Medicaid expands, bad debt contracts, bottom line stays the same

Hospitals in Medicaid expansion states saw significantly larger reductions in bad debt as compared to hospitals in non-expansion states in 2014, but the reductions did not affect overall financial performance, according to a report from Moody’s Investors Service. Hospitals in the District of Columbia and states that expanded Medicaid pursuant to the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) experienced average bad debt reductions of 13 percent, with some seeing reductions of 40 percent or more. However, Moody’s did not uncover any significant difference in the degree of financial improvement among hospitals in expansion versus non-expansion states.

Bad debt reductions

“Bad debt” refers to unpaid bills, as opposed to charity care, in which hospitals voluntarily waive charges for medical care. In 2013, one year prior to the implementation of the ACA, bad debt represented only 4.8 percent of median hospital revenue in states that later expanded Medicaid; in non-expansion states, bad debt represented 7.5 percent of revenue. Despite significant decreases among expansion state hospitals, however, many “have had difficulty translating reductions in bad debt directly into stronger margins.” Hospitals in non-expansion states saw a modest decrease in bad debt, which may have resulted from the “woodwork” effect that the publicity emphasizing the importance of insurance coverage had on enrollment. Expansion states also saw a shift in payor mix away from self-pay patients to Medicaid patients; the payor mix in non-expansion states remained roughly the same.

Financial performance

Macroeconomic factors, including overall economic improvement and lower unemployment, likely played a larger role in financial improvement than bad debt reductions. For example, reductions in bad debt may have been offset by payments for salaries, pensions, and population health management investments. Although they view the bad debt reduction as a “credit positive” overall, the authors opined that, with respect to financial success, “Medicaid expansion is beneficial, but other factors are more important.”