Medicaid Expansion Tied to Fewer Financial Challenges for Rural Hospitals

Rural hospitals in states that have not implemented Medicaid expansion have faced steeper financial challenges than those in expansion states, according to an analysis from the Kaiser Family Foundation (KFF).

Rural hospitals experienced rocky financial environments before and during the COVID-19 pandemic. Pandemic-related government relief funds help alleviate some burdens, but accompanying labor shortages and rising expenses have allowed challenges to persist.

KFF researchers used RAND Hospital Data to assess rural hospital finances and how expanding Medicaid under the Affordable Care Act (ACA) could help rural facilities avoid closing their doors.

The 11 states that have yet to expand Medicaid account for 34 percent of rural hospitals in the country, based on 2021 hospital cost report data.

According to KFF, past research has found that Medicaid expansion has resulted in decreases in uncompensated care, increases in operating margins, and reductions in hospital and obstetric unit closures. Expanding Medicaid can help boost hospital finances because it extends coverage to uninsured patients who would otherwise qualify for charity care or be unable to pay their bills.

Before and during the pandemic, rural hospitals in non-expansion states had lower median operating margins compared to hospitals in states that had expanded Medicaid. Between July 2017 and June 2019, the median operating margin was 0.6 percent for facilities in non-expansion states and 1.3 percent for facilities in expansion states. For all rural hospitals, the median operating margin was 1 percent.

After the reception of government relief funds in 2020, including Phase 4 Provider Relief Funds and American Rescue Plan (ARP) rural funds, rural hospital margins improved. Between July 2019 and June 2021, the median operating margin for all rural facilities was 7.7 percent. Hospitals in expansion states still maintained higher operating margins at 8.5 percent compared to 5.6 percent for those in non-expansion states.

After subtracting relief funds, the median operating margin for rural hospitals fell to 3.9 percent. The median operating margin dropped to 4.9 percent for hospitals in expansion states and 2.6 percent for those in non-expansion states.

Rural hospital operating margins declined again between July 2021 and June 2022, even with continued relief funds. The median operating margin was 3.3 percent for all rural hospitals, 3.9 percent for hospitals in expansion states, and 2.1 percent for hospitals in non-expansion states.

Without relief funds, the median operating margin was 0.8 percent for all hospitals and 1.2 percent for facilities in states that expanded Medicaid. Meanwhile, the median operating margin was negative for hospitals in non-expansion states at -0.7 percent.

Going forward, rural hospital finances will likely continue to deteriorate, especially as COVID-19 relief funds have been largely depleted. In addition, on March 31, 2023, Medicaid’s continuous enrollment provision is ending, meaning between 5 and 14 million people may lose Medicaid coverage. As a result, uncompensated care costs for rural hospitals may increase.

The end of the COVID-19 public health emergency (PHE) on May 11, 2023, could also hurt hospital finances. A handful of healthcare policies will expire with the PHE’s end, including the 20 percent increase in the Medicare payment rate for hospitalized patients diagnosed with COVID-19.

Given the prediction of additional challenges, expanding Medicaid could help protect rural hospitals from closures in the 11 states that have not implemented expansion.

Policymakers have also introduced initiatives to support rural hospitals. The omnibus spending bill includes a two-year extension of Medicare payment adjustments targeted toward rural hospitals. Additionally, the new Rural Emergency Hospital (REH) designation aims to help rural facilities maintain emergency and outpatient services when they cannot continue to provide inpatient care.