Medicaid Expansion and the Coming Gusher of Hospital Profits

S&P Global Ratings, a big-three bond rating agency, predicts that Medicaid expansion will be “credit positive” for Virginia hospitals by reducing the level of uncompensated and charity care. Reports the Richmond Times-Dispatch:

The report does not change the current credit ratings of any Virginia health system, but S&P credit analyst Anne E. Cosgrove said the positive outlook “should help their bottom lines.”

“If you don’t have as much uncompensated care, this should help your underlying profitability,” Cosgrove said in an interview on Wednesday.

Virginia hospital officials played down the S&P announcement because they said enrollment under expanded Medical eligibility hasn’t begun and the benefits will vary among health systems depending on the mix of patients they serve.

Let’s get a sense of what the impact will be when an estimated additional 400,000 Virginians enroll in Medicaid. I have downloaded the latest financial data for Virginia acute care hospitals from the Virginia Health Information website, as displayed above. Collectively, they provided $2.6 billion in charity care and wrote off $1.9 billion in bad debts in the fiscal year 2016. They also made nearly $1.7 billion in profit (including “surplus” revenue reported by nonprofits).

Speaking in rough numbers, the federal and state budget for Medicaid expansion will inject about $3 billion annually into Virginia’s health system. I don’t know how that money is to be distributed between acute care hospitals, physicians, long-term care facilities and other medical providers. But for purposes of illustration and subject to verification, let us assume that one-third goes to acute care hospitals, thus reducing charity care and bad-debt write-offs by $1 billion. Virginia hospitals still will be providing a lot of free health care, but they could see a roughly 60% increase in profits.

So, yeah, I expect Medicaid expansion will be “credit positive” for the industry.

Now, let’s conduct another mental exercise. Let’s ask what the impact will be on Virginia’s most profitable hospitals. I totaled the charity care and bad debts for each institution and assumed that Medicaid would reduce them by one-third. Please note, these estimates represent no more than a Scientific Wild Ass Guess useful only for ascertaining order-of-magnitude effects. Here’s what the numbers look like:

Of the hospitals reporting the highest profits in FY 2016, all but Henrico Doctors Hospital were “non profit.”

As Bacon’s Rebellion readers know, I think profits are a beautiful thing. But some profits — those that arise from innovation, productivity, efficiency, and the like — are more socially beneficial than others. Profits that arise from creating monopolies and cartels, restricting competition through the exercise of political influence on government rules and regulations, and relentlessly jacking up charges to paying patients is not socially beneficial. The problem is compounded when the entities engaging in this behavior are nonprofit. Whatever else you say about the business practices of Andrew Carnegie, Henry Clay Frick and John D. Rockefeller, at least they paid taxes!

Bacon’s Rebellion will be watching hospital profitability closely. The big question: What will the highly profitable non-profits do with the gusher of money? Will they hold down charges to patients… or will they continue plowing the money into institutional expansion?

Update: Readers have pointed out that hospitals’ reports of charity care are wildly inflated because they are pegged to absurdly high nominal prices for care that almost no one pays. One implication is that hospitals are far less generous than they purport to be. Another is that my methodology for calculating the financial impact of Medicaid reform on profits is inflated by a similar amount.

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14 responses to “Medicaid Expansion and the Coming Gusher of Hospital Profits”

  1. Steve Haner Avatar
    Steve Haner

    I’m always very suspicious of those numbers because it is unclear what things really cost. You link to a 2015 posting that raises the same concerns. No question hospitals provide major uncompensated care, but is the accounting based on the list price, the price charged inside a network (the Anthem or Medicare price), or the actual cost as determined by time, materials and overhead? My guess is they have a strong incentive to book the list price, which of course nobody actually pays.

  2. That’s a good point. If hospitals are inflating the reported value of their charity care and bad debts, then my estimate on profitability might likewise be inflated. Here’s the how the data is displayed on the Virginia Health Information website for Sentara Norfolk General Hospital:

    At some point, I just have to get on the phone and find someone who understands how the numbers are compiled.

  3. LarrytheG Avatar

    It’s not really about profits for SOME hospitals though. It’s about health care for 400,000 people AND allowing rural and unprofitable hospitals to stay open and provide access to health care for some of Virginians citizens who otherwise would – simply die for lack of timely access to emergency medical care because remaining hospitals are one or more hours away.

    All this worrying about ‘profits’.. would lead us to what? forgetting about all those who really benefit? Baby, bathwater? geeze. Pass a law capping hospitals profits and the money automatically goes to Charity Care Clinics… like the Moss Free Clinic in Fredericksburg.

