Association for Public Policy Analysis & Management

The first full year of Affordable Care Act coverage expansions has resulted in 14.1 million fewer uninsured Americans, largely due to the expansion of Medicaid to low-income childless adults.  The reduction in the number of uninsured patients has translated into dramatic declines in the volume of uncompensated care provided by hospitals.  At the same time, some hospitals report lower operating margins despite large reductions in uncompensated care and increases in the number of patients covered by Medicaid.  In this paper we explore the relationship between a hospital’s payer mix and its financial position in order to understand if and how greater Medicaid coverage could both reduce uncompensated care and reduce hospital operating margins.  Increased Medicaid coverage will improve a hospital’s financial position if most newly insured patients were previously uninsured patients who generated uncompensated care.  However, to the extent that the amount hospitals were able to collect from uninsured patients exceeds Medicaid payments, this will not be the case.  Similarly, the substitution of Medicaid for private insurance—“crowd-out”—will also result in reduced revenue for hospitals.  Using data from the Medical Expenditure Panel Survey, we estimate total hospital payments by payer source for the 10 most common hospital diagnoses in order to better understand how the Medicaid expansions are affecting hospital revenues.  We find that the uninsured pay more than Medicaid for many of the most common diagnoses; the uninsured pay more than Medicaid for 2 of the top 10 inpatient diagnoses, 8 of the top 10 emergency room diagnoses, and 6 of the top 10 outpatient diagnoses.  The relationship between payments from low-income uninsured patients and Medicaid are similar, implying lower revenues for hospitals post-Medicaid expansion despite reductions in uncompensated care.  Additionally, we find evidence that realistic levels of crowd-out could result in lower revenue for 3 of the top 10 inpatient and outpatient diagnoses, and 4 of the top 10 emergency room diagnoses.   Our results provide evidence that Medicaid expansion could worsen hospital financial position for some hospitals, despite reductions in uncompensated care.