Without Medicaid expansion, some hospitals suffer

McMinnville, Ore., shares a few similarities with McMinnville, Tenn., about 75 miles west of Chattanooga. With fewer than 35,000 residents, both McMinnvilles are the largest cities in their counties. Both appeal to outdoor enthusiasts, one for wine tasting, and one for hiking and other outdoor activities. Both are home to hospitals owned by Capella Healthcare. But on one major healthcare issue, there is a world of difference between the two, which are 2,500 miles apart.

Democratic-controlled Oregon expanded Medicaid under the Patient Protection and Affordable Care Act to adults with incomes up to 138% of the federal poverty level and aggressively signed up people for expanded Medicaid. At 88-bed Willamette Valley Medical Center, emergency department visits in the first half of the year were up 10% and self-pay ED visits were down 65% compared with the same period in 2013. Uncompensated care decreased 51.4%. “So far today, it has been a really positive story,” said Mark Medley, president of hospital operations for Capella.

Republican-controlled Tennessee has not expanded Medicaid, which means many low-income adults who would be eligible for coverage under the healthcare reform law have not gotten it. About 30% of McMinnville, Tenn.'s residents live below the federal poverty line. At 85-bed River Park Hospital, ED visits increased 2% and self-pay visits rose 1% in the first half of 2014 compared with the same period last year. Uncompensated care is up 1.8%.

“In the second quarter of this year, we started to see some pretty substantial differences,” Medley said, comparing the Oregon and Tennessee hospitals.

Of the six states where Capella operates, three have expanded Medicaid. But those three states accounted for about 90% of the decline in Capella's self-pay revenue in the second quarter, when it reported a 51% decrease overall. Medicaid admissions were up 24% overall.

Across the country, hospitals in Medicaid expansion states are seeing deep reductions in their uninsured volume and the amount of uncompensated care they deliver. That's not happening in nonexpansion states, which is why hospital leaders in those states continue to push elected officials to accept federal Medicaid money to cover more of their residents.

The contrasting approaches to expanding Medicaid are starting to produce two separate and unequal healthcare systems in America—one where a growing percentage of the population has insurance and providers are getting paid, and the other where the uninsured rate remains high and hospitals and doctors struggle with providing care for patients who have no way of paying their bills.

“I wouldn't be surprised if we saw some systems moving out” to focus on Medicaid expansion states, said Craig Becker, president of the Tennessee Hospital Association. “I hope we can get the Legislature to (expand Medicaid) because I think it has some real catastrophic impact if we don't.”

Yet there's also concern that per capita healthcare costs for Medicaid patients are growing significantly in expansion states. Experts say previously uninsured Medicaid patients often have substantial pent-up medical needs. And hospitals that pick up a larger caseload of Medicaid patients could feel a strain because Medicaid generally pays lower rates than other insurers.

In Camden, N.J., where nearly 40% of residents have incomes below the poverty line, Cooper University Health Care has seen its self-pay volume drop 40% and charity care decline by a third. Cooper also reported that its operating surplus nearly doubled in the first half of 2014 as revenue increased 5.2%.

New Jersey not only expanded Medicaid but allows hospitals to assume that patients are eligible for coverage as long as they meet income requirements. “So far, it's been a very positive thing,” said John Bucci, Cooper's director of patient accounts. “If (patients) walk in as self-pay, we try to make sure they don't walk out as self-pay.”

Publicly traded chains with hospitals in expansion and nonexpansion states saw a similarly stark divide when they reported quarterly earnings this month. Four chains raised their financial expectations for the full year, in part because of healthcare reform.

So far, 26 states plus the District of Columbia have expanded Medicaid while 24 have not. Many of the expansion states also set up robust insurance exchanges and enrollment efforts, further reducing uncompensated care.

After the U.S. Supreme Court in 2012 made Medicaid expansion voluntary for states under the Affordable Care Act, the issue became highly partisan, with many Republican governors and legislative leaders opposing expansion. They often argue that the federal government will renege on its commitment to pay for the lion's share of the expansion, and that states will have to eat the costs.

In states that have not expanded Medicaid, that policy decision poses a double-whammy for hospitals. Not only do they miss out on having a greater number of paying patients, under Obamacare they also will see phased-in cuts to disproportionate-share hospital payments, which help make up some of their shortfall for delivering uncompensated care.

“The theory was those payments would become less necessary as more people gain coverage,” said Judy Solomon, vice president for health policy at the liberal Center on Budget and Policy Priorities. “That's playing out exactly as planned in the states that have expanded. I think that sends a message, particularly for states in the Deep South that rely heavily on DSH payments.”

