective facilities to win market share and has eliminated whatever competitive forces may have constrained costs. Nonetheless, excess capacity remains enormous: occupancy rates were only 37 percent in small rural hospital in 2014, compared with 64 percent in urban hospitals. Insurers covering care at such facilities must pay for equipment that is often unused and skilled physicians who spend much of their time idle.
Medicare Advantage (MA) plans have been hit hardest by this arrangement. MA plans usually attract enrollees by providing supplemental benefits and reduced out-of-pocket costs, funded by preventing unnecessarily costly hospitalizations. But, as CAHs are able to claim unconstrained reimbursement for Medicare beneficiaries directly from the government, they have little reason to agree to reasonable fees with MA plans, who may constrain their claims or steer enrollees to cheaper sites of care. Even under relatively loose network adequacy requirements, MA plans can, therefore, be effectively locked out of states dominated by CAHs. While 56 percent of Medicare beneficiaries in Minnesota are enrolled in MA plans, only 3 percent of those in Wyoming and 1 percent in Alaska are covered.
Low volumes and the absence of competition have also resulted in a lower quality of care. CAHs are more poorly-equipped than other hospitals, fall short on standard processes of care and have higher 30-day mortality rates for critical conditions. As a result, patients are increasingly willing to travel longer distance for treatments, with rural residents receiving 48 percent of elective care beyond their local providers. This bypass of rural provider networks is particularly common for surgeries on eye, musculoskeletal and digestive systems and for complex procedures more generally.
Although CAH status gives each hospital an average additional $500,000 of revenues, falling volumes of inpatient procedures and the increased costs entailed by this arrangement nonetheless leaves many facilities struggling. According to the National Rural Health Association, 55 rural hospitals closed between 2010 and 2015, while 283 were on brink of closure.
Can the $2 billion total annual cost of additional hospital subsidies provided by the Medicare Flex program not be better spent to support essential care in rural areas?
MedPAC, the agency established by Congress to advise it on Medicare payment policy, has argued that CAHs are “not the best solution”, as “many small towns do not have the population to support efficient, high-quality inpatient services.” MedPAC has proposed that Congress provide lump-sum payments to cover the overheads needed to provide 24/7 emergency care at geographically isolated outpatient-only facilities and suggested that Medicare reimbursement be extended to care provided by standalone emergency departments.
This would focus subsidies to secure emergency services, which must be delivered locally, while leaving elective care to be located efficiently according to market demand. Such a reform would give emergency rural hospital care a firmer financial foundation while restoring payment rules for elective care that would make it possible for insurers to re-enter the rural marketplace.
The Senate’s healthcare bill, if passed, could spell doom for some cash-strapped rural hospitals, many of which are already vulnerable to closure, experts say.
Much of the concern is centered on cuts to Medicaid in the bill—a proposal that is also worrying to large hospitals and health systems—which could leave millions more uninsured and significantly increase uncompensated care costs.
“These hospitals are hanging on by their fingernails,” Maggie Elehwany, vice president of government affairs for the National Rural Health Association, told CNN. “If you leave this legislation as is, it’s a death sentence for individuals in rural America.”
The cuts wouldn’t only hurt patients, according to a new report. Some of the bill’s proposals could also lead to thousands of rural healthcare workers losing their jobs. The Chartis Center for Rural Health, a part of strategic planning firm The Chartis Group, estimated that the BCRA, if passed as is, could cause 34,000 rural healthcare jobs to be eliminated.
Under the Senate’s bill, the cuts could cost rural hospitals $1.3 billion in lost revenue. Much of this would be felt in reduced Medicaid payments; expansion states, this would be about $442,000 lost each year per facility, while it would equal about $224,000 in lost revenue. It would likely push nearly 150 more rural facilities into the red, according to the analysis.
One such vulnerable facility is Lincoln Community Hospital, the small, regional hospital in Hugo, Colorado. The 50-bed hospital serves the the town of about 825, according to an article from National Public Radio, with many of its patients on either Medicare or Medicaid.
The funding cuts proposed in the Better Care Reconciliation Act have given leaders at Lincoln pause, and if the hospital were to close it would leave local residents in a “medical desert,” as it’s more than 100 miles to the next nearest hospital.
