Where Medicaid expansion matters: Small Illinois hospital expands while Missouri counterparts cut back

Franklin Hospital is a short drive from the Public Square in Benton, Ill., a city center that's anchored by dollar stores and cavernous antique malls. A banner on the beige facility boasts the hospital is celebrating its 60th anniversary. Benton, a rural town of 7,300 people, is in the heart of Southern Illinois' economically declining coal-mining belt.

Inside, the not-for-profit, critical-access hospital looks all of its 60 years, from its mottled beige and brown linoleum floors to the drop ceilings. It has teetered on the brink of financial failure for the past 15 years. Survival rather than aesthetics has been the priority.

“The hospital has had very little done to it in the 60 years it's been in existence,” said CEO Hervey Davis, who came to the hospital 13 years ago when it was facing imminent closure.

That's about to change, largely because 25-bed Franklin Hospital is in one of the 25 states that expanded Medicaid eligibility in 2014, the first year such expansion was possible. For Franklin, the coverage expansion has halved the percentage of revenue tied to the uninsured, and its overall financial picture looks more secure. In the emergency room, for instance, it has seen 600 fewer “no pay” patients and 428 more Medicaid patients compared with 2013. Critical-access hospitals in Illinois have received Medicaid rate increases for outpatient services, further magnifying the benefit of the state's Medicaid expansion.

All of this has allowed Franklin's leaders to plan an $8 million remodeling project. But they also want to introduce a nuclear medicine program and retail pharmacy. The hospital will be able to treat more complex patients instead of sending them to other hospitals.

At a time when many rural hospitals across the country are on life support, the Affordable Care Act's controversial Medicaid expansion has resuscitated hospitals, including Franklin. But across the state line in Missouri, where Republican lawmakers have refused to expand Medicaid, hospitals such as Perry County Memorial Hospital in Perryville are not seeing a comparable financial boost.

In 2012, the U.S. Supreme Court left it up to each of the states to decide whether to expand Medicaid eligibility. As of now, 29 states plus the District of Columbia have extended their programs to adults with incomes up to 138% of the federal poverty level. The other 21 states, mostly GOP-led, either have rejected the expansion or are fiercely debating it.

Modern Healthcare is conducting a yearlong analysis of fiscal 2014 finances for hospitals across the country to determine how the ACA's Medicaid expansion affected revenue and operating margins. This project is supported by a fellowship from the Association of Health Care Journalists and the Commonwealth Fund.

The analysis, based on examining finances for 466 not-for-profit hospitals in 2013 and 309 in 2014, found that hospitals in both Medicaid expansion and non-expansion states improved their operating performance, even as the trends were somewhat more positive in the former group. Their revenue grew faster and their operating margins improved at a better clip.

Not-for-profit providers in Medicaid-expansion states saw their operating margins increase to 3.2% in 2014 from 2% in 2013, according to the analysis of financial statements filed for municipal bondholders. In non-expansion states, operating margins improved to 3.1% from 2.2%. The analysis excluded California hospitals, which artificially lost revenue while waiting for the CMS to approve an extension to the state's provider-fee program.

The larger difference was in revenue growth. Hospitals in expansion states saw an average year-over-year revenue increase of 7.2% compared with 5.6% in non-expansion states.

Both groups saw an increase in their provision for bad debt. But bad debt grew more in non-expansion states—11.6% compared with 8.1% in expansion states. “The issue is that bad debt in and of itself is not enough to set these hospitals apart,” said Daniel Steingart, an analyst at Moody's Investors Service, which has conducted its own analysis. In Medicaid expansion states, bad debt represented less than 5% of revenue in 2013, Moody's found.

These results may continue to diverge, particularly as the federal government begins to cut disproportionate-share hospital payments to providers that serve the uninsured, experts say. Or it's possible that hospitals overall may be buoyed by demographic changes such as more people aging into Medicare.

Still, the analysis found that hospitals across the country saw a financial improvement in 2014 no matter where they are located. All states except Kansas saw a reduction in their uninsured population, according to February data from Gallup. The largest decreases were in states that both expanded Medicaid and set up a state-based insurance exchange under the ACA. But even some states that did neither—including Louisiana, Maine and Montana—still cut their uninsured rate by at least 4.5% (Montana recently approved a Medicaid expansion, but it has not been implemented yet).

The overall uninsured rate across the country fell to 11.9% in the first quarter of 2015 after peaking at 18% in 2013.

The states that have not expanded Medicaid may have the most to lose if the U.S. Supreme Court this month in King v. Burwell strikes down premium subsidies in states using the federal insurance exchange. That likely would cause millions of people to drop their private exchange coverage.

In the hundreds of earnings reports included in Modern Healthcare's analysis, a number of other themes also emerged: The economy is improving, stronger hospitals are buying weaker ones and hospitals are negotiating better rates from commercial insurers. Those factors are boosting operating margins even without the additional benefit from healthcare reform.

“Medicaid expansion is not the only thing that's happening,” said Steven Lipstein, CEO at BJC HealthCare, an 11-hospital system based in St. Louis. Although Missouri has not expanded Medicaid, its uninsured rate has edged down to 13.5% from 16.1%. All but one of BJC's hospitals saw a revenue increase in 2014; the one that did not recently moved its obstetrics department to a nearby facility.

The system, like many others, also has tightly managed its costs.

