by guest contributor Shelley Michelson

“A nation’s greatness is measured by how it treats its weakest members.”

Mahatma Gandhi

The Patient Protection and Affordable Care Act (“PPACA,” “ACA” a/k/a Obamacare) is providing a unique set of challenges for the nation’s healthcare safety net providers. Safety net hospitals provide essential healthcare services to those in need, regardless of their ability to pay. These facilities may include urban and rural hospitals, academic medical centers, private, not-for-profit hospitals as well as government owned and operated medical centers. They often provide highly specialized services, such as trauma care, burn care and neonatal intensive care and training for medical residents. In its 2013 publication entitled “Safety Net Hospitals at Risk: Re-Thinking the Business Model,” Alvarez & Marsal, a consulting firm, frames the dilemma quite succinctly: “Safety net hospitals are in the crosshairs of economic distress and healthcare reform. They have historically been challenged by high levels of uncompensated care, a Medicaid payor mix and minimal commercial pay cost shifting. The economic challenges facing safety net hospitals are compounded by the socially disadvantaged and clinically vulnerable profile of their patients.”

Safety net hospitals are distinguished by a payor mix that consists substantially of Medicaid and the uninsured. According to America’s Essential Hospitals, an organization consisting of more than 250 government-owned providers, federal criteria for achieving Medicaid disproportionate share payments (“DSH”) include a low income utilization rate of 25% or higher or a Medicaid utilization rate more than one standard deviation above the mean Medicaid rate in the applicable state. Medicare DSH status takes into account a “low income cost ratio,” which encompasses the costs of all low-income patients.

Over 3,000 hospitals receive Medicare DSH payments, which tend to cluster in large, urban hospitals and academic medical centers. America’s Essential Hospitals indicates that, on average, uncompensated care varies from close to 15% at urban government hospitals to 10% for public or private academic medical centers. By comparison, on average, uncompensated care constitutes 5.5% at hospitals nationally, while public hospitals experience significantly higher uncompensated care costs of 21 percent. Both America’s Essential Hospitals and Alvarez & Marsal are urging the creation of new business models to sustain America’s safety net hospitals.

Hospitals receiving DSH payments are reimbursed according to a federal statutory formula that takes into account a percentage of Medicare and Medicaid inpatient days, adjusted for size and type of hospital. However, because each state’s Medicaid eligibility formula is different, allotments of Medicaid dollars vary considerably state by state.

So, is the ACA fraying our healthcare safety net? The answer is: yes and no.

The ACA made Medicaid eligibility available to virtually all non-elderly adults whose income was at or below 138% of the federal poverty level, which translated to a 2015 income of just over $16,000. The federal government pledged to fund 100% of the cost of this expansion through 2016, with a gradual step-down to 90% in 2020 and thereafter. Individuals with incomes between 100% and 138% of the poverty level could qualify for private insurance subsidies at no cost to the state, according to the American Enterprise Institute.

The Supreme Court’s ruling in 2012 that the federal government could not force states to expand their respective Medicaid programs left hospitals in non-expansion states at a considerable disadvantage. Those persons not eligible for Medicaid are often unable to afford other insurance options and so continue to result in uncompensated care at area hospitals. To date, 29 states and the District of Columbia have expanded Medicaid eligibility, which has resulted in 9.7 million Americans gaining coverage, according to the Chicago Tribune (2/4/15).

The following states are not participating currently in the Medicaid expansion program:

Non Medicaid Expansion States

  • Alabama
  • Alaska
  • Florida
  • Georgia
  • Idaho
  • Kansas
  • Louisiana
  • Maine
  • Mississippi
  • Missouri
  • Nebraska
  • North Carolina
  • Oklahoma
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Virginia
  • Wisconsin
  • Wyoming

Fallout from Non-Expansion

To encourage more widespread acceptance of Medicaid expansion, the Obama administration has threatened to withhold funds from the Low-Income Pool (a fund that reimburses hospitals for uncompensated care) from the hospitals in states that have not expanded Medicaid. States that are at risk of loss of these funds include, but are not limited to, Texas, Florida, Tennessee and Kansas, according to the Brookings Institute. In addition, those states (which also include, but are not limited to Texas and Florida) operating their respective Medicaid programs under federally-approved waivers are at risk of non-renewal of their waivers, which would threaten funds for their existing, non-expansion Medicaid programs. Some safety net providers have offered discounts to uninsured patients, while others have instituted new coping policies which include charging co-payments for uninsured patients, denying charity care to uninsured patients eligible for insurance marketplace subsidies and reducing financial aid for patients with certain income levels. Others may assist in helping patients pay for subsidized premiums to retain coverage for catastrophic events. It may also make sense for these hospitals to assist in premium payments for those uninsured patients with chronic conditions that require frequent medical treatment.

