The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals Allen Dobson Joan DaVanzo Randy Haught President Chief Executive Officer Senior Data Manager Dobson DaVanzo & Associates, LLC Dobson | DaVanzo Dobson | DaVanzo JUNE 2017 JUNE 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals Allen Dobson, Joan DaVanzo, and Randy Haught ABSTRACT ISSUE: Safety-net hospitals play a vital role in our health care system, delivering significant care to Medicaid, uninsured, and other vulnerable patients. The American Health Care Act (AHCA) would make changes to Medicaid that would substantially reduce federal funding, resulting in potential adverse effects on safety-net hospitals and the populations they serve. GOAL: Examine how the AHCA Medicaid provisions, which the Congressional Budget Office estimates will reduce federal Medicaid spending by $834 billion over 10 years, will affect the financial status of safety-net hospitals. METHODS: The Dobson | DaVanzo Hospital Finance Simulation Model uses Medicare Hospital Cost Report data for 2015 and assumptions regarding how states will respond to the AHCA Medicaid provisions to estimate the financial impact on safety-net hospitals. KEY FINDINGS: Beginning in 2020 the financial status of safety-net hospitals will deteriorate as Medicaid coverage is reduced and the per-capita spending limits proposed in the AHCA grow. By 2026 total margins will drop to 0.5 percent compared with estimates under current law of 2.9 percent—representing an 83 percent reduction in net income for safety-net hospitals. Small rural safety-net hospitals and safety-net hospitals treating the largest proportion of low-income patients would be hurt the most. The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 3 BACKGROUND this would reduce federal Medicaid support to states by Safety-net hospitals, which provide care to all patients, a total of $834 billion over a 10-year period (2017–26), regardless of their ability to pay, play an important which would represent a 26 percent reduction in federal role in the nation’s health care system. These providers Medicaid payments by 2026.5 deliver a considerable amount of care to Medicaid, Given the magnitude of these funding reductions, states uninsured, and other vulnerable patients. Safety- will likely be forced to make difficult decisions about their net hospitals include public hospitals that are often continued support for Medicaid programs, ultimately providers of last resort in their communities, academic affecting safety-net hospitals. This report examines the medical centers that combine a teaching function with impact of the following key provisions of the AHCA on a mission to serve vulnerable populations, and in some safety-net hospitals: communities, private hospitals that either because of their mission or the absence of public hospitals in the • eliminating enhanced federal funding for the community, serve as the safety-net provider. They often Medicaid expansion and the individual mandate provide services that other hospitals in the community • restoring Medicaid disproportionate share hospital do not, such as trauma care, burn care, neonatal intensive (DSH) payments, which are scheduled to be reduced care, and inpatient behavioral health. In addition, these beginning in 2018 providers offer medical education for future physicians and other health care professionals. Safety-net hospitals • eliminating hospital presumptive eligibility and are also an important source of care for undocumented three-month retroactive eligibility, whereby hospitals individuals who are ineligible for Medicaid or subsidized can help an uninsured patient apply for Medicaid, marketplace coverage.1 and coverage for that individual can date back three months prior to the month the application was filed The Affordable Care Act (ACA) allowed states to expand Medicaid eligibility to nonelderly adults with incomes • establishing per-capita limits on federal Medicaid up to 138 percent of the federal poverty level (about funding to states $16,650 for individuals or $33,950 for a family of four in • providing safety-net funding for states that did not 2017). Thirty-one states and the District of Columbia have expanded Medicaid, while 19 states have not.2 Several expand Medicaid. studies have found major reductions in uncompensated We examine how these AHCA provisions would affect care and improved financial status at safety-net the financial status of safety-net hospitals over the next institutions in states that expanded Medicaid compared decade. We use the Dobson | DaVanzo Hospital Finance with those in states that have not.3,4 Simulation Model (HFSM), a hospital-level micro- The American Health Care Act (AHCA), as proposed, simulation model that estimates the impact of health would make several unprecedented changes to Medicaid. reform proposals on hospital revenues, expenses, and net First, it would effectively end the ACA’s Medicaid income. The model uses Medicare Hospital Cost Reports expansion, which will result in lost coverage for an as the primary data source and applies assumptions about estimated 14 million people by 2026. Second, the AHCA the impact of the specific health care reform provisions. would change the longstanding arrangement between It then incorporates dynamics of how the assumptions states and the federal government by placing caps on impact hospital utilization, costs, and revenues. The the amount that states would receive from the federal Technical Appendix to this report describes the data used government. The most recent Congressional Budget Office in the model and the methodology for quantifying the (CBO) estimate of the House-passed AHCA indicates that impact of health reform provisions on hospitals. commonwealthfund.org June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 