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Will Medicaid Expansion ‘Bankrupt’ Kentucky Hospitals?

Sen. Rand Paul says the Affordable Care Act’s Medicaid expansion may “bankrupt” rural hospitals in Kentucky. But state health care leaders say its hospitals stand to benefit, since the expansion would provide insurance to those who otherwise wouldn’t be able to pay their hospital bills.

Paul, a Kentucky Republican who has introduced legislation that would repeal the Medicaid expansion, made his remarks on “This Week” when host George Stephanopoulos asked about the successful launch of the state health care exchange. The Kentucky website, kynect, had none of the problems plaguing the federal exchange. The state exchange had signed up 32,485 people in the first month of operation — about 5 percent of the state’s 640,000 uninsured residents.

Stephanopoulos, Nov. 3: What do you make of that fact that so many Kentuckians are signing up? And does that tell you that this program can be a success?

Paul: Well, nearly 90 percent of them are signing up for Medicaid, free health insurance from the government. My concern is not that we shouldn’t help people. I do want to help these people to get insurance. But there is going to be a cost.

And in my state, we have a lot of rural hospitals that teeter in the balance. My fear is that these hospitals may be bankrupt by overwhelming them with Medicaid patients.

We asked Paul’s office about the senator’s concerns about the impact of the Medicaid expansion on rural hospitals, but we received no response.

The state’s health care officials, however, have uniformly supported Medicaid expansion in part because it is expected to financially help, not hurt, state hospitals — particularly because the law also gradually reduces federal funding to hospitals for uncompensated care.

The Affordable Care Act cuts the federal Medicaid Disproportionate Share Hospital (DSH) program by $18.1 billion over seven years, beginning in fiscal year 2014, to help pay for the cost of expanding Medicaid. The cuts were predicated on the assumption that all states would expand Medicaid, but the U.S. Supreme Court ruled in June 2012 that states could opt-out of the expansion. That meant that states could decide not to expand Medicaid and, so far, only half of the 50 states have agreed to the expansion.

Shortly after the Supreme Court ruling, Foundation for a Healthy Kentucky President/CEO Susan Zepeda wrote a blog post urging Kentucky state officials to expand Medicaid. She wrote that not expanding Medicaid would financially hurt hospitals in the state.

Zepeda, July 31, 2012: [O]ther pieces of the law were developed with the assumption that all states would expand Medicaid coverage. Because of this assumption, cuts to other federal health funding are built into the continuing roll out of the Affordable Care law: For example, nationally Disproportionate Share Hospital (DSH) funding has provided an average of 95% of uncompensated care costs for state-owned hospitals; 69% of uncompensated care for local public hospitals; and 38% of uncompensated care for private hospitals. The law will reduce DSH funding by $14 billion over 10 years (starting in 2014). This funding decrease to key providers was supposed to be offset by the increase in Medicaid coverage, as the number of uninsured individuals seen at hospitals would drop significantly under the Medicaid expansion. If Kentucky opts out of the Medicaid expansion, however, state, local, and private hospitals could be faced with sharp increases in uncompensated care (care provided but not paid).

Michael Rust, past president of the Kentucky Hospital Association, agreed. He told the news website Business First in February that the state’s hospitals provided $718 million worth of uncompensated care in 2009. In a Q&A with Rust, Business First wrote that “the Kentucky Hospital Association supports universal insurance coverage, be it through Medicaid or other means. And expanding Medicaid is step toward that.”

Business First, Feb. 26: Question: What would it mean for Kentucky hospitals if Medicaid were to be expanded?

“It just provides another source of coverage,” which is important because hospitals care for patients who can’t afford to pay, he said.

“They’re good people, and they try to make payment but just can’t,” he said.

The total cost of uncompensated care in all Kentucky hospitals was $718 million during 2009, he said, the most recent year that data was available.

Question: Have you worked with the state, communicating what expansion could mean for providers?

“We work very closely with the state,” Rust said, noting that the Kentucky Cabinet for Health and Family Services has been receptive to the issue. “Our main bullet point is we do support universal coverage, everyone should have coverage.”

Most of Kentucky’s hospitals are located in rural areas. In 2007, 75 of Kentucky’s 123 hospitals were in rural areas, according to a 2009 Kentucky Hospital Association report.

The Kentucky Cabinet for Health and Family Services issued a 29-page report that recommended expanding Medicaid in part because “our hospitals will suffer” without the expansion. The report estimates that the state’s hospitals will see a cut in DSH payments of about $287.5 million over eight years, beginning in fiscal year 2014 through fiscal 2021. It said, “[S]tates that do not implement the Medicaid expansion risk losing substantial resources that will be needed by hospitals that serve large numbers of low income, uninsured patients, without the intended reduction in the number of uninsured in the state.”

