The Medicaid Expansion & Why Hospital Pricing Peaks in 2013


More Republican states are expanding Medicaid fully (to 138 pct of the Federal Poverty Level, or FPL) than we projected. Persons between 101 and 138FPL are now more likely to be in Medicaid than in exchange-based commercial plans

Medicaid pricing to hospitals currently is 37 pct lower than commercial pricing; accordingly full Medicaid expansion brings a less attractive payor mix than would have been the case had the 101 to 138 FPL beneficiaries gone to commercial coverage. Knock-on effects are likely to lower Medicaid hospital rates further:

The larger Medicaid is as a pct of a state’s budget, the lower that state’s hospital payment rates tend to be. The 2014 Medicaid expansion, simply by (eventually) increasing the pct of state budgets going to Medicaid, should lower Medicaid hospital pricing by +/- 2.4 pct

The Affordable Care Act (ACA) raises physicians’ Medicaid payment rates to Medicare payment levels for 2013 and 2014, thus any Medicaid savings from rate changes must come from hospital payment rates in this period

The Administration recently has signaled its willingness to support states that have been challenged by hospitals for relatively large Medicaid rate cuts
On a weighted average basis across all payors, we believe hospitals’ pricing will be about 2.3 pct lower as a result of the full expansion of Medicaid to 138FPL, as compared to a partial expansion to 100FPL

Hospitals’ commercial pricing power arguably is as high as it has ever been as the kick-off of the exchanges approaches. However following an initial enrollment surge, we see commercial pricing weakening as exchange-based underwriters work to narrow provider networks, and as commercial beneficiaries (including employer-sponsored) shift to less generous plans (whose higher out-of-pocket liabilities are difficult for hospitals to collect, reducing net pricing)

We see further upside to Hospital share prices as volumes increase, whether on improving employment, the roll-out of the exchanges, or some combination of the two. However because we believe Hospital pricing will peak this year, we recommend rotating into Non-Rx Consumables (e.g. CFN, OMI) as 2014 approaches

For our full research notes, please visit our published research site.

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