4 Because the AHCA’s proposed federal funding reductions Using this method, we identified 660 acute-care hospitals would have varying effects on different states— (excluding children’s hospitals, rehabilitation hospitals, particularly regarding states that have expanded Medicaid psychiatric hospitals, and long-term care hospitals) across versus other states—it is difficult to predict how each the United States. state would respond. Therefore, we performed a set Although the safety-net hospitals identified for this study of sensitivity analyses to provide a range of potential represented only 15 percent of all U.S. acute-care hospitals, financial impacts on safety-net hospitals. The estimates they collectively treated more than 6.2 million patients, presented correspond to our mid-range assumptions, provided 33 percent of all inpatient days of care for described below. The final section of this report provides Medicaid patients, and provided nearly 30 percent of all estimates based on a range of different assumptions. hospital uncompensated care in 2015.6 Safety-net hospitals in Medicaid expansion states had WHAT IS A SAFETY-NET HOSPITAL? more than twice the level of uncompensated care costs There is no agreement on what should be considered a and Medicaid revenue in 2015, compared with other safety-net hospital. The “deemed DSH hospital” method acute-care hospitals (Exhibit 1). Although total margins that we developed for this study (described in this report’s for safety-net hospitals were similar to those in other Technical Appendix) defines a safety-net hospital as acute-care hospitals, operating margins (which includes one that is required to receive Medicaid DSH payments only revenue from patient care) were substantially lower because it serves a high share of low-income patients. in safety-net hospitals. Exhibit 1 Financial Performance of Safety-Net Hospitals Compared with Other Exhibit 1. Financial Performance of Safety-Net Hospitals Compared with Other Acute-Care Hospitals, Acute-Care Hospitals, Medicaid Expansion States, 2015 Medicaid Expansion States, 2015 Safety-net hospitals Other acute-care hospitals 26.0% 11.7% 1.9% 5.8% 5.4% 3.9% 0.4% -1.9% Uncompensated care costs as a Medicaid revenue as a percent of Hospital total margin Hospital operating margin percent of operating expenses net patient revenue Note: AllAll metrics are computed as aggregateor margins, which means that both the numerators numerators and denominators are summed across all Note: metrics are computed as aggregate ratios ratios or margins, which means that both the and denominators are summed across all hospitals and the ratios are calculated from the summed amounts. from the summed amounts. hospitals and the ratios are calculated Data: Dobson | DaVanzo analysis of Medicare Hospital Cost Report Data for 2015. for 2015. Data: Dobson | DaVanzo analysis of Medicare Hospital Cost Report Data Source: A. Dobson, J. DaVanzo, and R. Haught, The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals, The Commonwealth Fund, June 2017. commonwealthfund.org June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 5 In states that did not expand Medicaid, safety-net declined for safety-net hospitals in nonexpansion states. hospitals had higher levels of uncompensated care costs However, even with the improved financial margins, and Medicaid revenue compared with other acute-care safety-net hospitals in expansion states still had lower hospitals in 2015 (Exhibit 2). Both total and operating margins than those in nonexpansion states. margins for safety-net hospitals were well below those On average, safety-net hospitals in nonexpansion states reported by other acute-care hospitals in nonexpansion tended to have higher proportions of privately insured states. Operating margins for safety-net hospitals in patients, higher private insurance payment levels relative both expansion and nonexpansion states are near or to costs, and higher Medicaid payment levels relative to below zero, which indicates these hospitals must rely costs than did safety-net hospitals in expansion states. on less predictable revenues from sources other than However, these results varied across individual states. patient care, like investment income and government tax appropriations. SUMMARY OF DATA AND FINANCIAL METRICS It is important to note that even with the Medicaid This analysis uses Medicare Hospital Cost Report Data for expansion, safety-net hospitals in expansion states the 660 identified safety-net hospitals to obtain baseline had lower total and operating margins than safety-net revenues and costs by payer category (Medicare, Medicaid, hospitals in nonexpansion states in 2015. These lower private insurance, and uncompensated care) for fiscal year margins place these hospitals in jeopardy of financial 2015. It projects hospital revenues and costs for each payer distress in the event of additional revenue reductions. category from 2015 through 2026. A detailed description Between 2012 and 2015, operating margins improved of the methods is presented separately in the Technical for safety-net hospitals in Medicaid expansion states but Exhibit 2 Appendix. Financial Performance of Safety-Net Hospitals Compared with Other Acute-Care Hospitals, Nonexpansion States, 2015 Exhibit 2. Financial Performance of Safety-Net Hospitals Compared with Other Acute-Care Hospitals, Nonexpansion States, 2015 Safety-net hospitals Other acute-care hospitals 16.1% 8.5% 7.8% 5.8% 6.1% 4.8% 5.1% 0.7% Uncompensated care costs as a Medicaid revenue as a percent of Hospital total margin Hospital operating margin percent of operating expenses net patient revenue Note: AllAll metrics are computed as aggregateor margins, which means that both the numerators numerators and denominators are summed across all Note: metrics are