Medicaid Expansion Opt-Out Could Hurt Hospitals, Localities More Than States

CHICAGO — States that opt out of the Medicaid expansion program under the new health care law might find that their safety-net hospitals and local governments bear the brunt of the decision, a municipal bond investment firm warned in a new report.

Evercore Wealth Management argued the decision will have less impact on state budgets than on local governments and hospitals, which carry much of the burden of caring for uninsured patients.

Evercore and other investors might shy away from bonds sold by hospitals and local governments located in states that do not join the expansion, as the issuers struggle with a high uninsured population and the loss of federal dollars that is part of the new law, Howard Cure, director of municipal research for the firm, said in the report, "Unwelcome Side Effects: The Financial Implications to States of the Affordable Care Act."

"The theory was that fewer people would be uninsured when the law takes effect, and safety-net hospitals would no longer need as much help to cover the costs of uncompensated care," he wrote. "But if a state opts not to expand Medicaid, many of the health care costs will remain without federal monies to subsidize this program."

Hospitals and the cities and counties that support them could see their borrowing costs spike.

"Investors are likely to demand a higher yield or totally avoid hospitals that are dependent upon a high proportion of governments unless they have significant balance sheet resources and strong market position to provide a financial cushion," Cure said.

Moody's Investors Service, meanwhile, put out its own report earlier this week saying that its ratings on states will likely not be affected by whether or not a state joins the Medicaid expansion.

Moody's believes the federal pledge to cover the expansion will make the costs manageable. Going forward, states will likely be more challenged by cuts taken as part of the effort to bring down the federal deficit, analysts said.

The Affordable Care Act, set to take effect in 2014, expands Medicaid to cover individuals with incomes below 133% of the federal poverty line. As part of the program, the federal government has pledged to cover 100% of all costs of the increased Medicaid enrollment before gradually scaling it back to 90% by 2020.

Medicaid is the largest single budget item for nearly all states, next to K-12 education. The federal matching rate averages 57% and varies depending on a state's income. It's one of the most difficult items to control in terms of costs, due to health care rates and federal program requirements.

The U.S. Supreme Court's July decision upholding the ACA ruled that states should be able to opt out of the Medicaid expansion provision, one of the new law's key provisions. Nearly a dozen states, including Texas and Florida, both of which serve large uninsured populations, have said they plan to opt out.

Lobbying from hospital and local government officials is expected to grow more intense in states where the governors, all Republican, have said they will not join.

The fate of the Affordable Care Act won't be clear until after the November election. But if the new law is upheld, "there could be severe implications on state and local finances in places that refuse to participate," Cure said in the report. "Bond transactions for these entities will be reassessed based on concerns over this situation."

The new law reduces so-called disproportionate share funding, federal dollars for hospitals that serve a high number of poor and uninsured patients, and hospitals located in states that opt out of Medicaid will still see this drop in such funding without the benefit of higher insured rates.

The financial impact could constrict access to capital markets and drive up borrowing costs for safety-net hospitals and local governments that support them, Cure said.

"There could be a financial gap in monetary support for hospitals that, because of their state's decision, do not benefit from expanded Medicaid insurance coverage," Cure said. "As a result, we will continue to remain cautious in investing directly in those hospital bonds or cities or counties that directly support these safety-net hospitals."

In its report, "State Ratings Not Likely Affected by Decisions on Joining Medicaid Expansion," Moody's said the outcome of the debate over the federal deficit poses bigger challenges to many states than the costs of expanding Medicaid under the new law.

Current proposals to bring down the deficit include trimming the Medicaid federal contribution rate, reductions of federal aid to safety-net hospitals and limitations on states' ability to tax health care providers to fund Medicaid, according to analysts.

"Our state ratings currently reflect the impact of Medicaid on state finances, including a moderate degree of risk that the program's future funding could be negatively affected due to the federal fiscal outlook," the report said. "However, a change in our view of that level of risk could affect state ratings. How states respond to underlying cost drivers going forward, and to any new federal actions, will determine the extent of any effect on ratings. Near-term decisions by individual states on whether to participate in the program expansion are not in themselves expected to result in any state rating actions."

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