    Problems can be solved.. improvements made – if we focus on what can be accomplished – not the stuff we don’t like.

  4. I believe Steve is correct. The hospitals generally use inflated non-negotiated prices to state how much “charity” care they provide.

    I also think the advantages non-profits get can lead to consolidation leading to increased market power for providers leading to higher prices.

  5. LarrytheG Avatar

    Hospitals AND providers use inflated prices for both charity and non-charity care. Anyone here who has consumed medical services knows that.

    Folks should also realize that when you have 400,000 people who don’t have insurance – getting charity care – that the hospitals and providers are going to do anything/everything they can to recover those costs – so they can continue to pay their staffs rather than not and lose them and/or having to close down.

    This is a reality. It’s what we actually have to deal with – even if the actual costs are high-balled… No one in their right mind should believe that hospitals over-charge to the degree that they cover all charity care costs – and therefore we don’t really have a problem that motivate the MedicAid Expansion – because all that does is increase profits… Geeze Oh Man… If that were really true – why are rural hospitals closing? Why do we focus on the richer hospitals profits and ignore the fact that rural Virginia is losing access to medical care… ??? It’s a question. What exactly are we trying to achieve? We’d deny care to those who are not getting it because we are worried that some hospitals will make profits? Good Lord!

  6. Larry, your posts always start by introducing an alternative point to the one being discussed, then you attribute some sort of nefarious motive to the prior post, then you proceed to indignant exclamations like “Good Lord!” and “Geez”.

  7. LarrytheG Avatar

    Here’s the law that governs Employer Provided insurance:

    “What is HIPAA?

    The Health Insurance Portability and Accountability Act of 1996 (HIPAA) includes provisions of Federal law governing health coverage portability, health information privacy, administrative simplification, medical savings accounts, and long-term care insurance. The responsibility of the Department of Labor and the subject of these FAQs are the law’s portability and nondiscrimination requirements.

    HIPAA’s provisions affect group health plan coverage in the following ways:

    Provide certain individuals special enrollment rights in group health coverage when specific events occur, e.g., birth of a child (regardless of any open season);
    Prohibit discrimination in group health plan eligibility, benefits, and premiums based on specific health factors; and

    While HIPAA previously provided for limits with respect to preexisting condition exclusions, new protections under the Affordable Care Act now prohibit preexisting condition exclusions for plan years beginning on or after January 1, 2014. For plan years beginning on or after January 1, 2014, plans are no longer required to issue the general notice of preexisting condition exclusion and individual notice of period of preexisting condition exclusion.

    Q18: Can a plan charge individuals with histories of high claims more than similarly situated individuals based on their claims experience?
    No. Group health plans cannot charge an individual more for coverage than other similarly situated individuals based on any health factor.”

    Now… if you don’t KNOW these facts AND you have an opinion or view with regard to whether the govt is involved or not – you should avail yourself of the facts in forming your opinion – and the facts are clear and unambiguous – if you read this… you’ll see that it’s the GOVT – not the employer or the insurer or an agreement between them that sets the rules – it’s the govt.

    And these rules only apply to EP insurance – not what people buy on the open market where companies CAN and DO determine coverage and premium prices based on age, gender, and all aspects of health status.

    So basically, it’s the govt that “protects” peoples health insurance IF they have EP but they do not if people have to buy their own.

    I do NOT think that health care is a “right” but I DO think that whatever the govt does or does not do – on something that is as important as health insurance – it should apply equally to all citizens – something all of us should support morally and fiscally.

    1. TooManyTaxes Avatar

      Larry – you have demonstrated multiple times that health insurance is heavily regulated by both states and the federal government. And that regulation is generally comparable for the same type of insurance (employer-provided, employer self-funded, individual, etc.) But there is no legal requirement to treat the different classifications the same.

      A rule that makes sense for regulating employer self-funded plans might make no sense when applied to employer-provided that actually purchases insurance. Similarly, the rules may make no sense in the individual market. An employer plan tends to have a “captive” market – virtually every employee will participate in the company plan. Ergo, with a big enough base, rules that require the same premium payment irrespective of age can work.

      But that likely won’t work as well in an individual purchase market because people with lower risks (younger, healthier people) don’t want to pay the higher premiums. Or some just want to self-insure with catastrophic coverage. Obamacare has demonstrated this. The markets are different so the rules need to be different. And keep in mind SCOTUS ruled that the federal government cannot make people participate in the market.