computed as aggregate ratios ratios or margins, which means that both the and denominators are summed across all hospitals and the ratios are calculated from the summed amounts. from the summed amounts. hospitals and the ratios are calculated Data: Dobson | DaVanzo analysis of Medicare Hospital Cost Report Data for 2015. for 2015. Data: Dobson | DaVanzo analysis of Medicare Hospital Cost Report Data Source: A. Dobson, J. DaVanzo, and R. Haught, The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals, commonwealthfund.org The Commonwealth Fund, June 2017. June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 6 The key financial metrics used for this study include IMPACT OF THE AHCA’S MEDICAID hospitals’ operating margin, total margin, and net income. PROVISIONS ON SAFETY-NET HOSPITALS These measures are defined as follows: Using our projection of revenues and costs, we estimate • Operating margin measures hospitals’ profitability that total revenues for safety-net hospitals from 2017 on the income or losses derived from patient care. through 2026 under current law would be $2.29 trillion An operating margin of 5 percent means that each and costs would be $2.22 trillion, which would result in dollar of patient revenues generates 5 cents in profits. $74 billion in net income over this period (Exhibit 3). We Operating margin is often a better measure of a estimate that the Medicaid provisions specified in the hospital’s sustainable profitability than the total AHCA would reduce revenues to safety-net hospitals by margin because it focuses on revenue from patient $36.5 billion and expenses by $18.3 billion. This would care as opposed to income from other less dependable result in an $18.3 billion (24%) loss of net income relative sources, such as investment income. This measure is to current law over this 10-year period. The following calculated as: sections discuss the impact on revenues, expenses, and net income for safety-net hospitals under each of the AHCA’s (net patient revenue – total operating expenses) / Medicaid provisions. net patient revenue Eliminating the Individual Mandate and Enhanced • Total margin goes beyond patient care to include all Federal Funding for Medicaid Expansion sources of income and expenses. Nonpatient revenue Currently, 31 states and the District of Columbia have includes income from investment; rental income; sales expanded Medicaid to all non–Medicare eligible of drugs and medical supplies to the general public; individuals under age 65 with incomes up to 138 percent operations of parking lots, gift and coffee shops, and of poverty. These states receive enhanced federal funding cafeteria; grants; and governmental appropriations. for newly eligible individuals (that is, people who were This measure is calculated as: not previously eligible for Medicaid based on their state’s (net patient revenue + nonpatient revenue – total eligibility criteria in 2010 or who were on waiting lists operating expenses – other expenses) / for a capped program) at 95 percent of spending in 2017, (net patient revenue + nonpatient revenue) phasing down to 90 percent by 2020. This compares to standard federal matching rates that range across states • Net income is the difference between a hospital’s total from 50 percent to 74 percent of Medicaid spending. revenues and total expenses including patient care and all other sources of income and expenses. Positive Under the AHCA, the federal government would net income indicates profits; negative net income eliminate the enhanced federal matching rate for newly indicates losses. This measure is calculated as: eligible beneficiaries enrolled under the expansion. States that have expanded Medicaid to nonelderly adults net patient revenue + nonpatient revenue – total as of December 31, 2019, would continue to receive operating expenses – other expenses the enhanced federal matching rate for newly eligible These financial metrics show the financial stability of beneficiaries enrolled by that time who do not have a safety-net hospitals. A hospital’s ability to maintain break in coverage for more than one month after that positive margins and net income allows it to continue date. States may enroll new applicants, but at the state’s to expand capacity, invest in strategies to improve care, standard federal matching rate. hire new staff, and develop better infrastructure to Although the individual mandate to buy health coverage monitor costs.7 is not specific to Medicaid, eliminating the penalties associated with the mandate would have an impact on commonwealthfund.org June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 7 Exhibit 3. Change in Revenues and Expenses for Safety-Net Hospitals Because of AHCA Medicaid Provisions, 2017–2026 Total Total Net income/ revenues expenses (loss) (millions) (millions) (millions) Revenues and expenses under current law $2,293,810 $2,219,745 $74,064 Eliminating individual mandate and Medicaid expansion ($37,698) ($18,254) ($19,444) Restoring Medicaid DSH payments $13,711 $0 $13,711 Eliminating three-month retroactive eligibility ($13,263) $0 ($13,263) Imposing per-capita spending limits ($3,646) $0 ($3,646) AHCA funds to hospitals in nonexpansion states $4,365 $0 $4,365 Total effect of all AHCA Medicaid provisions modeled ($36,531) ($18,254) ($18,277) Revenues and expenses after the AHCA Medicaid provisions $2,257,279 $2,201,491 $55,787 Data: Dobson | DaVanzo analysis using Medicare Hospital Cost Report Data. Medicaid enrollment. The CBO estimates that fewer states, but then would be fully restored beginning in 2020. people would enroll in Medicaid, including some who We estimate that restoring Medicaid DSH payments would are not subject to the penalties but think they are. The result in an increase in revenues to safety-net hospitals of assumptions