Even without Medicaid expansion, BJC has seen a 10% reduction in the bucket it calls free care—a combination of charity care, discounted care and bad debt. That reduction could be at least partly attributable to the expansion of subsidized private coverage through the federal exchange serving Missouri, which has enrolled nearly 254,000 Missourians.

Even within a given state, different hospitals are experiencing healthcare reform differently. One thing the ACA's coverage expansion has done is offer more provider choices to people who previously were uninsured. There's evidence in California, for instance, that patients who gained coverage are no longer seeking care from safety net hospitals and instead use private providers.

“Just because we're seeing a decrease of uncompensated care doesn't mean all hospitals will benefit equally,” said Dylan Roby, a health policy professor at the University of California at Los Angeles. “It really becomes an issue of where patients start going once they get coverage.”

Two studies have found that hospitals in non-expansion states saw a larger increase in revenue from commercial insurance last year than hospitals in expansion states saw. That's likely related to the fact that in non-expansion states, ACA premium subsidies to buy private exchange coverage were available to adults with incomes between 100% and 138% of the poverty level. In contrast, in expansion states that income group is automatically covered through Medicaid.

In Missouri, most nondisabled adults aren't eligible for Medicaid. Adults with children only qualify if they have incomes 18% below the federal poverty level, meaning the income threshold for a family of four last year was $4,365.

Missouri, by refusing to expand Medicaid, is losing $2.2 billion a year in federal Medicaid dollars. Faced with the lack of Medicaid expansion, many Missouri hospitals stay solvent by laying off employees, discontinuing unprofitable services and delaying new building projects and equipment purchases, said Herb Kuhn, president of the Missouri Hospital Association.

Even Missouri hospital leaders whose facilities are doing well financially are acutely conscious of how the state's failure to expand Medicaid is affecting their industry. They are quick to identify other hospitals that are struggling. Two rural facilities already have shut their doors. “If we don't figure out a way to move forward, we could lose five to 10 more hospitals in the state,” said Patrick Carron, CEO of Perry County Memorial Hospital.

Carron's 25-bed hospital is better off than most because of the particular economic situation in Perryville, a town of about 8,200 people. Located amid rolling hills and farmland about 80 miles south of St. Louis, Perryville has an employment rate below 5%, one of the lowest in the state. Food manufacturing, auto parts, farming and aircraft refurbishing provide industrial jobs in the area.

Carron's hospital's operating margin is typically in the 6%-8% range, while most of the state's other critical-access hospitals are barely breaking even.

Still, the past year has not been without challenges. Bad debt at his hospital increased 50%, which Carron attributed largely to the proliferation of high-deductible health plans and people not being able to afford their out-of-pocket costs. The hospital has put patients on payment plans with five or even 10 years to pay.

Nevertheless, Perry County Memorial is building. There are cranes working on medical office space, and the hospital recently bought a new CT imaging system. But it's cutting costs elsewhere, including through staffing. Carron said his facility needs to negotiate better rates with insurers to continue serving its patients.

For Missouri hospitals strong enough to issue bonds, operating margins improved to 2.9% for their fiscal 2014 from 0.9% the previous year.

Across the border in Illinois, the average operating margin for hospitals in the analysis rose slightly to 3.4% from 3.3%. But some of the state's most vulnerable hospitals say they're actually seeing a more substantial boost from the ACA's Medicaid expansion.

As coal-mining jobs dried up in Southern Illinois, the unemployment rate in Benton climbed above 9%. The state government is a major employer now, and many people work at one of the area's state parks or prisons.

The road from Benton to the nearby town of Christopher is dotted with pawn shops, gun shops and convenience stores advertising video poker and slots. Christopher's health clinic occupies a new building, one of the largest in the town.

Community health centers in the area have expanded “tremendously,” said Kim Mitroka, CEO of the Christopher Rural Health Planning Corp., which operates a dozen community health centers throughout the state and has added three clinic locations over the past three years that have brought in 18,000 additional patients. “We had a tough year last year. We did much better this year and I think a lot of it has to do with the (Medicaid) expansion.”

She estimated that her organization's Medicaid patients have increased 25%; almost all were previously uninsured. Medicaid patients now account for 40% of its total patients, and its operating surplus has increased 10% to $22 million.

Franklin Hospital hadn't made a dime in 25 years, CEO Davis said. He arrived there in 2002, five weeks before it was scheduled for closure; the hospital was holding on with a week's worth of cash. Over the previous five years, it had lost $12 million. For three months after Davis' arrival, the hospital shut down all services except its emergency department. It borrowed $4 million from the U.S. Department of Agriculture.

Remarkably, it didn't go under. Instead, it began to break even. And its financial condition remained at that marginal status for the next decade.

Now, Franklin's finances are significantly stronger. For fiscal 2015, it expects to report $41.6 million in revenue compared with $32.8 million the prior year. It may book net income close to $1.3 million compared with $1 million in fiscal 2014. With its stronger finances, the hospital applied for and received grants from the state and the USDA to fund its remodeling projects.

Davis rattles off the hospital's goals while sitting at a round table in his office. Because Franklin has an average patient census of only five, the hospital uses its excess food service capacity to prepare daily meals for 35 senior citizens, for which it receives funding from the county. Under the renovation plan, the cafeteria will be downsized to make room for a retail pharmacy.

“Right now, the hospital is doing better than it ever has,” Davis said. “We like Medicaid patients here.”