The $168 Billion Obamacare Windfall Many Hospitals Are Missing

For-profit hospital operators are doing well thanks to the Affordable Care Act; but they could be doing even better if half the states in the U.S. would take the federal boon of Medicaid dollars, and expand this health insurance for poor Americans.

Aug 17, 2014 at 11:03AM

Though hospital operators are reaping their best days in years thanks to millions of new customers under the Affordable Care Act, they're still losing out on some of the biggest opportunities in states balking at expanding their Medicaid programs for the poor -- to the tune of $167.8 billion, according to a new study from the Urban Institute and the Robert Wood Johnson Foundation. Investor-owned hospital chains like Tenet Healthcare, HCA Holdings, and Community Health Systems have long had their biggest markets concentrated in the south and southwestern part of the U.S., where states have more friendly regulations when it comes to buying, selling, and building new hospitals.

But when it comes to President Obama's signature legislative achievement, southern states, and markets dominated by for-profit hospital operators, aren't major growth areas for newly insured patients. That's largely because many of these states are led by political opponents of the President, who are against expanding Medicaid health insurance for the poor, a key part of the health law.

The state of Texas, for example, stands to lose the most federal revenue ($65.6 billion), according to the study linked above. It's bad news for Tenet, HCA, and Community Health, which, combined, have more than 70 hospitals in the Lone Star State. According to the report, Texas hospitals stand to lose $34.3 billion in reimbursements over a 10-year period from 2013 to 2022.

Hospital operators and their investors are missing out on new revenue in a big way across the country, according to the report:

In the 24 states that have not expanded Medicaid, 6.7 million residents are projected to remain uninsured in 2016 as a result. These states are forgoing $423.6 billion in federal Medicaid funds from 2013 to 2022, which will lessen economic activity and job growth. Hospitals in these 24 states are also slated to lose a $167.8 billion (31 percent) boost in Medicaid funding that was originally intended to offset major cuts to their Medicare and Medicaid reimbursement.

Under the health law, the federal government pays in full for the expanding portion of the program through 2016. Beginning in 2017, states gradually have to pay some costs, but by 2020, the federal government is still picking up 90% of the expansion tab.

The U.S. Supreme Court, which largely upheld the Affordable Care Act a little more than two years ago, allowed states to opt out of the Medicaid expansion. Texas, and 23 other states, are so far uninterested in expanding.

The differences are sharp in states that opted out, hospital company CEOs are noticing. "In our five states that expanded Medicaid in 2014, we benefited from a significant migration of patients from uninsured into Medicaid with a 54% decline in uninsured admissions and a 27% decline in uninsured outpatient visits," Tenet CEO Trevor Fetter told analysts earlier this month on the company's second-quarter earnings call.

In Tenet's case, it helped convince Fetter and his management team to boost the company earnings forecast for the rest of this year. "Including the states in which we operate that have not expanded the Medicaid programs, we achieved a 22% decline in uninsured admissions and drove a 13% decline in uninsured outpatient visits," Fetter said. "Because we only assumed a 15% decline in total company uninsured volume in our initial outlook for 2014, this favorable variance was a key driver behind our refined assumptions of a positive impact from the Affordable Care Act that we expect to realize this year."

At Community Health, CEO Wayne Smith said "self-pay" emergency room business, which is typically uninsured patients and those with little of their own money to pay their bills, "decreased 41% in expansion states and 5% in non-expansion states." Smith, like other investor-owned hospital company CEOs, is optimistic that political leaders will come around to expand Medicaid.

"I believe the likelihood of seeing movement by political leaders in these states will improve significantly after the election cycle once they are able to focus more fully on the changes facing their states," Smith told analysts on the call. "Simply stated expansion is the right thing to do for these less fortunate."

Whether or not the non-expanding states will expand Medicaid remains to be seen, but expansion -- and the money that would come with it -- is a key issue all hospital investors should be watching.

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4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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