Medicaid Redeterminations Create New Financial Challenges for Hospitals

Hospitals and health systems have been operating in the most challenging financial environment in history, and now they face another looming headwind—the impact of Medicaid redeterminations.

As of late July, more than 3.6 million Americans have been disenrolled from Medicaid, a process that began after the federal government ended the COVID-19-related declaration of a public health emergency (PHE), according to the Kaiser Family Foundation (KFF). As the number inevitably grows, it is likely to exact a toll on hospitals in terms of lower reimbursement, more bad debt, more charity care, increased emergency department (ED) utilization, and challenges for revenue cycle management (RCM) leaders.

Medicaid redeterminations are occurring at a particularly vulnerable time for US hospitals, many of which are still reeling financially and operationally from the effects of the pandemic and subsequent labor shortages. For example, the median year-to-date operating margin index for hospitals was 0.0% in April, according to Kaufman Hall. With operating margins remaining at or below zero, hospitals have little financial flexibility to grapple with new obstacles.

A significant contributing factor to tight margins has been escalating labor costs, a separate report from Becker’s Hospital Review found. Specifically, labor expenses for health systems increased 20% between March 2022 and March 2023, driven primarily by the growth of contract labor. In 2023, contract labor wages have remained more than 150% higher than prepandemic levels.

As hospitals confront inflated expenses and operating margins that may never recover, they must develop new strategic plans to cope with these new financial realities.

Medicaid Redeterminations Lead to Widespread Loss of Coverage
Near the beginning of the pandemic, the federal government passed a law requiring state Medicaid programs to keep patients continuously enrolled through the end of the PHE in exchange for additional federal funding. The PHE expired earlier this year, along with the continuous enrollment provision, meaning that states can begin redetermining Medicaid patients’ eligibility for the program. State Medicaid agencies must maintain up-to-date contact information for patients and attempt to contact enrollees prior to disenrollment.

The KFF estimates that 8 to 24 million people will lose Medicaid coverage during the unwinding of the continuous enrollment provision, and many of those patients are unlikely to have any idea that it is happening. For example, a survey of Medicaid enrollees found that most were unaware that states could resume disenrollments, and two-thirds said that they have not had a change in income or circumstance that would make them ineligible for Medicaid. These results suggest that many of the patients likely to be disenrolled from Medicaid are still eligible for the program, according to the KFF.

Early evidence bears this out. Of the 3.6 million disenrollments that have occurred so far across 37 reporting states and Washington, DC, 75% have occurred for procedural reasons as opposed to lack of patient eligibility.Procedural disenrollment refers to cases in which patients are disenrolled from Medicaid because they did not complete the renewal process. These cases often occur when a state has outdated contact information or because an enrollee does not understand or otherwise does not complete renewal packets within a specific timeframe. In some cases, patients may schedule and show up for appointments at providers’ offices without realizing they no longer have Medicaid coverage.

Like all Medicaid redetermination policies, procedural disenrollments vary widely by state. For example, 95% of all disenrollments in South Carolina have occurred for procedural reasons—with the other 5% having been determined ineligible for Medicaid—while just 15% of disenrollments in Alaska were related to procedural factors, according to the KFF.

Additionally, states are approaching the unwinding differently, leading to a variation in disenrollment numbers across reporting states. Forty-two states plan to take at least 12 months to complete renewals in hopes of preventing inappropriate terminations, while states like Arkansas are adopting a very aggressive 6-month timeline. The widespread variation in states’ redetermination policies adds to the complexity for providers of caring for Medicaid patients and trying to help this vulnerable population navigate the complexities of the US health care system.

What Providers Should Expect
The unavoidable truth of Medicaid redetermination is that health systems are likely to suffer, at least in the near term. Here’s what providers should expect as the process continues to unfold:

• More ED visits and charity care: As patients lose Medicaid coverage, some of those with chronic conditions are likely to cancel regular check-ups with their primary care physicians, causing their conditions to worsen; the result for hospitals will be more spent on charity care and increased patient visits to the ED than would have otherwise occurred had these patients maintained continuous coverage
• Increased emphasis on eligibility verification: In the realm of RCM, it will be essential for providers to streamline Medicaid-eligibility determination workflows prior to care delivery; if patients are found to be eligible but coverage has lapsed, providers can work with patients to ensure they complete re-enrollment paperwork
• The need to adjust models of care: Providers must continue the trend in recent years of shifting to more outpatient care over more costly, resource-intensive inpatient care; similarly, health systems can continue to trim unnecessary costs by transitioning what was once outpatient care to in-home models Regardless, care, quality, cost, and efficiency must be top-of-mind when determining the most appropriate sites of care

When it comes to Medicaid redetermination, there is only so much that providers can control. The effects on providers will vary extensively based on factors such as location, patient mix, and organizational mission. However, providers can be certain that more redeterminations are on the horizon, driving the need to prepare for another new financial reality.