The Economic Impact of Medicaid Expansion on Hospitals and Manufacturers

September 5, 2013 at 11:14 AM Leave a comment

In our last blog entry, we identified the top reasons some states have decided not to move forward with expanding their Medicaid programs in 2014 (“State Decisions on Medicaid Expansion Still Unfolding”). Since the June 2012 U.S. Supreme Court ruling that made Medicaid expansion under the Affordable Care Act optional for states, the economic implications of the expansion have been key in each state’s decision. In this entry, we’ll discuss these economic implications and how they may affect hospital revenues and healthcare manufacturers.


The economic implications of Medicaid expansion have been hotly debated by supporters and opponents of the measure. The federal government will bear 100% of costs from 2014-2017, and incrementally decrease funding from there until it reaches 90% in 2022. The states will then need to cover the remaining 10% of costs.1

States that support the measure want to take advantage of the federal dollars, which will reduce state costs and generate economic growth in the form of jobs and revenue.2,3

Opponents of Medicaid expansion are concerned that more of the cost will be shifted from the federal government to states down the line despite the government’s promises. They also point to state budget deficits and say that state fiscal stability must be fully reviewed before considering Medicaid expansion.2

Providers have a less diverse perspective of Medicaid expansion. Almost all providers believe that Medicaid expansion will have a positive impact on provider revenue. As the chart below shows, with the states currently moving forward (not including Michigan, which very recently decided to go forward ), hospital Medicaid payments are expected to increase by a total of $103.7 billion in the 2013-2022 time frame, the equivalent to a 7-8% increase in Medicaid payments.4

Medicaid expansion and Medicare payments chart

The expansion will move some U.S. residents from private insurance to Medicaid, which pays providers at lower rates. However, this loss for hospitals would be offset by Medicaid payments from the much greater number of previously uninsured patients who will be covered under Medicaid, to the tune of $2.59 gained per every dollar lost from private insurance payments.5 Hospitals are also expected to reduce uncompensated care costs (such as those often incurred in the emergency room), as these patients  – if they are U.S. residents – will now be covered by Medicaid.

States that don’t move forward with expansion will retain their current federal funding for Medicaid programs, but will experience reductions in other federal funding. For example, the Affordable Care Act requires a reduction in funding for disproportionate share hospitals. In other words, they will take these cutbacks without the offsetting gains from Medicaid expansion.

How might the expected increase in Medicaid payments for many hospitals affect healthcare manufacturers?

We know that hospital Medicaid payments are expected to increase significantly as millions become insured in states that go forward. Additionally, the Affordable Care Act will expand state benchmark benefits packages to include ten broad categories of essential health benefits, including ambulatory care services, lab services and prescription drugs,6 that will likely increase market access to products and services (see table below for the full list7).

Ten Categories of Essential Health Benefits required by the Affordable Care Act

This increase in hospital payments could be a boon for manufacturers of medical devices and drugs used extensively in the hospital. For example, the increase in patient census will correspondingly increase demand for medical devices, imaging procedures and pharmaceuticals currently administered in the hospital. Medical device manufacturers might find a more welcome audience for a high value-added product, especially if the product generates offsetting cost savings and delivers measurable improvements in care that can translate into publicly reported outcomes.

However, this expectation should be taken with caution. As hospitals serve more patients, costs of direct care as well as facility maintenance and repair will increase. Many hospitals have been struggling financially for years, and revitalizing their own financial health may take higher priority than paying for high value-added products.












Entry filed under: Affordable Care Act, Healthcare Economics, Healthcare Policy, Healthcare Reform, Medicaid, State Medicaid Expansion. Tags: , .

States’ Decisions on Medicaid Expansion Still Unfolding Hospitalists rising: a brief overview

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