The Mystery of Hospitals’ Medicaid Profitability: Evidence from Arizona

Advocates of consumer-driven health reform want to shrink the role of government. One of the things we want is for Medicaid dependents to have greater choice of coverage, perhaps even through vouchers or tax credits that would allow them to choose private coverage. We know that Medicaid patients face poor access to care and that increasing the number of people on Medicaid increases emergency-department use. And yet, it has also been argued that hospitals lose money on Medicaid patients. However, this cannot make sense because hospitals constantly lobby to expand Medicaid. They never join with proposals to move Medicaid patients to private coverage. This is especially baffling because scholars also believe that some proportion of people who take advantage of a Medicaid expansion drop private coverage to take up Medicaid.

Evidence from Arizona leads to an explanation. Arizona hospitals heavily lobbied Governor Brewer to expand Medicaid in line with Obamacare. This expansion resulted in a reduction in so-called “uncompensated costs” from about 8 percent of hospitals’ revenue in the summer of 2013 to under 5 percent in April 2014. As well, Arizona hospitals operating margin increased from $140 million for 2013 to date to $184 million for 2014 to date, an increase in operation margin from 4.0 percent to 5.2 percent.

This is where it gets interesting. Those figures tell us that gross revenues barely budged: From $3.500 billion for 2013 to date to $3.538 billion this year to date. So increasing the number of Medicaid patients did not improve hospitals’ revenue. Nor according to a graph in the memorandum, did it increase the number of patients discharged (which remained, for example, at about 45,000 in April both years). However, another chart shows that the number of emergency-room visits increased by about 10,000 a month.

This blog has previously argued that emergency departments are profit centers for hospitals. I do not understand how increasing the number of Medicaid patients increases the number of highly profitable admissions from the emergency department. Figuring that out would bring us a long way towards solving the mystery of hospitals’ Medicaid profitability.

Comments (11)

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  1. Linda Gorman says:

    Here’s some speculation on the question:

    If the hospitals are also running federally qualified community health clinics, federal law requires that they be paid a prospective payment system reimbursement rather than the state’s Medicaid reimbursement for Medicaid patients. Most ER visits do not result in admissions but do result in recommendations for follow-up appointments which are referred to the onsite federally qualified clinic.

    The per-visit baseline payment rate is equal to 100 percent of the center’s average costs incurred during the base years (1999 and 2000) which are reasonable and related to the cost of furnishing covered services. A cost ceiling is not allowed if it effectively excludes reasonable and related costs from the rate computation.

    So, for every patient that is converted from uninsured (a free or reduced charge) to Medicaid, the hospital makes money.

  2. Devon Herrick says:

    Medicaid expansion is often not tied to expanding the supply of physicians willing to treat Medicaid enrollees. One of the ways states reduce the cost of their Medicaid program is by setting physician fees below what is paid by private insurers. This not only saves money on each visit, it is also a rationing mechanism.

  3. Thomas says:

    “So increasing the number of Medicaid patients did not improve hospitals’ revenue. Nor according to a graph in the memorandum, did it increase the number of patients discharged.”

    This is interesting that an increase in Medicaid patients do not improves revenues or discharge numbers. One would think an increase in ER visits would lead to an increase in discharges. Hospitals continue to advocate to expand Medicaid, but one what basis?

    • Buddy says:

      I think that its the magic of ObamaCare. No one needs to know what’s going on, just that somehow, someway, the numbers are working in their favor.

  4. Matthew says:

    “One of the things we want is for Medicaid dependents to have greater choice of coverage.”

    I would certainly agree that in order for individuals to have the maximum amount of choice, its to make Medicaid optional and allow people to choose private plans if they choose to.

    • Mr. Freedom says:

      I agree Matthew, and I would have thought that there would not be any people who would willingly go from private insurance to Medicaid, for all the reasons listed in this post. However, I guess there are, and I am also puzzled by this. Just like I am when I think about why hospitals would also advocate for Medicaid expansion.

      • Davey says:

        Well many individuals will probably favor free over something they have to pay. Being on Medicaid eliminates the monetary strain that private health insurance can have on an individual or family.

        But to each his own, I guess.

  5. James M. says:

    If Medicaid care doesn’t get reimbursed adequately enough, how can hospitals possibly be profiting by increased Medicaid admissions?

    It certainly is a mystery, and perhaps there is something not being accounted for? Or numbers are being fudged?

  6. SPM says:

    I am baffled too. I obviously agree that Medicaid, for the vast majority of patients and healthcare workers alike, is a worse option that private insurance. However, could the reason that Medicaid is apparently in demand by some consumers and hospitals be that Arizona and some other states are outliers for some reason?

    Other than that I have no explanation.

    • Matthew says:

      While yes, Medicaid is in high demand these days, since their reimbursements rates are paltry, I am surprised hospitals want to take on more Medicaid patients. Perhaps there is some silver lining for them that is not obvious.

  7. Flyover Country American says:

    That’s true, I wonder what data are available from other states to better determine the answer to this mystery.