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Why it matters if states don't expand Medicaid

January 23rd, 2013

by Jonathan H. Burroughs

On June 28, 2012 Chief Justice Roberts surprised pundits by upholding the individual mandate that requires most individuals to pay a modest annual tax if they don't have health insurance by 2014.

On the other hand, states are not obligated to expand their Medicaid program to those with household incomes below 138 percent of the federal poverty level (FPL).

Although Medicaid accounts for more than 20 percent of total state budgets, it also represents the largest single source of federal funding to the states. The federal government finances 50 percent to 83 percent of Medicaid costs, according to the formula:

State Share of Medicaid = (State per capita personal income/National per capita personal income) X 0.45

[More:]

Thus, to put it another way, the state contribution to Medicaid ranges from 17 percent to 50 percent based upon the relative affluence of its citizens. Furthermore, under the Patient Protection and Affordable Care Ac, the Medicaid expansions are accompanied by 100 percent federal funding for the first three years, phasing down to 90 percent by 2020.

With this anticipated expansion, the Supreme Court upheld several key provisions of the PPACA:

1. Reduce disproportionate share hospital (DSH) payments ($22 billion/annually) which reimburse almost 75 percent of U.S. hospitals for uncompensated care provided to low-income or uninsured patients.

2. Prohibit cost shifting so those with insurance coverage are not subsidizing uncompensated care involuntarily. This provision will require greater price transparency so organizations can only bill an individual the "lowest negotiated rate."

Both of these provisions will have a significant impact on states--and their hospitals--that choose to opt out of Medicaid expansion.

1. First, they will lose the 90 percent - 100 percent federal subsidy to cover the cost of Medicaid.

2. Second, the DSH reductions will impact their hospitals without any relief to the number of uninsured patients or amount of uncompensated care. It is estimated that between 2014 and 2020, there will be a cumulative reduction of approximately $51 billion in DSH payments that will further exacerbate bad debt and may force some healthcare organizations to tighten their charity care policies and restrict their community benefit programs.

3. Most significantly, the inability to cost shift will transfer the uninsured and uncompensated care to hospitals, physicians and employers as they will provide or fund increasing uncompensated services without the ability to benefit from artificially increased payment or support from the private sector.

Commercial carriers are dealing with their own PPACA issues including a 20 percent cap on medical-loss ratios, mandatory coverage regardless of risk, and higher risk pools--and so they will look to the Centers for Medicare & Medicaid Services to set reimbursement rates that are sustainable financially and politically.

Healthcare organizations, employers and physicians make up a significant part of a state's tax base and cost shifting to them will only undermine state revenues while denying the state of its rightful federal subsidy.

It is time to recognize that healthcare, like other complex systems, is made up of interdependent parts that are integrally related and cannot be separated. Traditional political conflicts around federal vs. state, individual vs. state, individual vs. federal do not reflect the current necessity to work together.

Every other successful healthcare system has come to terms with a public/private and federal/regional delivery system and it is time that we do the same.

Jonathan H. Burroughs, MD, MBA, FACHE, FACPE is a certified physician executive and a fellow of the American College of Physician Executives and the American College of Healthcare Executives. He is president and CEO of The Burroughs Healthcare Consulting Network and works with some of the nation's top healthcare consulting organizations to provide "best practice" solutions and training to healthcare organizations.

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