The Colorado Hospital Association produced some of the earliest data on the effect of Medicaid expansion through its study of 465 hospitals in 30 states. It found that in the first quarter of 2014, hospitals in expansion states saw Medicaid charges account for 18.8% of their total revenue, an increase of 3.5 percentage points over the first quarter of 2013. Also, self-pay charges fell to 3.1% of the total, down from 4.7%. And the average amount of charity care per hospital declined to $1.9 million from $2.8 million—a decrease of 32.1%.

In contrast, Medicaid and self-pay charges at hospitals in nonexpansion states remained steady at 13.6% and 5% of total charges, respectively. These hospitals delivered an average of $4.2 million in charity care, a 10.5% increase from $3.8 million during the first quarter of 2013.

At Tenet Healthcare Corp., the number of uninsured and charity-care admissions in its five Medicaid expansion states—where it has about a third of its beds—fell 54% in the second quarter compared with the same period last year. The decline was 8% in nonexpansion states. Tenet's Medicaid admissions increased 23% in expansion states and 3% in non-expansion states.

Tenet CEO Trevor Fetter said that at least some of the increased volume could be due to high utilization among the newly insured. “There's undoubtedly pent-up demand for health needs in that population,” he said.

Fetter also attributed Tenet's results to its outreach efforts, such as training employees at Conifer, its revenue-cycle management arm, to serve as certified application counselors and guide patients through insurance exchange and Medicaid enrollment. “Within the states that did expand, our strategy has been to be very active in educating people about their enrollment options,” he said.

In some states, the impact of Medicaid expansion has been harder to see in hospital earnings reports. In Vermont, for instance, Medicaid eligibility for childless adults already started at 150% of the federal poverty line. But other expansion states such as Kentucky, West Virginia and Arkansas previously had much less generous Medicaid programs. In those states, the financial benefit to hospitals of Medicaid expansion has been sizable and swift.

For example, in Michigan, which expanded Medicaid through its Healthy Michigan program starting April 1, Tenet's uninsured and charity admissions declined 85% and Medicaid volume increased 26%. “That's a very pronounced and immediate effect,” Fetter said. Tenet had entered Michigan through its 2013 acquisition of Vanguard Health Services and has five hospitals in the Detroit metro region.

Healthy Michigan has been enrolling individuals at a rapid clip and has exceeded expectations. Wayne County—which includes the Detroit metro region where many of the state's largest health systems are located—saw 28% of the new enrollees even though it accounts for only 17% of the state's population, said Josh Fangmeier, a health policy analyst at the University of Michigan Center for Healthcare Research and Transformation.

Although many of Michigan's systems have yet to report second-quarter results, MidMichigan Health, a four-hospital system based in Midland, reported an 8.8% year-over-year increase in Medicaid charges as a percentage of total revenue after seeing the number of Medicaid charges decline 1.1% in the first quarter. In addition, its surplus nearly tripled in the second quarter compared with the same quarter last year, which an earnings report attributed to higher outpatient activity compared to the prior-year period. MidMichigan did not respond to a request for comment.

St. John Providence Health System, a Detroit-based subsystem of Ascension Health, has helped 4,200 patients sign up for Medicaid and 2,000 have been approved so far, an Ascension spokesman said.

But there are challenges associated with the Medicaid expansion, particularly for safety net providers that serve a large percentage of Medicaid patients. Some of the newly insured are more likely to require a substantial amount of medical care. “There are a lot of people who have gone without coverage who are now good patients and are going for their preventive care,” said Chris Mitchell, director of federal affairs at the Association of American Medical Colleges. “Of course they're going to identify health needs.”

On top of the cost of caring for these newly insured patients, Medicaid pays some of the lowest rates, which could put a financial strain on hospitals that pick up volume but treat patients at a loss. “It's quite logical that the first people who would want insurance would be the ones who need it the most,” said John Morrow, executive vice president at iVantage Health Analytics. With Medicaid reimbursing below cost, “the calculus says that at a certain volume, that's not a good deal for you.”

But Capella executives note that having more previously uninsured patients gain Medicaid helps incrementally in covering their hospitals' costs, freeing up funds for new jobs or service expansions. And getting Medicaid patients in the door for preventive care can lower costs over the long term.

Many of the nonexpansion states already have poorer population health than expansion states. Tennessee ranks 42nd in the country in health status while Oregon ranks 13th, according to a report card from the United Health Foundation.

“It's hard to imagine a scenario where health status improves if people don't have access to healthcare,” Capella's Medley said.

Follow Beth Kutscher on Twitter: @MHbkutscher