developed for modeling these provisions are $13.7 billion over 2017 to 2026. described in the Technical Appendix. Eliminating Hospital Presumptive and Three-Month We estimate that eliminating the individual mandate and Retroactive Eligibility the enhanced federal funding for the Medicaid expansion would gradually reduce Medicaid enrollment by about The AHCA would repeal hospital presumptive eligibility 16 percent by 2026. This would result in a reduction in determination beginning in 2020 and eliminates revenues to safety-net hospitals of $37.7 billion between the three-month retroactive coverage requirement 2017 and 2026. As individuals lose coverage, we assume beginning in fiscal year 2017. The hospital presumptive they will use less hospital care, resulting in a reduction eligibility provision under the ACA allows hospitals in hospital costs of $18.3 billion. The difference between to enroll low-income people in Medicaid who may be changes in revenues and changes in expenses results in a eligible for Medicaid but are not enrolled. The ability to $19.4 billion loss of net income for safety-net hospitals over enroll patients at the point of service reduces hospitals’ this period. uncompensated care. The retroactive coverage provisions allow hospitals to collect Medicaid payments for services Restoring Medicaid DSH Payments provided to these patients up to three months prior to being enrolled. The AHCA would restore some of the Medicaid DSH payments that were reduced under the ACA. The ACA DSH Actuarial analyses of Medicaid payments have shown reductions are scheduled to begin in 2018 and end in 2025. that about 5 percent of Medicaid payments occur during The AHCA would entirely restore DSH payments for states the retrospective eligibility period.8 In addition, we spoke that did not expand Medicaid. Medicaid DSH reductions with officers at a safety-net hospital who estimated that for 2018 and 2019 would be maintained for expansion eliminating retroactive eligibility would result in about a commonwealthfund.org June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 8 5 percent loss of Medicaid revenue. Based on these results, Based on these assumptions, we estimate that lower we assume that eliminating these provisions would Medicaid provider payments would reduce safety-net result in lost Medicaid revenue of $13.3 billion over 2017 hospitals’ revenues and net income by $3.6 billion over to 2026. However, we assume that the cost of treating 2017 to 2026. these patients would still be incurred by the hospitals, and this provision would therefore result in increased Providing Safety-Net Funding to Nonexpansion States uncompensated care. The AHCA would provide $2 billion per year from 2018 to 2022 to states that did not adopt the Medicaid expansion Imposing Federal Per-Capita Limits on to supplement payments to safety-net providers that treat Medicaid Spending Medicaid patients. The AHCA safety-net funds would be The AHCA would incorporate per-capita limits on allocated to each nonexpansion state based on the state’s Medicaid spending beginning in 2020. Per-capita limits proportion of individuals below 138 percent of the federal would be determined by enrollee category—aged adults, poverty level. Payments to individual providers would be people with disabilities, children, expansion adults, or limited to the costs of treating uninsured patients plus the other adults. The caps would exclude Medicaid DSH provider’s payment shortfall under Medicaid. The AHCA payments, Medicare copayments, and the cost of care does not specify how the safety-net funds are to be used, for enrollees in certain eligibility groups. Per-capita so states would have considerable flexibility in using these limits would be based on 2016 spending per enrollee funds. Not all the funding would be directed to safety-net and trended to future years by the medical component hospitals. of the consumer price index (plus 1 percent for aged For this analysis, we assume that up to one-half of the and disabled eligibility groups). If Medicaid spending funds appropriated to each nonexpansion state would exceeds the limits, then federal dollars as a percent of be paid to safety-net hospitals. As specified under the total spending would decline over time—leaving states legislation, we assume that payments to individual with a larger burden of the cost. To control their spending providers would be limited to the costs of treating liability, states would need to incorporate cost-cutting uninsured patients plus the provider’s payment shortfall measures such as eligibility limits, reduced provider under Medicaid—the cost of treating Medicaid patients payments, reduced optional benefits, waiting lists for that exceeds Medicaid and DSH payments—in that year. waiver services, or some combination of the above. Based on these assumptions, we estimate that these funds Using projections of Medicaid spending per enrollee would increase revenues to safety-net hospitals by $4.4 from the Center for Medicare and Medicaid Services billion over 2017 to 2026. Office of the Actuary and CBO projections for the medical consumer price index, we estimate that the per-capita IMPACT OF THE AHCA ON SAFETY-NET limits would gradually reduce federal Medicaid spending HOSPITALS’ FINANCIAL MARGINS by 1.4 percent in 2020 and by 4.6 percent by 2026. It is Exhibit 4 presents our projection of operating and total difficult to determine how states will respond to this margins under current law compared with margins under reduced level of spending. For this analysis, we assume the AHCA for safety-net hospitals over the 2017–2026 that states would reduce overall spending to stay within period. Our projections indicate that total margins for these limits and would not use additional state funding. safety-net hospitals under