As the uncertainty about healthcare reform was extinguished by the Supreme Court in its 5-4 decision upholding the Affordable Care Act, with the provision that the Department of Health and Human Services may not withhold Medicaid funding from states that refuse to adopt the Medicaid expansion, all states, including Kentucky, now have important decisions to make about expansion of Medicaid to a projected 22.3 million uninsured eligible individuals.  Under the Affordable Care Act, the federal government will pay the full cost of covering the newly eligible Medicaid participants for three years from 2014 to 2016.  Thereafter the federal share will gradually decline until it reaches 90% in 2020.  For traditional Medicaid, the federal government now pays, on average, about 57% of a state’s total Medicaid costs.  With 826,941 Kentucky Medicaid beneficiaries in January 2012, and an additional 290,000 individuals that would be covered under the expansion, Governor Steve Beshear has announced that he is studying the issues and the costs.

If states choose to expand eligibility, then the federal government will pay the majority of the costs for six years.  While this may seem like a “no brainer,” Texas, Mississippi, Florida, South Carolina, Louisiana and other states have already announced their intention to opt out.  These opt-out states all have greater than a 20% uninsured population — exactly the population that the Affordable Care Act strove to insure.  These states have opted out based upon a concern that federal funding will end leaving states with the financial burden of paying for the expansion.  States have also cited concerns about the additional administrative costs for the expansion, as well as a concern that individuals who are already eligible for Medicaid will now sign up for the program because of increased public awareness.  The cost of covering these individuals who are already eligible will be covered only at the traditional Medicaid federal funding rate.   These costs will not be considered to be expansion costs that will be fully covered by the Federal government.  Consequently, these opt-out states justify their decisions based upon the projected costs that the individual state may incur.

The mandatory expansion of Medicaid was an important element of the Affordable Care Act as providing health care benefits to uninsured was intended to achieve equity.  The expansion of Medicaid rolls was also intended to reduce the cost of providing care for the uninsured and the need for disproportionate share hospital funding, which is an adjustment to account for the needs of hospitals serving a large number of low-income patients.  With the ability to opt out of the Affordable Care Act’s expansion of Medicaid eligibility, the opt-out states may create financial problems for hospitals that depend on disproportionate share payments to cover part of their costs for providing unreimbursed services to the indigent and uninsured.  The Affordable Care Act’s decrease in disproportionate share payments to hospitals is not changed by the Supreme Court’s ruling.

 Generally, those hospitals serving the largest numbers of uninsured and Medicaid patients are organized as non-profit organizations that qualify for tax exempt status under IRC Section 501(c)(3).  The Affordable Care Act creates new requirements for these hospitals.  These new requirements mandate that a hospital conduct a community health needs assessment to assure that it is serving the needs of the community.  Hospitals will also be required to adopt an implementation strategy to meet the identified health needs.  In addition, non-profit hospitals must adopt a financial assistance policy and an emergency care policy.  Coupled with more scrutiny of non-profit hospitals to implement equitable financial assistance policies for the indigent and to justify their non-profit status by demonstrating that non-profit hospitals are meeting the needs of the community, non-profit tax exempt charitable hospitals may suffer if states opt out of the expansion and these hospitals lose disproportionate share payments.  Both Medicare and Medicaid disproportionate payments will be reduced starting in 2014.  The penalty for not conducting a community needs assessment and having financial assistance plans in place that meet the Affordable Care Act’s requirements can result in a disqualification for IRC 501(c) (3) tax-exempt status are also effective in 2014.

Currently, CMS has not announced a deadline for states to decide whether to participate in the expansion.  Because this is an election year, several states have announced that they will delay making the decision until the winner of the presidential election is known.  Meanwhile, states with the lowest rates of uninsured, such as Minnesota, Vermont and Massachusetts, have committed to the expansion.  With the increased focus on whether 501(c)(3) hospitals are meeting the needs of their communities, opting out of the Medicaid expansion, when coupled with decreasing payments for serving the uninsured and Medicaid populations, may mean even more difficult financial times for non-profit hospitals and their organizations.  Most analysts seem convinced that every state will eventually give in and accept the expansion funding because it is too much money to give up.  By accepting the federal awards for implementation of the state insurance exchanges, Governor Beshear seems intent on maximizing Kentucky’s federal dollars.  With the Medicaid expansion dollars still up in the air, Governor Beshear must decide whether these expansion dollars are the poison or the cure.