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Hospitals' Uncompensated Care Costs Fall Under Health Law, HHS Says

By Rebecca Adams, CQ HealthBeat Associate Editor

September 24, 2014 -- The hospital industry may save about $5.7 billion this year because it will treat fewer patients who cannot pay their medical bills, according to a recent federal report. Spending on uncompensated care is estimated to be 16 percent less than hospitals' costs would be without the health care law, and most of the savings will be concentrated in states that expanded Medicaid.

Almost three-fourths of the total savings, or $4.2 billion, will accrue in states that expanded Medicaid as soon as possible, according to the 28-page Department of Health and Human Services (HHS) report. Health systems in those expansion states will save about 25 percent off the costs that they might have faced without the health care law in effect.

A total of 28 jurisdictions including the District of Columbia chose to expand their Medicaid programs under the law, but the report did not include two of the states in the estimate because those expansions were not in effect by midyear.

HHS officials said that hospitals in states that did not broaden Medicaid will see a combined savings of $1.5 billion, or 9 percent below the level of uncompensated care spending that would be expected this year without the law.

The amount of uncompensated care in states that expanded and states that did not expand Medicaid has been similar in the past. The health care law (PL 111-148, PL 111-152) allows states to broaden Medicaid, the federal and state program for the low-income, to people with income of up to 138 percent of the federal poverty level.

Hospital association officials in many states, aware of the potential for savings, have actively lobbied their governors and state legislators to take the federal money for Medicaid expansion. The federal government will pick up all of the costs through 2016 and phase down to 90 percent of costs in 2020.

HHS officials extrapolated the savings based on estimates that 10.3 million fewer people will be uninsured this year and 8 million additional people will be covered by Medicaid.

Hospitals' uncompensated care was defined as both bad debt, which are bills that hospitals expected patients would pay, and charity care, which comprises medical expenses for which hospitals didn't expect to be paid because officials had determined early on that patients couldn't afford them.

Ultimately, the federal government picks up most uncompensated care costs. Hospitals pass on to federal agencies such as Medicare, Medicaid and the Veterans Health Administration about 62 percent of uncompensated care.

Lawmakers expected a decline in charity care and bad debt as consumers gain coverage and are better positioned to pay their bills. That was one reason why Congress included in the law billions of dollars in cuts in Medicare and Medicaid payments for hospitals that care for a large share of low-income patients.

But since the Supreme Court ruled in 2012 that states can choose whether to broaden Medicaid eligibility, it has been unclear how much uncompensated care costs would decline.

It also has been unclear how much more medical care people who gain coverage will consume than they did when they were uninsured.

"Given the magnitude and timing of these cuts, as well as the uncertainty introduced by whether and how states plan to expand Medicaid, it is critical to determine how [uncompensated care] is changing following coverage expansion so as to avoid shifting a large financial burden to states, localities, and hospitals," the HHS report stated.

The analysts acknowledge that their estimates are preliminary. The findings are based in part on evidence such as quarterly hospital earnings reports and member surveys conducted by hospital associations. The authors also used estimates of the historical link between changes in coverage and declines in uncompensated care costs to project the decrease in total U.S. hospital uncompensated costs as a result of increases in coverage under the health care law.

"Hospitals have long been on the front lines of caring for the uninsured, who often cannot pay the full costs of their care," said HHS Secretary Sylvia Mathews Burwell. "Today's news is good for families, businesses, and taxpayers."

The findings echo reports by other analysts somewhat.

Earlier this month, a PricewaterhouseCoopers analysis of financial data from the nation's five largest for-profit health systems showed that in states that expanded Medicaid, hospitals are seeing financial benefits. The number of hospitalized patients who had Medicaid coverage jumped by 10 percent at Community Health Systems, more than 20 percent at Tenet Healthcare and 32 percent at HCA Holdings. At the same time, the number of hospital patients who lacked coverage and had to pay their bills fell by 46 to 48 percent among the three systems.

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