current law would decline We also assume one-half of the spending reductions from 5.3 percent in 2017 to 2.9 percent in 2026, due to would be achieved by reducing provider payment levels. the aging of the population that results in increased We present some sensitivity analyses regarding this proportion of Medicare beneficiaries in their payer mix, assumption below. commonwealthfund.org June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 9 since Medicare pays most hospitals below cost. Since net providers at an increasing rate. In addition, the benefits safety-net hospitals rely heavily on Medicaid and DSH to hospitals of providing AHCA safety-net funding payments, the projections show a consistent decline in and eliminating the Medicaid DSH reductions would total margins between 2018 and 2025 due to the scheduled only be temporary and would expire in 2022 and 2025, Medicaid DSH reductions under the ACA. However, the respectively. ACA Medicaid DSH reductions end in 2026, which results in an increase in total margins from 2 percent in 2025 to As shown in Exhibit 4, total hospital margins for 2.9 percent in 2026. safety-net hospitals under the AHCA would improve Over the 10-year period from 2017 to 2026, we estimate relative to current law for 2018 and 2019, primarily due that the Medicaid provisions of the AHCA would reduce to eliminating DSH reductions and providing AHCA net income for safety-net hospitals by 24 percent. safety-net funding for hospitals in nonexpansion states. However, the effect of these reductions would increase However, beginning in 2020, the financial status of safety- over time. For example, we estimate that the number of net hospitals could deteriorate more and more each year people who lose Medicaid coverage would grow from 5 as Medicaid coverage is reduced and the effect of the million in 2020 to 12 million by 2026, which would reduce Medicaid per-capita spending limits grows. Thus by 2026, safety-net hospitals revenues year over year. Similarly, we estimate that hospital total margins would drop to 0.5 we estimate that the Medicaid per-capita spending limits would have an accumulating effect that would gradually percent, compared with estimates under the current law reduce federal Medicaid spending by 1.4 percent in 2020 of 2.9 percent. Exhibit 4 shows a similar trend in operating and up to 4.6 percent by 2026, therefore affecting safety- margins for safety-net hospitals. Exhibit 4 Projected Total and Operating Margins for Safety-Net Hospitals, 2017–2026 Exhibit 4. Projected Total and Operating Margins for Safety-Net Hospitals, 2017–2026 6.0% 5.3% 5.0% Current law total margin AHCA total margin 4.4% 5.2% Current law operating margin AHCA operating margin 3.6% 4.0% 4.6% 3.3% 4.0% 2.9% 2.9% 2.6% 2.2% 2.0% 3.2% 2.0% 2.8% 2.2% 1.5% 1.0% 0.0% 0.8% 0.5% -1.5% -1.7% -2.4% -2.0% -1.5% -3.1% -2.2% -3.5% -3.6% -2.8% -3.8% -4.2% -4.0% -4.5% -4.6% -3.7% -4.1% -4.7% -6.0% -5.5% -5.9% -6.2% -6.4% -8.0% 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Data: Dobson | DaVanzo analysis of Medicare Hospital Cost Report Data for 2015. Data: Dobson | DaVanzo analysis of Medicare Hospital Cost Report Data for 2015. commonwealthfund.org Source: A. Dobson, J. DaVanzo, and R. Haught, The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals, June 2017 The Commonwealth Fund, June 2017. The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 10 HOW THE AHCA’S IMPACT DIFFERS IN margins would be under current law. For these hospitals, EXPANSION AND NONEXPANSION STATES a reduction in margin of one percentage point translates The AHCA would impact safety-net hospitals in Medicaid into a loss of nearly 33 percent of net income (1.0% ÷ 3.2%). expansion states differently than in nonexpansion states. The AHCA Medicaid provisions would have an adverse HOW THE AHCA’S IMPACT DIFFERS BY impact on safety-net hospitals in expansion states. We RURAL/URBAN LOCATION, SIZE, AND SHARE estimate that, beginning in 2020, total margins for safety- OF LOW-INCOME PATIENTS net hospitals in expansion states would decline substantially Eliminating the individual mandate, the Medicaid relative to current law and would fall to –0.5 percent by expansion, and retroactive eligibility under the 2026 relative to 2.7 percent under current law (Exhibit 5). AHCA would have a significant impact on hospitals’ The ACHA provisions that would restore Medicaid DSH uncompensated care costs. By 2026, we estimate that payments beginning in 2018 and provide additional uncompensated care costs for all safety-net hospitals safety-net funding to nonexpansion states could improve would increase by 65 percent relative to current law margins for safety-net hospitals in these states between (Exhibit 7). Of these, eliminating the Medicaid expansion 2018 and 2022 relative to current law (Exhibit 6). However, would have the largest effect on uncompensated care. We we estimate that by 2023 their margins would decline estimate that uncompensated care costs would increase relative to those under current law due to the per-capita by about 16 percent relative to current law for safety-net spending limits and the elimination of retroactive hospitals in nonexpansion states. Safety-net hospitals in eligibility. By 2026, we estimate that hospital total states that expanded Medicaid under the ACA could see margins for safety-net hospitals in nonexpansion states uncompensated care costs more than double compared could be more than one percentage point below what with current law. Exhibit 5 Exhibit 5. Projected Total and Operating Margins for Safety-Net Hospitals in Medicaid Projected Total and Operating Margins for Safety-Net Hospitals in Medicaid Expansion States, Expansion States, 2017–2026 2017–2026 6.0% 5.1% Current law total margin AHCA total margin 4.4% 5.1% 3.8% Current law operating margin