      If you want to live in the country of total conformity, you need to leave beautiful Spotsylvania County.

      1. LarrytheG Avatar

        re: ” And that regulation is generally comparable for the same type of insurance (employer-provided, employer self-funded, individual, etc.) But there is no legal requirement to treat the different classifications the same.”

        It’s fundamentally wrong to have the govt provide subsidies and protections to one group and not others on something that is fundamental as health care. It is like allowing only some people to get Medicare when they retire and not others.

        re: ” But that likely won’t work as well in an individual purchase market because people with lower risks (younger, healthier people) don’t want to pay the higher premiums. Or some just want to self-insure with catastrophic coverage.”

        What if that is how you and your wife were treated with your Employer Provided? That they COULD charge you more for your age or health – or even deny you coverage. Would you be okay with that?

        Isn’t this “I’ve got mine, screw you”?

        Our whole country is messed up over health care – we are the worst in the industrialized world – because of this – because we insist of favoring one group of people over our policies and the folks who benefit are in denial about it…

  8. Peter Galuszka Avatar
    Peter Galuszka

    Having been through a couple of family illnesses, I think Steve H. is right. If these are “list” prices then the exercise here to show shameless profiteering is off.

    The first step towards badly needed reform in health care is to establish a useable price. On reason I am for a single payer system (as most advanced industrialized countries have) is that you skip the monkey business of back-door price fixing by Big Pharma and Big Insurance and Big Hospitals.

    If Teddy Roosevelt were president, there would be yeeeoooage probes.

  9. The U.S. spends a significantly higher percentage of its GDP on health care than any other large industrial country. (Indeed, I don’t think any other country other than the U.S. could be generally competitive in the world with this huge burden.) A lot of the debate focuses on should we have a single payer or “free market” system, but the reality is we don’t have either, and we may need elements of both to get out of this mess. As Peter pointed out, there is no usable price. Buyers know nothing about price and primary providers like doctors know little and have an array of incentives to prescribe expensive options. Government provides huge subsidies (which would be enough to provide a good basic level of care to all if prices were under control), but it does not play a positive role in improving market conditions (which it should) for a variety of reasons. The primary reasons are 1) there is no political consensus and 2) it has been captured by special interests. The special interest discussion focuses on Big Pharma, etc., we have major supply side issues where institutions like the AMA, with obvious vested interests are allowed to control the standards of care (e.g. use of nurse practitioners) and number of spots at medical schools.

    This post touches on another huge distortion I see, which is the non-profit status of medical systems. In practice, this is provide large providers with substantial market advantages (tax exempt status), in return for providing a level of charity care. The level of charity care is easily distorted (by using list prices). The non-profits are actually using “profits” from their status to pay high administrative costs and to reduce competition. The research is showing that areas with fewer options have higher prices (regardless of whether the options are for-profit or non-profit) and non-profit hospital systems are reducing the number of options.

    1. TooManyTaxes Avatar

      Izzo – great comments. There is no consensus on health care or changes thereto. And special interests of many kinds, not just medical interests, have captured Washington. Obama first moved to expand coverage and benefits instead of cutting costs. Instead of allowing Americans an option to purchase a lower-coverage, lower-cost plan, his Administration loaded up even the most basic options with all sorts of goodies to appeal to potential voters but that also pushed up the premium costs for those who didn’t get subsidies. Many of these people voted with their feet, creating a downward spiral.

      The amount of charity care required to maintain tax exempt status should be measured by the mean, median or mode of the actual payments accepted. And big institutions should be required to publish the actual “price” received per service for most services.

  10. LarrytheG Avatar

    re: ” A lot of the debate focuses on should we have a single payer or “free market” system, but the reality is we don’t have either, and we may need elements of both to get out of this mess. As Peter pointed out, there is no usable price. Buyers know nothing about price and primary providers like doctors know little and have an array of incentives to prescribe expensive options. ”

    Good comment!

    Does not need to be Single-Payer though – many other industrialized nations like Switzerland have Universal but not Single Payer:

    Also – the folks in those other countries that pay 1/2 what we do – they don’t know the prices either – yet they pay far less than us…

    the simple reality is – if you are in an auto accident or get cancer or have a heart attack.. you’re not likely to go “shopping” …you’re headed to the nearest ER and hope they can save you. You expect them to be competent and trained… etc.. price is not an issue.

  11. LarrytheG Avatar

    Just came across this , this morning:

    Singapore and Paris Top World’s Most Expensive Cities

    Notice that in all of these cities that their citizens have guaranteed health care and longer life expectancies than the US.

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