Financial Impacts of Medicare Expansion Proposals on Hospitals Appear Daunting

By Jeff Leibach, Jeff Goldsmith, and Kurt Eicher for HFMA

The next Presidential election is over a year away, but it already is clear the idea of expanding the 60-million-person Medicare program will take center stage in the healthcare policy debate. As an alternative to Republican efforts to repeal and replace the Affordable Care Act, Democratic candidates have put forward various healthcare reform proposals that expand Medicare to various degrees. The proposals have different prospects for adoption, depending on the extent to which Democrats end up controlling both the Presidency and Congress. The crucial concern for the nation’s hospitals and health systems is the potential impact of Medicare expansion on their finances if some version of it were to be adopted. 

With this concern in mind, we analyzed the financial impact of three different Medicare expansion scenarios on a hypothetical medium-sized multihospital system. Our analysis reached one broad conclusion: The greater the degree of Medicare expansion, the greater the financial stress on hospitals. With any of these approaches, a health system’s ability to weather the impact will depend on the strength and coherence of its revenue and expense control strategies. 

How a Medicare expansion differs from the ACA coverage expansions
The last major health insurance coverage expansion, the 2010 Affordable Care Act, used two main levers to increase health coverage: Medicaid and commercial insurance. Both were fraught with implementation challenges. The decision whether to expand Medicaid coverage was left to the states by the Supreme Court in 2012. The health exchange experiment – both federal and state – proved technically complex and fragile, falling far short of enrollment expectations. 

By contrast, Medicare expansion relies on a popular national program with a largely settled payment methodology. Unlike Medicaid, it does not rely upon the voluntary collaboration of 50 state governors and legislatures. Unlike private insurance, whose competitive structure and costs vary dramatically between communities, Medicare has a relatively uniform and predictable cost profile. Because Medicare pays providers considerably less than commercial insurers, the budgetary “savings” to the federal government from relying on Medicare rates reduces the cost of a coverage expansion. Yet these lower payment rates pose a major concern for hospitals and health systems because, to the degree that Medicare substitutes for commercial health insurance, it markedly reduces hospital revenues and disrupts the already delicate balance of cross-subsidization between higher commercial rates and lower government rates.

Read more: Financial impacts of Medicare expansion proposals on hospitals appear daunting

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