Medicaid Expansion State Hospitals Report Less Bad Debt

Hospitals in the 29 states and Washington, D.C. that expanded Medicaid saw bad debt drop an average of 13%. Some hospitals saw reductions of 40%, but that's not the entire story, says a Moody's Investors Service analyst.

Not-for-profit hospitals operating in the 29 states that expanded their Medicaid rolls under the Affordable Care Act saw "significant" decreases in bad debt when compared with hospitals in non-expansion states, according to Moody's Investors Service.

However, Moody's also found that the Medicaid expansion did not affect the bottom-line financial performance of the hospitals. In fact, financial performance improved for hospitals in every state in 2014 thanks largely to an improving economy.

"The lower bad debt in and of itself is not surprising or necessarily the headline here," says Daniel Steingart, a senior analyst for Moody's and the lead author of the study. "What is interesting is the lack of difference in financial performance between the expansion and the non-expansion states. There was a lot of press coverage over the past year talking about expansion states, what a difference we are seeing, how they are pulling ahead. This is showing that this is not the entire story."

Moody's examined the unaudited interim financial reports from about 150 not-for-profit hospitals for 2014, the first full year of the Medicaid expansion. Hospitals in the 29 states and Washington, D.C. that expanded Medicaid saw bad debt drop an average of 13%. Some hospitals saw reductions of 40%.

In contrast, bad debt for hospitals in non-expansion states rose for most of 2014, although it dropped in the fourth quarter for as yet undetermined reasons.

Steingart says the numbers are just a snapshot, and could fluctuate in the coming months,

"I wouldn't look to that 13% as the final end-all be-all number," he says. "That bad debt clearly dropped throughout the year and the pace clearly accelerated throughout the year. If it ends up being 15% to 20% that would surprise me. The trend is clear."

In 2013, bad debt accounted for only 4.8% of a median hospital revenues in Medicaid expansion states. While the reduction in bad debt is a credit positive, Steingart says hospitals in expansion states have yet to shift their reduced exposure into higher cash flow of better financial results.

"They are taking the savings and putting it into other investments. They probably could flow it to the bottom line but they are not," Steingart says. "You're seeing more investment in population health strategies, putting it back into salaries and other deferred investments that have been cut over the past several years as hospitals have been laser focused on expense control."

The improved financial performance for hospitals in all states, regardless of their Medicaid expansion status, was less about reduced bad debt, Steingart says, and had more to do with "macroeconomic conditions" around an improving economy, and cost cutting and improved management by the hospitals.

"Big drops in bad debt do not necessarily lead to big improvements in operating performance," he says. "It goes to show that there are so many other factors that drive performance. Volumes, the general economic environment, are much better than they have been in the last several years. Those factors are themselves are overpowering what it is happening on the payer mix bad debt side."

In the near-term, Steingart says bad debt "will continue to trend along at whatever level it settles out at."

"I don't know that we are quite at that settled-out point. We are only now into the full 12 months of Medicaid expansion. The exchange rollout was so troubled in the first quarter that I almost don't consider that quarter as a part of the expansion. Even though Medicaid, technically, sits outside of that, it was all wrapped up in it," he says.

"We have another quarter to go to see a little more improvement and then the pace of improvement will taper off. What you will see are bad debt levels, as a share of overall revenues, will remain much lower than they were historically in the expansion states, but I do not think you will see continued major year-over-year improvements."

"The other thing to mention, the big thing that people have been waiting for is King v. Burwell," he says. "Although that doesn't impact Medicaid expansion, it does affect the exchanges. Depending upon how the Supreme Court rules, that could have a very disruptive effect on how people are accessing insurance and that in and of itself could have a spillover."