The Effect of ACA Medicaid Expansion on Hospital Revenue

Prior research has found that in states which expanded Medicaid under the Affordable Care Act (ACA), Medicaid revenue rose sharply, while uncompensated care costs fell. That implication, however, has not been directly studied, and turns out to be unfounded. We use a difference-in-differences (DiD) research design, applied to annual Medicare Cost Reports (MCRs) filed by all hospitals with the Centers for Medicare and Medicaid Services, and the revenue categories available from this data source. We confirm that the large increase in Medicaid revenue and drop in uncompensated care costs in expansion states persists through 2016, but find no evidence of a relative increase in total revenue or in patient revenue. Instead, a decline in “other revenue” (defined as the MCR category of patient revenue minus the Medicare fee-for-service and Medicaid categories) offsets the large increase in Medicaid revenue. The principal components of other revenue are Medicare Advantage payments, private insurance payments, and individual payments.

At ACA onset in 2014, private insurance coverage (and thus payments) rise faster in non-expansion than in expansion states; this rise drives the relative fall in other revenue in expansion states. One channel for this effect is a form of crowd-out –private insurance coverage increases more in non-expansion than in expansion states, and private insurers pay higher rates than Medicaid. Medicaid expansion thus leads to some substitution of lower paying Medicaid patients for higher paying privately insured patients. Another possible channel is renegotiation between private insurers and hospital in the shadow of Medicaid expansion.

One might still expect that Medicaid expansion would help inner-city hospitals that see a large proportion of poor, uninsured patients, much as it was a boon to federally qualified health centers (FQHCs), which see exclusively poor patients. This expectation turns out to be unfounded as well. Even hospitals which pre-ACA were in the top decile for Medicaid discharges/total discharges or uncompensated care cost/total revenue do not experience a relative post-ACA increase in total revenue or patient revenue.

From a policy perspective, during debates over overhauling the ACA, hospitals and policy organizations expressed concern that reducing federal support for Medicaid expansion could increase hospitals’ uncompensated care at hospitals, decrease revenue, and put stress on hospitals that see more poor patients. Our results provide a countervailing message: other forces could well work in the opposite direction, so that hospitals did not benefit from Medicaid expansion, and might not suffer much if Medicaid funding is restricted, at unless Medicaid cutbacks are combined with changes in access to private insurance.