Failure of States to Expand Medicaid Shifts Costs to Hospitals

Hospitals could incur an additional $53.3 billion in uncompensated care costs by 2019 as a result of states choosing not to expand Medicaid coverage as originally required by the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148 and 111-152,) according to a report from the National Association of Public Hospitals and Health Systems (NAPH). The United States Supreme Court in National Federation of Business v. Sebelius ruled that forcing states to choose between providing  Medicaid to all adults with incomes below 133 percent of the federal poverty level (FPL) and losing all Medicaid funding was unconstitutional; the ruling allowed states to choose whether to expand Medicaid coverage. John Graves, Ph.D. of Vanderbilt University wrote a perspective in the December 20, 2012 edition of the New England Journal of Medicine explaining the dynamics that will result in hospitals having to shoulder more of the cost of uncompensated care in states that do not expand Medicaid coverage in line with PPACA.

Coverage Gap

The problem develops from two fronts.  First, the health insurance exchanges will provide subsidies to individuals and families with incomes from 100 percent of FPL to 400 percent of FPL.In states that do not expand Medicaid, there will be a number of individuals who will not qualify for Medicaid but will not be able to afford insurance provided through an exchange. The Congressional Budget Office (CBO) estimated that because of the Supreme Court’s decision 6 million people will not be eligible for Medicaid as PPACA had envisioned. CBO estimated that 3 million of those folks will be able to obtain insurance from the insurance exchanges, but 3 million will be ineligible for Medicaid or insurance through the insurance exchange.

DSH Reductions

Although the number of uninsured will not drop as expected, PPACA will cut Medicare and Medicaid disproportionate share hospital (DSH) payments. PPACA will reduce the amount of Medicare DSH payments to hospitals by 75 percent in 2014, but adds back a portion of this amount based on the percentage of uninsured in the state.  Graves makes the argument that if states drive down the percentage of uninsured by having people obtain coverage through the exchange, the amount of Medicare DSH payments hospitals in that state would receive would also go down.  Graves calculates that hospitals in a state that reduces its uninsured rate by half will see a 38 percent reduction in its Medicare DSH payments.

Overall, Graves calculated that Medicare DSH payments would decrease by about 16 percent in states do not expand their Medicaid coverage to the PPACA levels.  There is variation from state to state. For example in Texas, Louisiana and Florida where the governors have announced they will not be expanding Medicaid, the reductions in Medicare DSH payments are the greatest— 16 percent, 19 percent and 13 percent respectively, Graves calculates. On the Medicaid side NAPH estimates Medicaid DSH reductions in payments will total $14.1 billion from FY 2014 to FY 2019.


The theory behind these DSH cuts was that the amount and cost of uncompensated care provided by hospitals would decrease as hospitals would be receiving additional reimbursements from Medicaid or insurers. Following the Supreme Court’s decision this will not necessarily be the case. Hospitals will have to provide care to folks who do not have either Medicaid or health insurance, while the amount of money they can expect to receive for it will dramatically decrease.