AHCA operating margin 4.0% 3.4% 4.3% 3.0% 2.6% 2.7% 3.6% 2.2% 1.8% 1.6% 2.0% 2.3% 1.8% 1.0% 0.0% 0.5% 0.0% -0.3% -0.5% -2.0% -2.5% -3.2% -2.5% -3.9% -4.3% -4.0% -3.4% -4.6% -4.6% -5.0% -4.1% -5.4% -5.8% -5.9% -6.0% -5.6% -6.2% -7.0% -8.0% -7.5% -8.0% -8.3% -8.5% -10.0% 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Data: Dobson | DaVanzo analysis of Medicare Hospital Cost Report Data for 2015. Data: Dobson | DaVanzo analysis of Medicare Hospital Cost Report Data for 2015. commonwealthfund.org June 2017 Source: A. Dobson, J. DaVanzo, and R. Haught, The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals, The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 11 Exhibit 6 Projected Total and Operating Margins for Safety-Net Hospitals in Exhibit 6. Projected Total and Operating Margins for Safety-Net Hospitals in Nonexpansion States, 2017–2026 Nonexpansion States, 2017–2026 8.0% Current law total margin AHCA total margin 6.1% Current law operating margin AHCA operating margin 5.6% 6.0% 5.5% 4.7% 5.4% 4.4% 4.1% 4.9% 4.0% 4.4% 4.1% 3.2% 3.2% 3.8% 2.9% 2.7% 3.5% 2.9% 2.0% 2.7% 2.4% 2.2% 0.9% 0.4% 0.1% 0.0% -0.6% -0.9% 0.1% -1.1% -0.5% -1.0% -2.2% -2.0% -2.0% -1.3% -2.4% -1.6% -2.6% -1.9% -2.4% -2.7% -2.9% -3.1% -4.0% 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Data: Dobson | DaVanzo analysis of Medicare Hospital Cost Report Data for 2015. Data: Dobson | DaVanzo analysis of Medicare Hospital Cost Report Data for 2015. Source: A. Dobson, J. DaVanzo, and R. Haught, The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals, The Commonwealth Fund, June 2017. Exhibit 7. Projected Uncompensated Care Costs of Safety-Net Hospitals by Urban/Rural Location, 2026 Uncompensated care Uncompensated care costs per safety-net costs per safety-net Hospital Number of hospital under current law hospital after AHCA Percent characteristics safety-net hospitals ($1,000s) ($1,000s) change Safety-net hospitals in Medicaid expansion states Total 426 $13,454 $28,232 110% RURAL 153 $2,636 $5,866 123% URBAN 273 $19,517 $40,768 109% Safety-net hospitals in nonexpansion states Total 234 $22,508 $26,164 16% RURAL 99 $3,689 $4,234 15% URBAN 135 $36,309 $42,246 16% Total 660 $16,664 $27,499 65% Data: Dobson | DaVanzo analysis using Medicare Hospital Cost Report Data for 2015. commonwealthfund.org June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 12 The increase in uncompensated care would be most dramatic Exhibit 8. Projected Total and Operating Margins for Safety-Net in rural safety-net hospitals in Hospitals by Urban/Rural Location and Bed Size, 2026 Medicaid expansion states that have a high Medicaid payer mix Total margin Operating margin and have therefore benefitted the Percentage- Percentage- most from the expansion. Exhibit Hospital Current After point Current After point 7 shows that uncompensated care characteristics law AHCA change law AHCA change costs could increase by 123 percent Safety-net hospitals in Medicaid expansion states by 2026 for this group of hospitals. Our analysis also showed that rural Total 2.7% -0.5% -3.2% -4.6% -8.5% -3.9% safety-net hospitals in California, RURAL 1.3% -2.0% -3.3% -5.9% -9.9% -4.0% Kentucky, Nevada, Oregon, and 25 or fewer beds 4.8% 0.2% -4.6% -2.8% -8.6% -5.8% Washington could see increases in uncompensated care of more 26–99 beds 0.5% -3.3% -3.8% -5.2% -9.6% -4.4% than 200 percent. Hospitals in rural 100+ beds 0.0% -2.3% -2.3% -7.9% -10.7% -2.8% communities have recently been closing at an alarming rate, and an URBAN 2.8% -0.4% -3.2% -4.5% -8.4% -3.9% increase in uncompensated care of Fewer than 100 beds 3.1% -0.2% -3.3% -3.8% -7.8% -4.0% this level may not be sustainable for 100–199 beds 1.6% -1.7% -3.3% -6.2% -10.4% -4.2% these vulnerable hospitals. 200–299 beds 0.8% -2.5% -3.3% -4.8% -8.6% -3.9% The AHCA would have varying impacts on safety-net hospitals of 300–499 beds 2.9% -0.8% -3.7% -5.7% -10.3% -4.6% different sizes. Exhibit 8 shows the 500+ beds 4.2% 1.5% -2.7% -2.4% -5.6% -3.2% estimated change in hospital total Safety-net hospitals in nonexpansion states and operating margins for safety-net hospitals in 2026 relative to current Total 3.2% 2.2% -1.0% -2.0% -3.1% -1.2% law. As described above, safety-net RURAL 2.3% 1.2% -1.1% -2.3% -3.5% -1.2% hospitals in Medicaid expansion states would experience the largest negative 25 or fewer beds 3.7% 2.7% -1.0% -1.6% -2.7% -1.1% impact on margins. Particularly, small 26–99 beds 0.4% -0.7% -1.1% -4.7% -6.0% -1.2% rural hospitals as well as small and 100+ beds 5.2% 4.1% -1.1% 2.2% 1.0% -1.1% midsize urban hospitals in expansion states would experience the largest URBAN 3.3% 2.2% -1.0% -1.9% -3.1% -1.2% negative impact. Fewer than 100 beds 7.8% 6.4% -1.5% 7.0% 5.4% -1.6% Safety-net hospitals that have the 100–199 beds 4.5% 3.6% -0.9% 1.6% 0.6% -1.0% highest commitment to serving 200–299 beds 0.2% -0.9% -1.1% -3.1% -4.3% -1.2% low-income and Medicaid patients tend to have the lowest operating 300–499 beds 4.3% 3.4% -0.9% -1.5% -2.5% -1.0% and total margins under current law 500+ beds 3.1% 2.0% -1.1% -2.5% -3.8% -1.2% and would be hurt the most by the Grand total 2.9% 0.5% -2.4% -3.6% -6.4% -2.8% AHCA, regardless of location in an expansion or nonexpansion state. Data: Dobson | DaVanzo analysis using Medicare Hospital Cost Report Data for 2015. commonwealthfund.org June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 13 Exhibit 9 shows the estimated change in hospital total and operating Exhibit 9. Projected Total and Operating Margins for Safety-Net margins for safety-net hospitals in Hospitals by Low-Income Utilization Rate (LIUR) Level, 2026 2026 relative to current law by how Total margin Operating margin many low-income patients a hospital serves. Although all safety-net Percentage- Percentage- hospitals are by definition committed Current After