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The Supreme Court, Medicaid and Hospital Bankruptcies


The Business Advisor

February 21, 2013

The reelection of Barak Obama has saved the Patient Protection and Affordable Care Act of 2010 (“ACA”) from repeal–for the time being at least. The salvation of the ACA may lead to bankruptcy or insolvency for a number of hospitals dependent on Medicaid reimbursement as a significant source of revenue.

One of the crucial policies underlying the ACA was the expansion of access to health care for low- and moderate-income individuals. To that end, as a condition to their continued participation in the Medicaid program, the ACA required states to expand their Medicaid programs to cover all citizens with a family income of less than 133% of the federal poverty level. Citizens with incomes between 133% and 400% of the federal poverty level would be eligible for subsidies to purchase health insurance on exchanges to be established under the ACA. Citizens eligible for expanded Medicaid would not be eligible for subsidies to purchase health insurance on the exchange, and without those subsidies, would almost certainly be unable to do so. Anticipating that such payments would not be necessary once Medicaid was expanded and the insurance exchanges were operative, Congress included in the ACA a provision phasing out disproportionate share payments to hospitals that treated a higher than average number of poor patients who were ineligible for Medicaid.

Approximately half of the states objected to mandatory expansion of Medicaid and filed suit. On June 28, 2012, in Nat’l Fed. of Indep. Business v. Sebelius, 567 U.S. ___ (2012), the Supreme Court invalidated the Medicaid expansion provisions of the ACA as an unconstitutional coercion of state activity, but upheld the remaining provisions of the ACA that were subject to challenge. States are now free to remain in the Medicaid program without expanding eligibility, although they are not entitled to the expanded benefits available to states that increase Medicaid eligibility. The governor of Mississippi has indicated that Mississippi will not expand Medicaid eligibility.

The Supreme Court’s invalidation of the mandatory aspects of Medicaid expansion potentially imposes significant burdens on hospitals in states not expanding Medicaid eligibility. The Emergency Medical Treatment and Advanced Labor Act (“EMTALA”), 42 U.S.C. § 1395dd, requires hospitals to provide emergency treatment to patients in medical distress, even if they cannot pay. Most states, including New Jersey, impose charitable care requirements on hospitals, requiring the treatment of the poor. The federal government and a number of state governments (among the leaders in this regard, Illinois) are pressuring non-profit hospitals to demonstrate significant amounts of uncompensated charitable care as a condition to continuing eligibility for tax exemptions. Meanwhile, the ACA provisions reducing proportionate share payments to hospitals remain in effect, having not been addressed by the Supreme Court. The likely result is increased financial pressure on hospitals serving low income populations in states not expanding Medicaid eligibility. Their disproportionate share payments will shrink while their patient base will not. An uptick in hospital bankruptcies is, thus, a real possibility.