Gov. Steve Beshear, a Democrat, accepted the report’s recommendation and issued an executive order in May to expand Medicaid.

Under the Affordable Care Act, states may expand Medicaid coverage to residents with incomes up to 138 percent of the federal poverty level, which is $15,856 for individuals and $32,499 for a family of four. The state estimates that an additional 308,000 Kentuckians will be eligible for the joint federal-state medical program, beginning Jan. 1.

The Robert Wood Johnson Foundation and the Urban Institute issued a report in March that assessed the impact of Medicaid expansion on hospitals nationwide. That report said opponents of the Affordable Care Act have made the argument that “hospitals will not gain from Medicaid expansion, since it undermines more generously reimbursed private coverage.” But the report found that “for each dollar in private revenue that a Medicaid expansion eliminates, hospitals’ Medicaid revenue rises by $2.59.”

Its conclusion: Medicaid expansion “greatly favors hospitals.”

Robert Wood Johnson Foundation and Urban Institute, March 2013: Put simply, a Medicaid expansion increases the number of patients for whom hospitals are paid, but some patients shift from private to more poorly reimbursed public coverage. The net result of these two factors greatly favors hospitals. Altogether, for each dollar in private revenue that a Medicaid expansion eliminates, hospitals’ Medicaid revenue rises by $2.59. … Whether the ACA creates net economic pain or gain for hospitals will depend significantly on whether states add Medicaid expansion to the remainder of the federal legislation.

That’s not to say there are no concerns in Kentucky about expanding Medicaid.

Kentucky already does not have enough medical providers to serve its population. In an August 2012 report, the Foundation for a Healthy Kentucky said that in 2008 “80 of Kentucky’s 120 counties were designated as Health Professional Shortage Areas (HPSAs) by the Health Resources and Services Administration’s (HRSA) Bureau of Primary Care.”

Kentucky Auditor Adam Edelen said the shortage has been exacerbated by the state’s new Medicaid Managed Care system, which took effect in November 2011. Edelen issued a report in July that found an 8 percent decline in Medicaid providers.

“Overall, the reduction in the number of providers under the managed care program is troubling, especially in light of the more than 300,000 new Medicaid members estimated to join the program when the Commonwealth implements the Medicaid expansion portion of the Affordable Care Act (ACA),” the report said.

The auditor’s report also said the Medicaid Managed Care system has caused a cash-flow problem for rural hospitals in particular. Edelen blamed a “quick transition” to the new system, delays and errors in processing claim payments, and additional reporting requirements.

“I am concerned about the long-term viability of some of our rural hospitals and in turn, even more worried about access to health care by all rural Kentuckians,” Edelen said in a press release.

In an email, Zepeda of the Foundation for a Healthy Kentucky said her organization “remains very concerned about the capacity of KY’s existing health care system — particularly in rural areas — to cost effectively care for a much larger number of patients.” She said that’s why her organization is funding “demonstration projects around ways to ‘do care differently,’ ” such as “redesign care delivery to include telemedicine, nurse-managed clinics, community care workers, etc.”

The foundation is an independent charitable organization funded as part of a court-approved agreement that resulted from a state investigation into the merger of Anthem Inc. and Blue Cross & Blue Shield. It launched in 2000 to “address the unmet health care needs of Kentuckians.”

In an interview, Zepeda also told us that the cash-flow problems caused by a rapid and rocky transition to Medicaid Managed Care are being addressed. Stephenie Hoelscher, a spokeswoman for the auditor, agreed.

“Progress has been made and continues to be made in easing the cash-flow burdens of rural hospitals, but I don’t think these hospitals would say the problems have been sufficiently addressed at this point,” Hoelscher said.

On balance, Zepeda said her organization still believes the state’s residents and hospitals will benefit from the expansion.

“The opportunity to insure a large proportion of presently uninsured Kentuckians who seek medical services is likely to have a positive effect both on their own health (by seeking more timely care, when the illness or injury they present is more likely to be healed effectively and at a lower cost) and on the health of institutions and providers from which/whom they seek care (who presently provide them with some level of uncompensated care),” Zepeda said in her email to us.

One footnote: Paul also said that nearly 90 percent of those who have signed up on the state exchange so far have enrolled in Medicaid. That was true as of Nov. 1. The state reported that 27,854 of the 32,485 people who enrolled on the state exchange enrolled in Medicaid. But the state also reported that an additional 13,900 Kentuckians who went on the state exchange were found to be eligible for government subsidies to purchase private insurance, although they have yet to enroll. Ultimately, the state said, about half of the state’s 640,000 uninsured residents will enroll in private plans.

— Eugene Kiely