point Current After point LIUR level law AHCA change law AHCA change to serving low-income and Medicaid patients, this metric further sorts Safety-net hospitals in Medicaid expansion states safety-net hospitals by their volume Total 2.7% -0.5% -3.2% -4.6% -8.5% -3.9% of low-income patients. Lowest tercile 5.5% 3.6% -1.9% 0.7% -1.6% -2.2% VARIABLES AFFECTING Middle tercile 0.7% -3.5% -4.1% -5.6% -10.4% -4.9% THIS ANALYSIS Highest tercile 0.0% -4.7% -4.7% -12.3% -18.6% -6.3% The federal funding reductions from Safety-net hospitals in nonexpansion states the AHCA’s Medicaid provisions would affect states differently, Total 3.2% 2.2% -1.0% -2.0% -3.1% -1.2% particularly with respect to states Lowest tercile 5.4% 4.8% -0.6% 1.9% 1.2% -0.7% that have expanded Medicaid versus Middle tercile 2.3% 1.1% -1.1% -3.2% -4.5% -1.3% states that have not. For this reason, it is difficult to predict how each state Highest tercile 2.0% 0.5% -1.5% -4.8% -6.6% -1.8% would respond to the legislation. Total 2.9% 0.5% -2.4% -3.6% -6.4% -2.8% Therefore, we performed a set of “sensitivity analyses” to provide a Note: The LIUR is a metric used for determining Medicaid DSH hospitals and consists of a hospital’s Medic- aid revenue as a percent of total revenue and charity care charges as a percent of total hospital charges. range of potential financial impacts Data: Dobson | DaVanzo analysis using Medicare Hospital Cost Report Data for 2015. as they relate to safety-net hospitals. Using a range of assumptions (described in the Technical Appendix), we estimate that the Medicaid provisions specified in Exhibit 10. Change in Key Financial Performance Metrics for Safety- the AHCA would in total reduce Net Hospitals Under Various Assumption Scenarios, 2017–2026 net income to safety-net hospitals Total Total Net income/ between $13.3 billion and $26.9 revenues expenses (loss) billion (or an 18% to 36% reduction (millions) (millions) (millions) in net income relative to current law) over the 2017 to 2026 period (Exhibit Current law $2,293,810 $2,219,745 $74,064 10). Low-range estimate ($30,422) ($17,160) ($13,262) Mid-range estimate ($36,531) ($18,254) ($18,277) (presented above) High-range estimate ($50,844) ($23,949) ($26,895) Data: Dobson | DaVanzo analysis using Medicare Hospital Cost Report Data. commonwealthfund.org June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 14 DISCUSSION Our analysis indicates that small rural safety-net hospitals Under the AHCA, beginning in 2020, the financial status would by hit the hardest by the AHCA’s Medicaid of safety-net hospitals could deteriorate year over year provisions. There is already substantial financial pressure as Medicaid coverage is reduced and the effect of the on rural hospitals; some 80 rural hospitals have closed Medicaid per-capita spending limits grows. By 2026, we or eliminated inpatient services since 2010, and many estimate that hospital total margins would drop to 0.5 more are vulnerable to closure.9 In addition, other percent, compared with estimates under current law of rural hospitals are eliminating specific services such as 2.9 percent—representing an 83 percent reduction in net obstetrics care. The impact of the AHCA on these hospitals income for safety-net hospitals. and the services they provide would not only affect Medicaid patients but also the communities they serve. Safety-net hospitals in Medicaid expansion states would experience the largest losses under the AHCA. Small Furthermore, since Medicaid helps to absorb the costs of rural hospitals and small and mid-size urban hospitals care for so many Americans, cuts of this magnitude could would experience the largest negative impact. Safety- have unintended consequences, including the shift of costs net hospitals in states that expanded Medicaid may see to Medicare and private insurers. Already-low Medicaid uncompensated care costs more than double compared provider payments would be at risk for further reductions with current law by 2026. This would be most dramatic and, at the same time, uncompensated care costs for in rural safety-net hospitals in expansion states that have hospitals would rise. a high Medicaid payer mix and therefore benefitted the most from the Medicaid expansion. In addition, safety-net hospitals that have the highest commitment to serving low-income and Medicaid patients tend to have the lowest operating and total margins under current law and would be hurt the most by the AHCA, regardless of whether they are in a Medicaid expansion or nonexpansion state. We will be publishing a state-by-state analysis of the impact of the AHCA on hospitals as a follow-up to this report. The financial margin analysis presented in this report is meant to illustrate the pressures that would be placed on safety-net hospitals due to the reduced Medicaid funding under the AHCA. The negative total margins predicted under the AHCA by 2026 for safety-net hospitals in expansion states indicate that projected revenues from all sources would be less than projected costs. Hospital administrators may need to respond by reducing their costs, meaning eliminating specific services, reducing staff, or possibly closing the hospital. commonwealthfund.org June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 15 NOTES Cunningham and L. Felland, Environmental Scan 1 P. 6 Dobson | DaVanzo analysis of Medicare Hospital Cost to Identify the Major Research Questions and Metrics Reports for federal fiscal year 2015. for Monitoring the Effects of the Affordable Care Act on Safety Net Hospitals (Assistant Secretary for Planning Felland, P. Cunningham, A. Doubleday et al., Effects 7 L. and Evaluation, U.S. Department of Health and Human of the Affordable Care Act on Safety Net Hospitals, Services, June 2013). submitted to the Assistant Secretary for Planning and Evaluation (Mathematica Policy Research, Nov. 2016). 