The Kaiser Family Foundation has projected that the 21 states not yet enrolled in Medicaid expansion would, if enrolled, see a total of 7 million more enrollees which would result in an increase in federal Medicaid spending of $472 billion between 2015 and 2024, with a corresponding spending increase at the state level of $38 billion. For hospitals within those states, savings on uncompensated care is projected to offset between 13% and 25% of the added state spending. The Urban Institute estimated the national cost of uncompensated care to hospitals approached $45 billion in 2013, with only 65% of it covered by government programs. The rest was absorbed by the hospitals.

The non-expansion states that would have the largest increases in Medicaid enrollment, Idaho and Georgia, would increase federal Medicaid spending by 50% and 48%, respectively and by 10% and 8% respectively at the state level. The Kaiser Family Foundation cites other studies and state budget projections from expansion states concluding that “on balance, Medicaid expansion would help, not hurt state budgets over a multi-year period extending well beyond 2016.” Rural hospitals are being especially hard hit in non-expansion states with closures hitting communities in Tennessee, Georgia, Virginia and North Carolina.

Upcoming DSH Payment Reductions

In April of this year, the President signed into law the Medicare Access and CHIP Reauthorization Act of 2015, which delayed cut to the Medicaid DSH Program by one year, to 2018, with a compensating additional year of cuts on the back end. The American Hospital Association reports the reductions begin at $2 billion per year in 2018 and escalate each year by $1 billion through 2024 when they reach $8 billion where they remain in 2025. The method by which the cuts are distributed relate to how the DSH payments are used within a state and the percentages of uninsured individuals in a state, as well as where uninsured patients and Medicaid recipients receive care. Non-Medicaid expansion states may be able to minimize cuts in DSH funding by targeting their DSH payments to those hospitals with high rates of uncompensated care.

Factors Influencing Levels of Uncompensated Care

Reduction in uncompensated care is dependent not just on the number of additional Medicaid enrollees, but also on the number of persons who gain insurance through either the exchanges or via employer-provided health insurance. The state of the local economy is a major driver of coverage and safety net providers in non-expansion states, such as Florida, Texas, Georgia, Tennessee, South Carolina, Virginia and Kansas reported improved results in 2014 over those of 2013.

The Colorado Hospital Association reported that Medicaid volume in Medicaid expansion states surged in the first quarter of 2014 when expansion began with an increase in the proportion of total charges from 15.3% of total charges in 2013 to 18.8% in 2014. From the first quarter of 2013 to the comparable quarter of 2014, average charity care per hospital in expansion states declined by 30% and self-pay charges in those same states declined by 25 percent. Similar results have been reported in Seattle, Washington with safety net provider Harborview Medical Center experiencing a drop in the proportion of uninsured patients from 12% in 2013 to 2% in 2014, resulting in a $20 million positive revenue impact

How hospitals in general and safety net providers specifically are faring under the ACA depends on a multiplicity of factors that reach beyond whether a state has agreed to expand Medicaid, although it is clear that Medicaid expansion has reduced uncompensated care in Medicaid expansion states. Aside from issues of financial management, in non-expansion states, the robustness of the local economy, how existing state Medicaid funds are directed and the extent to which subsidized enrollment has offset uncompensated care, are the factors that largely determine financial outcomes.

Access and Pent-up Demand

But access to care is still a barrier, dependent on plan design, physician supply and acceptance of the new plans by both physicians and hospitals. Narrow networks, inadequate payment rates, pent-up demand for services, behavioral health conditions and lack of access to transportation are all factors that contribute to hospital utilization, reimbursement rates and profitability levels. The Commonwealth Fund has reported that one-quarter of the insured population, or 31 million people, are underinsured with high co-pays and deductibles that they cannot afford, resulting in uncompensated care at the hospital or a decision to defer medical care.

A survey by the American College of Emergency Physicians conducted in March 2015, pointed to an increase in emergency room visits attributable to the shortage of primary care clinicians and inadequate Medicaid reimbursement rates. It is not clear how much of the cost of these behavioral health visits and emergency room visits may have been covered by insurance.

A Tale of Four Hospitals

To gauge the impact of the ACA on safety net providers, increases or decreases in bad debt and/or charity care between 2013 and 2014 were selected as indicative of whether the increase in the insured population positively or negatively affected financial results. Two hospitals were selected from Medicaid expansion states and two from non-expansion states. The analysis relies, in part, on data furnished by Merritt Research Services, LLC.

