The Impact of Proposed Federal Medicaid Work Requirements on Hospital Revenues and Financial Margins

Abstract

• Issue: Analyses of mandatory federal work requirements for Americans covered by the Affordable Care Act’s Medicaid eligibility expansion have focused on potential coverage losses, overlooking the financial impact on health care providers.
• Goal: To assess the financial impact of the work requirement policy on hospitals in affected states.
• Methods: We used Urban Institute estimates of coverage losses to project the financial impact on acute-care hospitals.
• Key Findings and Conclusion: Hospitals in Medicaid expansion states could see operating margins reduced by an average of 11.7 percent to 13.3 percent. Safety-net hospitals could be disproportionately impacted: their operating margins could fall by an average of 25.9 percent to 29.6 percent, and even more in certain states and in rural areas. Both Medicaid enrollees and the broader communities that hospitals serve would likely be affected, as lower revenues and increased uncompensated care costs could force hospitals to reduce staff or eliminate services.

Background

Congress recently passed unprecedented cuts to federal Medicaid spending that will not only impact beneficiaries but the entire safety-net system that serves a wide array of patients and families. To achieve a large portion of these cuts, lawmakers adopted mandatory federal work requirements for people who qualified for Medicaid through the Affordable Care Act’s (ACA) expansion of eligibility. Under this policy, enrollees ages 19 to 64 must engage in at least 80 hours per month of community engagement activities (such as work, volunteering, or enrollment in an educational program) and must verify these activities twice a year to retain coverage. The law exempts caregivers of dependent children under age 14, people with disabilities, people who are pregnant, and several other groups.¹

Forty states, along with the District of Columbia, have expanded Medicaid eligibility to nonelderly adults with incomes up to 138 percent of the federal poverty level (FPL) — more than 16 million people in 2024.² In these states, Medicaid beneficiaries could lose health insurance if they cannot find work, are unable to document the required number of hours they work, or cannot document an exemption. While the vast majority of Medicaid beneficiaries subject to the requirements either work or qualify for an exemption, millions could lose coverage because of difficulties they experience in navigating complex work-reporting and verification systems or the work-requirement exemption process. Others who could lose their Medicaid are people who have been laid off or are temporarily unemployed.

While the work requirement policy could generate federal and state savings by reducing the number of people that receive Medicaid insurance, it could leave many uninsured. This would lead to lower revenues and higher uncompensated care costs for hospitals.

Alongside the potential loss of coverage for Medicaid beneficiaries is the work requirement policy’s impact on hospitals — a subject that has received less attention. Coverage losses will affect hospitals by reducing their revenue and increasing uncompensated care costs. These adverse outcomes will affect not only Medicaid patients but the broader community as well, since lower revenues and increased uncompensated care could force many hospitals to reduce staff and payroll or eliminate important clinical services used by all patients.³

Based on the impact that Arkansas and New Hampshire’s state work requirement programs had prior to their halt in 2019, the Urban Institute has estimated that about 5.5 million to 6.3 million people across all Medicaid expansion states would lose access to coverage if such a policy were fully implemented in 2026.⁴ Although the Urban Institute report did not attempt to estimate the number of people losing Medicaid coverage who would become uninsured, our estimates show that 5.1 million to 5.8 million people would become uninsured and that 400,000 to 500,000 individuals would either enroll in employer-sponsored health coverage or purchase nongroup health insurance (see “How We Conducted This Study” for details). In comparison, the Congressional Budget Office (CBO) estimated that 5.2 million people would lose Medicaid coverage and 4.8 million would become uninsured by 2034.⁵ The Urban Institute study assumed that Medicaid agencies would rely on existing state databases to automatically determine whether enrollees are meeting work requirements or are exempt from the policy, using data-matching processes similar to those that Arkansas and New Hampshire used previously. The study’s estimates also assumed that noncompliance rates for people not automatically exempted from the reporting requirement are consistent with the noncompliance rates observed in Arkansas (with a low-range estimate of 72%) and New Hampshire (with a high-range estimate of 82%).

In this brief, we examine the potential financial impact of federal mandatory work requirements on hospitals once the new policy is implemented for Medicaid expansion enrollees in 40 states and the District of Columbia. Our analysis provides high- and low-range estimates of the impact of Medicaid coverage loss on revenues, uncompensated care costs, and financial margins for hospitals in the affected states. For modeling purposes, we assume the policy is fully implemented in all expansion states in 2027. We present impact estimates by state and focus on two specific subgroups of hospitals: safety-net hospitals and rural hospitals (see “How We Conducted This Study” for details).

