The Affordable Care Act (ACA) helped millions of Americans gain access to health insurance. But what did it do for hospitals?

Because hospitals absorb the cost of caring for uninsured patients, it would follow that fewer uninsured patients would mean more savings. And according to new research from the Kellogg School, there has indeed been a decrease in the cost of “uncompensated care” that hospitals have to provide. But interestingly, this decrease has not been due to people buying insurance on the public exchanges. It has come instead from the expansion of Medicaid that became possible through the ACA.

Twenty-eight states and the District of Columbia opted to expand the income threshold to qualify for Medicaid. The researchers found that hospitals’ uncompensated care costs dropped significantly in those states that expanded eligibility for Medicaid, while the burden remained effectively unchanged in nonexpansion states.

In other words, the ACA has been a huge boon for hospitals in states that have expanded Medicaid.

But quantifying this drop in uncompensated care raises an important question about nonprofit hospitals: If their tax-exempt status is due in part to their coverage of the uninsured, do they need to make up for the fact that this burden is decreasing?

“We were very interested in the shifting nature of community benefits that nonprofit hospitals provided as the picture for uncompensated care changes," says Craig Garthwaite, an associate professor of strategy at the Kellogg School.

Measuring the ACA’s Impact

Garthwaite, along with strategy professor David Dranove, and strategy research assistant professor Christopher Ody, have been interested for some time in the economic effects of the ACA, which was signed into law in 2010. While the future of the ACA remains unclear, the professors’ studies shed light on its impact to date.

To focus on the cost of uncompensated care—any losses by the hospitals related to charity care and unpaid medical bills—the researchers used data from a total of 1,249 hospitals from 2011 to 2014. The study provides the first national estimates on the decrease in uncompensated care post-ACA.

“Hospitals in states that chose not to expand Medicaid are actively paying for that choice.”

They were able to study the effect of the Medicaid expansions by comparing hospitals in states that expanded Medicaid benefits with those in states that did not. “When the ACA was passed, it was thought all states would expand Medicaid,” Garthwaite says. “But the Supreme Court said that states weren’t obligated to accept the expansion.”

As expected, the findings revealed a much larger drop in uncompensated care in states where Medicaid expanded than in those where it did not.

On average, within one year of expansion, uncompensated care costs decreased from 4.1 percent to 3.1 percent of hospital operating costs in states that expanded Medicaid. These reductions were larger in hospitals that had greater pre-ACA uncompensated care burdens and in markets where more people were expected to take advantage of the Medicaid expansion to gain coverage

But not much changed in non-expansion states. “We found no real break from previous trends for uncompensated care in states that did not expand Medicaid,” Garthwaite says. That is despite the fact that many other ACA provisions—such as the federally subsidized insurance marketplaces—could have reduced the uncompensated care burden there.

That may change with time, Garthwaite explains. The healthcare plans in the marketplaces require enrollment prior to coverage, while Medicaid can be signed up for retroactively to cover a condition or injury even after treatment. Therefore, it could just be that some people who needed coverage did not sign up right away and as a result their healthcare has remained as uncompensated care.  After new enrollment windows open and these people receive coverage, there may be more of an effect.

The takeaway, then, is that the Medicaid expansion rather than other ACA components drove the initial reduction in the uncompensated care burden on hospitals. What is more, if the remaining states had opted to expand Medicaid, this would have reduced uncompensated care costs in those regions as well—an estimated drop from 5.7 percent of hospital operating costs to 4 percent. Instead, the burden in those states remains on hospitals. At this point, 19 states have not expanded Medicaid.

“The results are economically meaningful,” Garthwaite says. “Hospitals in states that chose not to expand Medicaid are actively paying for that choice.”

A New Burden for Nonprofit Hospitals

What are the implications of these findings for nonprofit hospitals? Since the 1970s, nonprofit hospital status has been based primarily on the provision of “community benefits,” including free or discounted care for patients who qualify, participation in government programs like Medicaid, and subsidized services. The majority of U.S. hospitals are nonprofits.

“With the Medicaid expansion,” Garthwaite says, “people believe that these hospitals will have the burden of uncompensated care lifted from them and placed on federal and state governments.”

If that is the case, it begs an important question. “If nonprofit hospitals, which pay no taxes in exchange for providing community benefits, have a lower burden of uncompensated care, what else are they doing to justify their tax-exempt status?” Garthwaite says.

Meaning, the researchers argue, nonprofit hospitals that are benefiting from the ACA’s Medicaid expansion should be providing greater or more affordable care than they did pre-ACA. Taxpayers are now footing the bill not only for the hospitals’ tax-exempt status but also for uncompensated care, via Medicaid. As the authors write, “This represents a direct transfer of taxpayer dollars to hospitals’ operating margins.”

What might hospitals do to make up for this?

“They could cut their prices,” Garthwaite says. “They could offer more free or reduced-price services. They could provide more community clinics. There are lots of ways they could increase their community benefits. But in general they should do more now that the nation as a whole is taking on a much larger burden of paying for uncompensated care and federally sponsored insurance.”

Garthwaite says hospitals should be expected to more rigorously document their community benefits as part of the requirement for their tax-exempt status. This would allow hospitals to tailor their community benefits to their populations, rather than mandating that all nonprofit hospitals provide the same specific benefits across the board.

In ongoing research, the team is examining exactly how hospitals are currently responding to the reduced burden of uncompensated care, including any changes to the price patients pay for care or the types of services provided.

“Regardless of future trends,” Garthwaite says, “something needs to be offered by hospitals to make up for the large reduction in the uncompensated care burden.”