The Affordable Care Act (ACA) created a trade-off for providers, particularly hospitals: On the one hand, Medicare fee-for-service hospital payments will be cut by $260 billion over 10 years. Some people newly eligible for Medicaid will switch from private insurance, which pays much higher provider rates than Medicaid does. On the other hand, providers will get new business from 11 million new Medicaid enrollees and 25 million Health Insurance Exchange (HIX) enrollees, according to the Congressional Budget Office (CBO).  Of those covered through Medicaid expansion or federally-subsidized HIX health plans, at least 30 percent already have private coverage and will move to taxpayer financed coverage (this is referred to as crowd out).  The other 70 percent or so will be those who are genuinely newly insured as a result of the ACA.

Hospitals will take an additional big hit under Obamacare. Medicare and Medicaid disproportionate share hospital (DSH) payments – intended to compensate care for the uninsured – will be cut $34 billion and $22 billion, respectively, over the next decade.  Safety net hospitals will be especially hit by these cuts.  And the Medicaid and Medicare DSH payments will be cut even in states that decide against expanding Medicaid.

They will soon find out if the trade off is worth it. Enrollment in Health Insurance Exchanges begins Oct. 1, 2013. The Medicaid expansion takes effect Jan. 1, 2014, as does the individual mandate requiring almost all people to have health coverage.

Hospital Revenues from Medicaid Expansion Surpass Losses from Crowd Out:

A recent brief from the Urban Institute and the Robert Wood Johnson Foundation (RWJF) concludes that hospitals come out ahead in the health reform law’s Medicaid expansion. See the full brief here, and a one-page summary here. Authors Stan Dorn, Matthew Buettgens, John Holahan, and Caitlin Carroll have written a number of excellent ACA-related briefs, and add another to the list with this analysis.

A summary of the findings:

The findings assume all states will choose to expand Medicaid to all people earning 138 percent of federal poverty level or less.  Of course, while most states will likely expand Medicaid, many will not.  Also, the Urban Institute’s work on ACA tends to be among the most optimistic.

Complications with ACA Medicaid Expansion:

There are two caveats worth noting. First, higher revenues do not always translate into higher profits. Though there will be a surge in the number of Medicaid patients, Medicaid reimbursement rates are very low. If revenues do not cover the cost of care, meaning hospitals lose money caring for Medicaid patients, hospitals will be worse off even though they have more business.

The second caveat is that many states could choose not to expand Medicaid, thanks to the Supreme Court decision in NFIB v. Sebelius. In states that choose not to expand Medicaid, hospitals will still pay all of the costs in lower Medicare fee-for-service payments and lower DSH payments. But they will also pay for large amounts of uncompensated care and will not see more Medicaid patients. To compensate for those losses, hospitals likely will raise the price of caring for people with employer-sponsored insurance (ESI) and other private health insurance.

It’s also important to note that the estimate of crowd out may be too low.  The ACA increases premiums for many employers and individuals.  This may push move privately insured to Medicaid and Exchanges.  In addition, the take-up rate for Medicaid and subsidized Exchange coverage is very tough to predict.

Sellers Dorsey keeps an updated list of states that have decided to expand Medicaid. Those of you who have not yet read my post describing the pros and cons of the ACA Medicaid expansion, see here: Arguments For and Against States Opting for the ACA Medicaid Expansion.  For those interested in how the new optional Medicaid expansion population could be covered through Exchanges instead, please check out my post on A Way to Lower Premiums under Arkansas Medicaid Expansion Plan.