The facility was nearly shut down several decades ago, and former board member Ted Lyons said that, though the Affordable Care Act is far from perfect, he hopes that members of Congress work to protect rural hospitals if they intend to move forward with a repeal.
“You don’t drown the duck to get the feather out of him,” Lyons told NPR.
Rural healthcare leaders in Pennsylvania expressed similar concerns. Washington Health System operates two hospitals, one with 260 beds and one with 49 beds, in the western part of the state. CEO Gary Weinstein told WESA that if its smaller Waynesburg hospital closed, patients would have to travel at least 30 minutes for care.
The Waynesburg facility is located in Greene County, which is ranked 60th out of 67 Pennsylvania counties in per capita income, so many of its patients are Medicaid recipients. If a patient without insurance comes into the hospital, it recoups just 5% of its costs, Weinstein said.
“We don’t make money when somebody is insured by Medicaid, but at least we get something,” Weinstein said. “But when somebody has no insurance at all, a lot of times they just aren’t able to pay any part of the bill.”
Weinstein said he has spoken to Sen. Pat Toomey, R-Pennsylvania, one of the 13 senators involved in crafting the Senate’s bill, about that possibility, asking him to make additional changes to the legislation.
In Focus: Reimagining Rural Health Care
News of growing health disparities between rural and urban Americans prompted Transforming Care to focus on what’s happening in rural health care today. What we found was surprising: While there is much to worry about—including a greater risk of dying from preventable causes and worse access to care—there are also many signs of innovation, including bold experiments in organizing and financing care delivery, making services more accessible, and addressing the social determinants of poor health. This issue focuses on these bright spots—places where policymakers, providers, and community organizers are seeking to transform their health care systems to better serve residents.
Forty-six million Americans—some 15 percent of the U.S. population—live in rural areas of the country.1 Data from the Centers for Disease Control and Prevention show they are more likely to die from the five leading causes of death—heart disease, cancer, unintentional injuries, chronic lower respiratory disease, and stroke—than residents in urban regions and that a greater percentage of rural deaths may be preventable.2 Gains in life expectancy among urban and rural Americans, which once tracked fairly closely, began to diverge in the 1990s. By 2009, the life span of residents of large cities was 2.4 years longer; for poor and black rural residents, life expectancy was what urban rich and urban whites enjoyed four decades earlier.
“Rural America is a unique health care delivery environment,” says Alan Morgan, CEO of the National Rural Health Association, a nonpartisan organization with more than 21,000 members. “You have an elderly population, you have a sicker population, and you have a low-income population. Yet you have the fewest options available when it comes to seeking care. It’s a perfect storm.”
But for all these challenges, Morgan and other experts say some rural communities have begun to innovate, adopting new care delivery and payment models to address long-standing workforce shortages and population health needs.
Many of the rural hospitals and health centers serving 62 million Americans have operated on a shoestring for years.
Since January 2010, 80 rural hospitals and health care facilities that provided treatment to large numbers of elderly and low-income families were forced to close for financial reasons. More than 670 of the remaining 2,078 facilities are vulnerable or “at risk” of closure, according to hospital industry experts.
For many of those hospitals, the Affordable Care Act (ACA) was a lifeline, providing millions of their patients with the financial wherewithal to obtain health care treatment and prescription drugs without having to turn to emergency rooms for assistance.
But as the new Republican Congress and GOP President-elect Donald Trump press to repeal Obamacare in the coming months with no suitable replacement in hand, rural hospital officials say they are facing a “triple whammy” of lost financial benefits that could force many of the remaining rural hospitals out of business in the coming decade.
“We’re in the midst of a rural hospital closure crisis right now, and that is with the ACA currently in place,” Alan Morgan, the CEO of the National Rural Health Association, said in an interview Thursday. “Looking at our projections for where we’re headed, at the current rate we could see a third of all rural hospitals closed within the next decade.”
The advent of Obamacare enabled 1.7 million rural Americans to purchase subsidized private coverage on government operated exchanges last year, an 11 percent increase from 2015, according to the U.S. Department of Health and Human Services. Millions more obtained expanded Medicaid coverage for low-income adults in rural states that opted into the program under Obamacare.