Medical Economics

What You Didn’t Know About Medicaid Expansion

ACAThe Patient Protection and Affordable Care Act of 2010 has been one of the most polarizing pieces of legislation in recent history. Whether you call it the ACA or Obamacare, you probably either love it or hate it. One of the features of the Affordable Care Act was Medicaid expansion which was particularly objectionable to many Americans who believed that it was a threat to the idea of personal responsibility that has been central to American cultural identity. But there is a hidden side of Medicaid expansion that most people don’t realize, one that has left many critical access hospitals in the U.S. in danger of closing.

The Affordable Care Act left the decision of whether or not to participate in Medicaid expansion up to the individual states. Most states elected to participate but 19 states elected to not participate in Medicaid expansion. Through 2016, the federal government covered all of the cost of Medicaid expansion but by 2020, the federal government will only cover 90% of the cost of Medicaid expansion, leaving 10% up to the individual states. One of the main reasons that states opting out of Medicaid expansion offered was that they could not afford the 10% additional state portion of the Medicaid expansion.

On the surface, it might sound like the argument offered by these 19 states was correct. But under the surface, things are a lot more complicated and it all comes down to the “disproportionate share” funds.

There are 5,686 hospitals in the United States. Of these, about 250 are “safety net hospitals” that serve a disproportionate share of poor and uninsured patients. The federal government has long provided support for these hospitals in order to keep their doors open and provide care to those patients who cannot pay for it themselves. It makes sense: if you own a restaurant and a customer comes in asking for dinner but says he can’t pay for it, he doesn’t get served; but if a patient comes in to the emergency department with appendicitis and can’t pay for the appendectomy, the hospital and the doctors are legally required to provide care for him. The federal program that supports these safety net hospitals is the “Disproportionate Share Hospital” or DSH program that was enacted in 1981 as part of the OBRA act. Although 3,109 American hospitals have received some DSH funding, most of it is concentrated in hospitals in urban areas. Last year, federal DSH payments were $11.9 billion.

One provision of the Affordable Care Act that most people don’t realize is that it greatly reduces the federal DSH funds as it expands Medicaid, in fact, this is one of the ways that Medicaid expansion is funded. Under the original Affordable Care Act, Medicaid DSH allotments were to be reduced by $0.5 billion in 2014, $0.6 billion in 2015, $0.6 billion in 2016, $1.8 billion in 2017, $5 billion in 2018, $5.6 billion in 2019, and $4 billion in 2020. There have been some additional laws affecting DSH fund reduction since the Affordable Care Act with the net result of delaying the reductions in DSH funds. Currently Under current law, the aggregate reductions to the Medicaid DSH allotments will be $2.0 billion in 2018, $3.0 billion in 2019, $4.0 billion in 2020, $5.0 billion in 2021, $6.0 billion in 2022, $7.0 billion in 2023, $8.0 billion in 2024, and $8.0 billion in 2025.

Up until now, DSH expenditures have been concentrated in just a few states: New York, California, Texas, and Louisiana account for half of DSH expenditures and 10 states (one of which is Ohio) account for 75% of DSH expenditures. There has been a lot of legislative jockeying in the 6 years since the Affordable Care Act with the result that the DSH funds will eventually be reduced but not eliminated and the future DSH funds will be largely redirected to a different group of states, namely those that did not expand Medicaid.

On the surface, this might sound like a victory for those states that opted out of Medicaid expansion but there are two problems.

First, DSH funds are a lot less than Medicaid funds so the increased DSH funds in states that did not expand Medicaid will not offset the lower federal Medicaid funds that these states would have received with Medicaid expansion. Last year, the federal government spent $300 billion on Medicaid but only $11.9 billion on DSH.

Second, there is an important difference between how DSH funds are used versus how Medicaid funds are used. DSH funds go to hospitals, where as Medicaid funds not only goes to hospitals but also pays for doctors and medications. As a result, DSH covers the cost of being sick but Medicaid covers both the cost of being sick AND the cost of keeping people well.

Let’s see how this plays out for a patient with coronary disease. When he has a myocardial infarction, DSH funds help to pay for his cardiac catheterization and coronary stent placements but once he leaves the hospital, he has no way to pay for Plavix or a statin and he has no insurance coverage to see a primary care physician for on-going preventive care. On the other hand, Medicaid funds pays for the cardiac catheterization and stent but also pays for the Plavix, statin, and primary care physician. In a DSH model, the patient keeps coming into the hospital with more myocardial infarctions requiring additional cardiac catheterizations and ultimately ends up disabled whereas in the Medicaid model, the patient does not have additional myocardial infarctions, stays out of the hospital, and remains in the workforce.

In Ohio, our legislators and our governor understood all of this and realized that failure to expand Medicaid was going to result in our safety net hospitals facing budget deficits or closing and Ohioans’ federal income tax dollars going to the other states that did expand Medicaid. But the legislators also knew that the average Ohio taxpayer did not understand all of the nuances of DSH funds and Medicaid expansion so they were in a bind: if they didn’t pass Medicaid expansion, federal funds were going to go to other states and not Ohio but if they did pass Medicaid expansion, they were going to have a hard time being re-elected because of the visceral reaction that many Ohioans had against the Affordable Care Act.

The solution was nothing less than brilliant. The legislature voted against Medicaid expansion thus saving face and ensuring their reelection and then the governor found a way to expand Medicaid via executive action thus ensuring Ohio did not lose out on the federal Medicaid expansion funds in a time of reduced DSH funds. In return, the legislators did not excessively criticize the governor or attempt legislation to overcome the executive action. Everybody won.

The major flaw in the opponents of Medicaid expansion is that whether or not you have Medicaid expansion, people are still going to get sick and when they get sick, hospitals and doctors are still going to be morally and legally obligated to take care of them when they are hospitalized, even if the patients can’t pay for it. With the reduction in DSH funds, there is a danger that those hospitals will close without the off-setting Medicaid funds. But even more concerning, without Medicaid expansion, states have no way to keep low income patients well.

Our medical students and residents realize this and it makes Medicaid expansion states a lot more attractive to start a medical career in than those states that did not expand Medicaid.

August 15, 2016

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital

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