2 Expansion states included: Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Lewin Group, Assessment of Medicaid Managed 8 Illinois, Iowa, Kentucky, Maryland, Massachusetts, Care Expansion Options in Illinois, prepared for Michigan, Minnesota, Nevada, New Hampshire, New the Commission on Government Forecasting and Jersey, New Mexico, New York, North Dakota, Ohio, Accountability (Lewin Group, May 3, 2005). Oregon, Rhode Island, Vermont, Washington, and A. Ellison, A State-by-State Breakdown of 80 Rural 9 West Virginia. The District of Columbia expanded as Hospital Closures (Becker’s Hospital CFO Report, Dec. well. Although Alaska, Indiana, Louisiana, Montana, 13, 2016). and Pennsylvania have expanded Medicaid, they are included in our nonexpansion states, since they expanded in 2015 or later, which is the last year of our database. In addition, six states (California, Colorado, Connecticut, Minnesota, New Jersey, and Washington) and the District of Columbia expanded Medicaid prior to 2014. However, we included hospitals in these states in our study as expansion states, because the trend in Medicaid utilization and revenue as well as uncompensated care costs observed for hospitals in these closely resembled the trends observed in other expansion states over the 2012–2015 period. Searing and J. Hoadley, Beyond the Reduction in 3 A. Uncompensated Care: Medicaid Expansion Is Having a Positive Impact on Safety Net Hospitals and Clinics (Georgetown University Health Policy Institute, June 2016). Felland, P. Cunningham, A. Doubleday et al., Effects 4 L. of the Affordable Care Act on Safety Net Hospitals, submitted to the Assistant Secretary for Planning and Evaluation (Mathematica Policy Research, Nov. 2016). Congressional Budget Office, Cost Estimate—H.R. 1628, 5 American Health Care Act of 2017, as Passed by the House of Representatives on May 4, 2017 (CBO, May 24, 2017). commonwealthfund.org June 2017 The Financial Impact of the American Health Care Act’s Medicaid Provisions on Safety-Net Hospitals 16 ABOUT THE AUTHORS Medicaid Services (CMS) by providing financial analysis Allen Dobson, Ph.D., is cofounder and president of and consulting on payment models and innovations. Dobson DaVanzo & Associates, LLC. Over the past several He also worked on a project with the CMS Center for years, Dr. Dobson has studied Medicare’s Prospective Medicaid and CHIP Services to review Medicaid DSH and Payment Systems (PPS) and Physician Payment System UPL submissions from each state to identify gaps in the and has led efforts to model the impact of physician and methodologies used by states, as well as gaps in the data hospital payment policies upon stakeholders using micro- submission and review process. simulation and econometric techniques. He also led a series of state Medicaid studies. Dr. Dobson developed Editorial support was provided by Deborah Lorber and estimates for the Institute of Medicine Committee Martha Hostetter. on Medicare Benefit Extensions of the likely cost to Medicare of expanding preventive benefits, including skin cancer screening, medically necessary dental services, selected nutritional interventions, and the provision For more information about this report, please contact: of immunosuppressive drugs to transplant patients Allen Dobson past three years. Before cofounding Dobson DaVanzo & President Associates, Dr. Dobson was a senior vice president at The Dobson DaVanzo & Associates, LLC Lewin Group. Prior to that, he was director of the Office al.dobsondobsondavanzo.com of Research at the Health Care Financing Administration during the period that Medicare PPS was developed and About The Commonwealth Fund implemented. Dr. Dobson earned his Ph.D. in economics from Washington University and is a phi beta kappa The Commonwealth Fund, among the first private foundations started by a woman philanthropist—Anna M. graduate of the University of Washington. Harkness—was established in 1918 with the broad charge to Joan E. DaVanzo, Ph.D., M.S.W., is chief executive officer enhance the common good. of Dobson | DaVanzo. Before she cofounded the firm, she The mission of The Commonwealth Fund is to promote a served as vice president at The Lewin Group for almost a high performance health care system. The Fund carries decade. Her research interests include Medicare payment out this mandate by supporting independent research on policy and the sociomedical aspects of normal aging. Dr. health care issues and making grants to improve health care DaVanzo has expertise in both qualitative and quantitative practice and policy. An international program in health policy analyses and brings a clinical perspective to her consulting is designed to stimulate innovative policies and practices in work. She also has extensive experience in the use and the United States and other industrialized countries. interpretation of large datasets, such as Medicare claims Support for this research was provided by The files, Medical Expenditure Panel Survey, Medicare Current Commonwealth Fund. The views presented here are Beneficiary Survey, and National Health and Nutrition those of the authors and not necessarily those of The Examination Survey. Commonwealth Fund or its directors, officers, or staff. To learn more about new publications when they become Randy Haught is a senior data manager at Dobson | available, visit the Fund’s website and register to receive DaVanzo and brings more than 25 years of experience email alerts. performing analysis of Medicare and Medicaid payment policies and major health care reform legislation. While at Dobson | DaVanzo, Mr. Haught has worked for a range of organizations to assist them with their Health Care Innovation applications to the Centers for Medicare and commonwealthfund.org June 2017