How the budget bill will impact hospital finances

The first report, released by the Urban Institute and the Robert Wood Johnson Foundation, found that Medicaid provisions in the budget bill would reduce Medicaid payments to hospitals by $321 billion over 10 years. As a result, hospitals would see a $63 billion increase in uncompensated care.

The report also said healthcare providers may increase costs for insured patients to make up for losses in uncompensated care. However, according to TJ Burdine, a senior director at Optum Advisory*, "this cost shift strategy is not a feasible short-term tactic. The ability of most small hospitals, or even large health systems, to rapidly respond in this manner is handcuffed due to multiyear payer agreements with defined fee schedules that cannot be unilaterally changed and instead take time to renegotiate."

The first report also found that doctors would see an $81 billion cut in Medicaid funding and a $24 billion increase in uncompensated care. Meanwhile, spending on prescription drugs would decrease by $191 billion and there would be a $205 billion spending reduction coming from the rest of healthcare services. The Congressional Budget Office (CBO) has estimated that the bill would lead to nearly 11 million Americans losing their health insurance.

Federal healthcare spending would drop the most in California, by $100 billion, while Texas would experience a $67.5 billion cut in federal spending, New York a $61.6 billion cut, and Florida a $55.8 billion cut.

The report also detailed the impact of expiring enhanced premium subsidies for insurance purchased on the Affordable Care Act (ACA) marketplaces. Those tax credits are slated to expire at the end of the year and Congressional Republicans likely won't extend them in the tax bill.

If those subsidies aren't extended, CBO has estimated that around 5 million more people would lose their insurance. The report said those estimates would translate to an additional $103 billion loss to hospitals, a $39 billion cut to doctors, and a $50 billion reduction in prescription drug spending. Funding for all other healthcare services would be reduced by $70 billion.

A version of the budget bill released by the Senate Finance Committee makes even further cuts that could impact hospitals.

In the House bill, provider taxes, which are used by 49 states, would be frozen at current levels and new approvals would be barred. However, in the Senate version, provider taxes would only be frozen in states that have not expanded Medicaid. Expansion states would see their threshold amounts drop by 0.5% each year until they hit 3.5% in 2031. The Senate's version of the bill would also eliminate a type of provider tax that some states impose on private insurers who administer Medicaid benefits.

Advisory Board's Sebastian Beckmann noted that Advisory Board modeling has also found a "significant policy impact on health system finances" resulting from the budget bill.

"We've modeled the margin impact based on increased expenses from a range of policies including increased uncompensated care and tariffs as well as reduced revenue from Medicaid cuts, Medicaid sequestration, and sunsetting ACA subsidies," he said. "Based on our current modeling, we expect a 16-percentage point impact on operating margins for health systems with between $1 billion and $2 billion in revenue. Since the median operating margin in that cohort today is just 1%, without changes, this set of policies could place a majority of health systems in the red."

Beckmann said that health systems need to "prioritize their response based on the magnitude and timing of individual policies. For example, health systems with greater Medicaid exposure should prioritize enrollment efforts to reduce uninsurance in their markets."

How the bill would impact rural hospitals and access to care

Meanwhile, a second report from the Cecil G. Sheps Center for Health Services Research found that the budget bill would cause hundreds of rural hospitals to risk closure, service reductions, or ending inpatient care. Many of these hospitals are located in Kentucky, Louisiana, California, and Oklahoma.

"It's very clear that Medicaid cuts will result in rural hospital closures," said Alan Morgan, CEO of the National Rural Health Association.

Many rural hospitals operate on very thin, if not negative, margins, and proposed cuts to Medicaid in the bill would further erode hospitals' ability to maintain services and stay open. According to a report from Chartis, a health analytics and consulting firm, Medicaid brings in $12.2 billion or nearly 10% of rural hospital net revenue.

A 15% cut to Medicaid would lead rural hospitals to collectively lose more than $1.8 billion, which is roughly equivalent to 21,000 full-time hospital employees' salaries.

Hospitals that can stay afloat amid cuts would likely do so by cutting services especially dependent on Medicaid reimbursements like labor and delivery units, mental healthcare, and EDs.

Adam Gaffney, a critical care physician and assistant professor at Harvard Medical School, said that under the Senate's proposed version of the bill, rural hospitals would likely be forced to reduce their services, cut staff, or close entirely. In addition, many patients would likely die as they will no longer have a hospital nearby.

A report from the Pew Research Center found that rural Americans live an average of 10.5 miles or 17 minutes from the nearest hospital, which is around twice as far and five to seven minutes longer than people in suburban and urban areas.

"There's no way around it. It's just basic math," Gaffney said. "It means more harm, and more people will die from lack of care."

Kevin Stansbury, CEO of the Lincoln Community Hospital, a 25-bed rural hospital in Hugo, Colorado, said his hospital is unlikely to survive under the proposed bill. Stansbury said his hospital serves an area roughly the size of Connecticut but only has around two providers per square mile. Around 25% of his patients are on Medicaid.

Stansbury added that his hospital receives around $300,000 a month in provider tax reimbursements, which he said are "essential for us to keep our doors open" and still just enough to break even. Without the 6% provider tax rate, Stansbury said he'll likely have to start cutting services for patients, including long-term care.

Rural hospitals' margins have been declining for 10 to 15 years, according to Michael Topchik, executive director for the Chartis Center for Rural Health. A decade ago, around a third of rural hospitals were operating in the red. That number is closer to 50% now, Topchik said, and it's even higher in the 10 states that didn't expand Medicaid eligibility under the ACA, with 53% of rural hospitals in those states operating in the red and more than 200 vulnerable to closure.

Some rural hospitals have responded to financial pressures by joining larger networks like Intermountain Health or Sanford Health, which are connected to facilities throughout the Midwest and Mountain West. However, around half of rural hospitals are still independent, Topchik said, and they struggle with the collision of low patient volume and high fixed costs.

"We can't Henry Ford our way out of this by increasing volumes to dilute costs and reduce prices," Topchik said. "It's expensive, and that's the reason the federal government, for a long time, has reimbursed rural hospitals in a variety of manners to help keep them whole."

*Advisory Board is a subsidiary of Optum. All Advisory Board research, expert perspectives, and recommendations remain independent.