The Potential Financial Impact of Medicaid Work Requirement on Kentucky Hospitals
Kentucky’s implementation of the Medicaid expansion and its health insurance marketplace was one of the success stories of the Affordable Care Act (ACA). Together, these coverage expansions increased the percent of nonelderly residents with health care coverage from 84 percent in 2013 to 93 percent by 2016. This coverage increase, in turn, contributed to improved financial footing for hospitals, especially safety-net hospitals, in the state. Between 2011 and 2016, thanks in large part to increased Medicaid revenues, Kentucky hospitals saw uncompensated care costs decline by $4.6 million (59%) per hospital,1 as well as a 16 percent increase per hospital in total patient revenues. These funds helped Kentucky safety-net hospitals deliver a significant level of care to Medicaid, uninsured, and other vulnerable patients, as stipulated through their missions or legal mandate.
However, earlier this year the state received approval of its 1115 Medicaid waiver (Kentucky HEALTH), which includes making work requirements for Medicaid enrollees a condition of enrollment. In July, the Washington, D.C., federal district court overturned the waiver on the condition that it was in violation of federal law. And in response, the U.S. Health and Human Services Secretary Alex Azar reposted Kentucky’s original application for a public comment period and is expected to issue a new determination on the wavier soon.
We conducted a study to estimate the impact of the Kentucky work requirements on rates of uninsured and hospital finances, especially for safety-net hospitals. Our study results indicate Kentucky HEALTH work requirements, if implemented, would significantly reduce Medicaid coverage and increase the number of uninsured in the state. Consequently, Kentucky hospitals’ Medicaid revenues would decline, uncompensated care costs would increase, and operating margins would be diminished.
Work Requirements Will Increase the Number of Uninsured
Our analysis estimates that 325,000 Kentucky Medicaid enrollees, or 39 percent of all Medicaid, non-Medicare enrollees, would be subject to work requirements. Of these 325,000 enrollees, about 266,000 are either working at least the minimum number of hours per week or would meet at least one of the requirement’s exemptions.
The remaining 59,000 Medicaid enrollees not currently working will need to document hours spent in community service, job training, or applying for jobs. Experience in other public programs that have implemented work requirements suggests many of these individuals will lose coverage. For example, studies show expired Supplemental Nutrition Assistance Program (SNAP) work requirement waivers led to enrollment drops of 60 percent to 85 percent, with most reductions occurring within three months of implementation.
If work and documentation requirements have the same effect in Medicaid as they had in other public programs, we estimate that between 108,000 and 118,000 Kentuckians could lose Medicaid coverage. Based on recent experience in SNAP, loss of coverage could occur in the first year if the state fully implements work requirements statewide and across all age groups on its first day. This estimate is consistent with results seen in the first month of Arkansas’ Medicaid work requirement program, in which 29 percent of the targeted population did not satisfy the necessary reporting requirements.
Most of the individuals losing Medicaid coverage will be ineligible for premium subsidies in the Kentucky Health Benefit Exchange.2 Also, many will not be employed or have jobs that do not offer employer-sponsored insurance. Because many enrollees cycle on and off of Medicaid coverage as a result of income fluctuations (referred to as “churn”), a recent analysis estimated that about 76,000 to 117,000 individuals who lose Medicaid coverage solely because of work requirements will be uninsured at any given time during the year.
Hospital Finances Will Be Negatively Affected by Work Requirements
These health insurance coverage changes could have a detrimental financial impact on Kentucky’s hospitals, especially safety-net hospitals.3 Assuming that Kentucky HEALTH work requirements are implemented statewide, we estimate the following effects on Kentucky hospitals in 2019. We provide a range of estimates that account for the possibility of individuals who lose Medicaid coverage gaining another source of coverage.
We find hospitals’ Medicaid revenues will be reduced, on average, by 19 percent to 21 percent, and safety-net hospitals’ Medicaid revenues will be reduced by nearly $8 million per safety-net hospital.
Hospitals’ uncompensated care costs will more than double, and safety-net hospitals would be hit the hardest.
We estimate that Kentucky hospitals’ operating margins would drop from –3.9 percent on average across in 20194 to as low as –5.4 percent to –6.5 percent, depending upon the ability of individuals losing Medicaid coverage to gain another source of coverage. For safety-net hospitals, operating margins could fall from –5.7% in 2019 to as low as –7.7 to –9.1 percent.
Improved Hospital Financial Stability in Jeopardy
Medicaid work requirements would clearly weaken Kentucky hospitals’ financial positions, especially safety-net hospitals that serve a disproportionate share of low-income patients. On average, operating margins for safety-net hospitals in Kentucky could drop to –9.1 percent in 2019 if Kentucky HEALTH work requirements are implemented, meaning that safety-net hospitals will lose more than nine cents on every dollar of patient revenue.
The improved financial stability experienced by Kentucky safety-net hospitals after ACA implementation allows these hospitals to continue expanding outpatient capacity, hiring new staff, and maintaining or offering new services to the communities they serve. These improvements could be jeopardized if Medicaid work requirements are implemented in the state, which will not only impact the institutions and Medicaid patients but the entire community served by these hospitals.
1 Dobson | DaVanzo analysis of Medicare Hospital Cost Report data for Kentucky hospitals between 2011 and 2016.
2 Since the state expanded Medicaid, tax credit eligibility effectively ranges from 138 percent to 400 percent of the federal poverty level. See Henry J. Kaiser Family Foundation, Explaining Health Care Reform: Questions About Health Insurance Subsidies (KFF, Nov. 2017).
3 For this study, we used the criteria for “Deemed DSH Hospital” as our definition of safety-net hospitals. The definition of deemed DSH hospitals is: hospitals that are required to receive Medicaid DSH payments because they serve a high share of low-income patients.
4 Hospital operating margins reflect income from patient care, but not from other sources such as parking, food service, and investments. The margins also take overhead expenses into account.