Healthcare

How Obamacare Saves Hospitals $5.7 Billion (and how it could save almost $3 billion more)

The Affordable Care Act was built largely on the premise that the current health care system in the United States is broken.  One piece of that brokenness is embodied in the way in which the uninsured received health care. Given the high cost of care, in most cases the uninsured only interacted with the health care system in an emergency.  When they did receive care, it was expensive, and hospitals and the government combined to cover the costs that uninsured patients typically couldn’t afford.

A new report from the Obama administration says that might be changing.  The U.S. Department of Health and Human Services (HHS) released a report last month estimating that the ACA could save hospitals $5.7 billion in Uncompensated Care Costs in 2014.  This figure includes charity care that hospitals provide to the uninsured, as well as bad debt from customers expected to pay.  

These savings will largely accrue in states that have expanded Medicaid, the government program to provide health insurance to low-income people.  The Affordable Care Act allows states to expand their Medicaid programs to all residents earning below 138% of the Federal Poverty Line.  Twenty seven states and DC have currently expanded their Medicaid programs while the other 23 have refused expansion to date.  HHS estimates that 74 percent of the savings on Uncompensated Care will be seen in the 27 expansion states. If the 23 non-expansion states had expanded their programs this year, hospitals could have seen an additional $2.7 billion in savings, as explained below.

The estimates were supported by early figures showing decreases in the volume in uninsured patients as reported by several hospital associations.  The Arkansas Center for Health Improvement reported that hospitals in Arkansas saw a 30 percent drop in the volume of uninsured patients when comparing early 2013 to early 2014.  The Colorado Hospital Association saw a similar 30 percent drop.  Community Health Systems, Hospital Corporation of America, and Tenet Healthcare Corporation also reported decreased uninsured admissions between 28 and 33 percent in member hospitals located in expansion states.

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Source: U.S. Department of Health and Human Services

Given that 23 states haven’t expanded their Medicaid programs, how much savings is being left on the table?  Based on literature cited by HHS and using estimates from the Kaiser Family Foundation on the number of uninsured in the coverage gap, its possible that hospitals in non-expansion states could save another $2.72 billion if all of the non-expansion states extended their Medicaid eligibility.  Big savers include Texas ($630 million), Florida ($460 million), Georgia ($246 million), and North Carolina ($192 million).   

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Source: Author Calculations 

Note: Excludes Pennsylvania, which agreed to expand Medicaid in September.  HHS excluded Pennsylvania from their UCC estimates.

There are some assumptions used in this estimate.  First, the savings reported by HHS are projections based on a model and not reported figures from hospitals.  Uncompensated Care data typically take one or two years to report and collect.

Next, HHS highlights some limitations of their report, most importantly assuming that the newly insured will be able to cover their portion of the costs.  If newly insured patients cannot cover cost sharing requirements (the percentage of a total medical bill owed by an insured patient) then hospitals may not realize the full UCC savings.  HHS also models based on overall trends, and reimbursement environments in individual states may impact savings.

Additionally, the estimates based on the Coughlin model serve as a best-case scenario where non-expansion states would have covered 100 percent of their coverage gap in 2014.  States typically cover around 86% of eligible children and 66% of eligible adults.  Childless adults (primary targets of Medicaid expansion) participated at only a 35% rate in certain states where they were previously eligible.  However, increased media attention on the Affordable Care Act has heightened awareness about health care options and increased the phenomena known as the woodwork effect.

Finally, who gets to see these savings?  There are three ways to think about it.

Do I get to see these savings?

Maybe.  In the run up to health reform, Families USA released a report indicating that Uncompensated Care represented a “hidden health tax” amounting to $1,017 in 2008 for each family coverage plan.  Families USA argued that through cost-shifting, health care providers were negotiating higher prices with insurance companies to cover their losses for treating uninsured patients.  In short, privately insured families were paying the bills for the uninsured through monthly premiums.  

The Kaiser Family Foundation and the Urban Institute push back on this idea.  In 2013, they estimated that $84.9 billion in Uncompensated Care was delivered.  $53.3 billion of this care was paid for by a combination of federal programs, state and local governments, and the private sector.  Another $10.5 billion is provided as charity care by providers not in hospitals.  This leaves $21.1 billion in uncompensated care that is unaccounted for, but this total only amounts to 2.3 percent of total private health insurance spending in 2013.  Kaiser/Urban concludes that there is limited evidence that hospitals have increased prices as the number of uninsured has grown (pre-ACA) and that the potential amount of cost-shifting is relatively small.  

Government (and indirectly taxpayers) is likely to see some of these savings.  Lawmakers even included these predictions into the ACA as the law includes cuts to some of the federal payments previously used to defray the cost of Uncompensated Care.  

Does my community see these savings?

If you live in rural America, you could see savings if non-expansion states change their mind. Hospitals, which generally represent key components of a local rural economy, are struggling financially in the face of high uninsured rates.  Since the beginning of 2013, 24 rural hospitals have closed.  A majority of these hospitals are in states that have not expanded their Medicaid programs.  While reformers debate over the value of large rural hospitals (some favor closure and conversion to smaller outfits with more emphasis on mobility and telemedicine), increasing insured rates take some financial pressure off of rural health care providers.   

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Source: Reuters and the North Carolina Rural Health Research Program

Does society see these savings?    

Herein is one of the most important questions of health reform.  While UCC savings may be limited for individuals and already accounted for in government, there are broader savings that are a part of the conversation.  Being uninsured incentivizes people to avoid the health care system until an emergency arises.  When an emergency finally does arise, the uninsured incur high health care expenses they cannot afford for conditions that may have been avoidable with primary care.  Alternatively, insurance provides a payment mechanism for primary care and encourages the newly insured to seek care at the first sign of a problem.  Medicaid even increased payment rates to primary care providers, albeit temporarily.  

This theory is based on the idea that having insurance is the first step in a more effective approach to providing healthcare.  Being insured allows for access to care as patients do not have to fear high out-of-pocket medical expenses.  Patients who have access to primary care can schedule annual checkups and receive regular advice on better lifestyle habits like diet and exercise.  A more effective approach to health might prevent the onset of chronic health conditions like diabetes and high blood pressure, conditions that are expensive.

Medicaid provides early evidence that this is possible.  In the Oregon Medicaid Experiment, Medicaid increased access to care by almost eliminating catastrophic medical expanses and increased the chances that a person with diabetes would be diagnosed and use medication.  The Council of Economic Advisors extrapolated the Oregon Medicaid Experiment onto non-expansion states to estimate that 800,000 more people would receive cholesterol-level screenings, 214,000 more women would receive mammograms, and 255,000 fewer people would face catastrophic medical expenses if non-expansion states embraced health reform’s key coverage option.  

Ultimately, the UCC report fits the trend of other preliminary health reform news.  The outlook is positive, but certainty is elusive.  Advocates, hospitals, and patients are anxious to find out for sure.

Kyle is a recent graduate from the MPP program at American University. During his time at AU, he focused on health care policy including work on Medicaid expansion and Health Insurance Marketplace issues related to the implementation of the Affordable Care Act. Kyle currently works as a Project Associate at the American Institutes for Research where he promote's AIR's research on education issues. Kyle is also interested in economic policy as it impacts low-income families and the structural political forces that shape modern political and public policy debates. He grew up in Atlanta, Georgia and is a graduate of the University of Georgia. He shares in two of the state's proudest obsessions: southern politics and Georgia Bulldog football.

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