The ACA had uneven effects on 611-bed Boston Medical Center in Boston, MA. Massachusetts is a Medicaid expansion state and has been operating under its own expanded insurance program since 2011. The Hospital saw a 2.7% increase in bad debt in 2014, but charity care decreased by 22 percent. The Hospital received a favorable Medicaid rate adjustment of over $1 million in 2014. As a safety net provider, the hospital met the criteria for receipt of $52 million of additional supplemental payments from the Commonwealth in 2013 and 2014.

Denver Health and Hospital Authority in Colorado, a public hospital with 407 staffed beds in a Medicaid expansion state, reaped great benefits from the ACA. Between 2013 and 2014, bad debt decreased by 9% and charity care declined by close to 60 percent. Medicaid DSH and other safety net reimbursement increased by 1.5% and beginning in January 2014, the increase in Medicaid enrollment resulted in a decrease in patients covered under the Colorado Indigent Care Program and other uninsured categories. The 19,000 new Medicaid patients accounted for a $75 million increase in net patient service revenue in 2014.

Erlanger Medical Center in Tennessee, also a public hospital with 813 beds on 5 medical campuses, is located in a non-Medicaid expansion state and has been adversely affected by the ACA. Between 2013 and 2014, bad debt at the Primary Health System (which includes the hospital and related healthcare entities) increased by 13% and charity care increased by 8 percent, despite having recognized a total of over $33 million in state public hospital supplemental and essential access and trauma payments. Disproportionate share payments were cut from $8.5 million in 2013 to $0 in 2014.

Florida Health Sciences Center (a/k/a Tampa General Hospital) is a private not-for-profit medical center with 1,004 licensed beds located in Florida, a non-Medicaid expansion state. This hospital was able to reduce bad debt and charity most likely attributable to the availability of premium subsidies under the ACA. Despite the state’s decision not to expand Medicaid and a cut in state disproportionate share distributions of $3.7 million in 2014, bad debt eased by 23% and traditional charity care declined by close to 20% between 2013 and 2014.

The Wild Card: King v. Burwell

The long-awaited Supreme Court decision in June on whether individuals who have enrolled in subsidized insurance plans through the Federal marketplace can retain their subsidies will have an enormous impact on whether uncompensated care will increase at hospitals nationally, but it will have a much greater effect on safety net providers and rural facilities. If the subsidies disappear, logical results include hospital closures, bankruptcies, forced consolidations and large premium rate increases for subsidized individual insurance plans which could also add to the cost of all health insurance policies, particularly if enrollment of the young and healthy does not offset that of an older, sicker population. Therefore, the odds remain strong that the justices will find some justification under the law to affirm the validity of these subsidies.

The following states have set up their own respective exchanges and would be unaffected by an adverse ruling on insurance subsidies in King v. Burwell:

States with Their Own Insurance Exchanges

  • California
  • Colorado
  • Connecticut
  • District of Columbia
  • Hawaii
  • Idaho
  • Kentucky
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Rhode Island
  • Vermont
  • Washington


At the Becker’s Hospital 6th annual meeting in Chicago held in early May of this year, three hospital executives, Barry Arbuckle, PhD, President and CEO of MemorialCare Health System, Long Beach, CA, Robert Wolterman, CEO of Ochsner Medical Center, New Orleans, LA and John Jay Shannon, MD, CEO of Cook County Health & Hospitals in Chicago, predicted that this underlying premise of the ACA would remain in place. Nevertheless, it is alarming that neither the administration nor the industry has a contingency plan in place to provide healthcare insurance for those who may lose their subsidies should the Supreme Court invalidate this portion of the law. Perhaps this is a deliberate course of action by both the administration and the nation’s hospitals to retain the subsidies, as the justices would otherwise contemplate large scale chaos within a key national industry. The very fate of all hospitals and especially safety net providers hinges on this ruling.

Shelley Michelson is a municipal finance professional and Principal at Healthcare Analytics, LLC, a consulting firm specializing in health care finance.

Disclaimer: The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column. This column does not reflect the position or views of RICIC, LLC, or MuniNet Guide.

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Summary Text:

he Patient Protection and Affordable Care Act (“ACA”) is providing a unique set of challenges for the nation’s healthcare safety net providers, which provide essential healthcare services to those in need, regardless of their ability to pay. Is the ACA fraying our healthcare safety net? The answer is: yes and no… How hospitals in general and safety net providers specifically are faring under the ACA depends on a multiplicity of factors.