Association for Public Policy Analysis & Management

The American Health Care Act, which was considered by Congress but ultimately did not reach the House floor for a vote, would have repealed the state option to expand Medicaid under the ACA. However, with the ACA remaining intact for now, some states still face the decision to expand Medicaid and receive the enhanced match rate for the ACA expansion population.

States’ decisions to expand Medicaid could have important implications for hospitals. Expansion could decrease unreimbursed expenses attributable to uninsured patients, while increasing revenue from newly covered patients. This paper estimates the impact of the Medicaid expansion on the financial health of hospitals through 2015, using the experience of hospitals in states that did not expanded Medicaid under the ACA to serve as a formal counterfactual against which to assess the changes in hospitals in states that expanded. This analysis also explores the distributional effects of the expansion by urban vs. rural status, ownership type, size, and system status.

Design

This study uses FY 2011 to 2015 data from the American Hospital Association Annual Survey Database, merged with the CMS Health Care Cost Report Information System (HCRIS), to measure the effects of the Medicaid expansion on hospital’s Medicaid revenue, uncompensated care costs, and profits. Difference-in-difference equations are estimated with hospitals in states that did not expand Medicaid in 2014 as a comparison group. The model also controls for hospital and year fixed effects and time-varying hospital characteristics.

The main sample includes nonfederal, general medical/surgical hospitals, excluding those in six states that used the ACA option to expand Medicaid before January 2014 and those in three states that expanded in late 2014 or 2015.

Findings

The ACA Medicaid expansion decreased mean annual uncompensated care costs by $3.2 million per hospital and increased mean annual Medicaid revenue by $5.0 million per hospital, relative to hospitals in states that did not expand. Medicaid expansion was also significantly associated with improved excess margins (1.7 percentage points) and operating margins (2.5 percentage points). These magnitudes are larger than those in the prior analysis that only included the 2014 post period.

This study also provides insight on the types of hospitals that gained the most under the Medicaid expansion. All types of hospitals in expansion states—regardless of metro status, ownership type, and size—experienced reductions in uncompensated care costs and increases in Medicaid revenue, compared with their counterparts in nonexpansion states. However, the Medicaid expansion’s effects on margins were strongest for small hospitals, for-profit and non-federal-government-operated hospitals, and hospitals located in nonmetro areas.

Conclusions and Policy Implications

For states still considering the Medicaid expansion, these findings suggest that expansion likely would improve hospitals’ payer mix and overall financial outlook, particularly those in nonmetro areas. These results will become increasingly important for hospitals if the ACA were to be repealed and millions of low-income adults currently covered by the expansion become uninsured. This analysis also highlights how not all hospitals will be equally affected by a Medicaid expansion or potential repeal of the ACA.