How Medicaid Coverage Losses Impact Hospital Finances

Reductions in Medicaid coverage will decrease Medicaid payments and increase uncompensated care costs, resulting in lower hospital operating margins. Exhibit 1 shows the projected baseline revenues and expenses by payer source under current laws for 2,958 general acute-care hospitals in the 40 expansion states and the District of Columbia, compared to projections if the proposed work requirement policy were to be fully implemented.

The Dobson | DaVanzo Hospital Finance Simulation Model (HFSM) incorporates the following dynamics of how changes in coverage across a population would affect hospital utilization, costs, and revenues:

1. The Urban Institute estimates that about 5.5 million to 6.3 million Americans would lose Medicaid coverage. Based on this projected level of coverage loss, the HFSM estimates that hospitals’ expenses for Medicaid patients would decline by $13.7 billion to $15.5 billion (−8.8% to −10.0%) and corresponding revenues would decline by $12.2 billion to $13.8 billion (−8.7% to −9.9%).
2. We estimate that of those who lose Medicaid coverage, about 5.1 million to 5.8 million would become uninsured. With this change in coverage status, the HFSM estimates that hospitals’ uncompensated care expenses would increase by $7.0 billion to $8.0 billion (29.5% to 33.6%), as former Medicaid beneficiaries lose their coverage and become uninsured.
3. We further estimate that of the Americans losing their Medicaid coverage, about 0.4 million to 0.5 million would either enroll in employer-sponsored health insurance or purchase nongroup health plans. For this segment, the HFSM estimates that hospitals’ expenses for commercially insured patients would increase by $1.1 billion to $1.2 billion (0.2%) and corresponding revenues would increase by $1.3 billion to $1.5 billion (0.2%), based on the assumption that payment rates would remain similar to those for current commercially insured patients.

The work requirement policy would reduce hospital expenses by $5.5 billion to $6.3 billion because people use hospital services less when uninsured compared to being covered by public or commercial insurance. As such, hospital revenues are projected to decline by $10.9 billion to $12.4 billion (representing $12.2 billion to $13.8 billion in Medicaid revenue reductions partially offset by a $1.3 billion to $1.5 billion increase in commercial insurance revenues). Thus, hospital net operating income is projected to decline, resulting in hospital operating margins falling by 11.7 percent to 13.3 percent.

To help offset increased uncompensated care costs in hospitals, Medicare could increase disproportionate share hospital payments and uncompensated care payments to hospitals. Local governments also could increase tax appropriations to hospitals for uncompensated care. However, we did not assume that these amounts change in this analysis.

How Medicaid Coverage Losses Impact Safety-Net Hospitals

The financial impact of the proposed work requirement policy on hospitals will vary dramatically across different groups of hospitals, depending on their patient–payer mix and the level of Medicaid expansion enrollment in their respective states. Safety-net hospitals would likely be disproportionately impacted because they treat a higher share of Medicaid and low-income patients.

On average, the 567 safety-net hospitals identified in this study located in Medicaid expansion states are estimated to receive about $90 million per hospital in Medicaid revenues (24% of net patient care revenues) and provide $10.3 million per hospital in uncompensated care (2.6% of total operating expenses) in 2027 (see Appendix B for a list of these hospitals). In contrast, other acute-care hospitals are estimated to receive about $37 million per hospital in Medicaid revenues (10% of net patient care revenues) and provide $7.5 million per hospital in uncompensated care (1.9% of total operating expenses).

Net operating income for safety-net hospitals would decline by $2.4 billion to $2.8 billion, which would reduce operating margins by 25.9 percent to 29.6 percent (Exhibit 2).

Safety-net hospitals are heavily dependent on revenues from treating Medicaid patients. As a result, the reduction in Medicaid revenues due to implementation of work requirements would have a larger impact on total operating revenue loss (−1.8% to −2.0%) compared to the average across all hospitals (−0.9% to −1.0%). Because most of these Medicaid patients would likely become uninsured, safety-net hospitals would experience a larger increase in uncompensated care costs (38.2% to 43.5%) compared to the average across all hospitals (29.5% to 33.6%).

Net operating income would decline by $2.4 billion to $2.8 billion (a reduction of 27.2% to 31.0%), which would result in a 25.9 percent to 29.6 percent decrease in operating margins for safety-net hospitals compared to 11.7 percent to 13.3 percent across all acute-care hospitals.

State-Level Impacts of Medicaid Coverage Losses on Safety-Net Hospitals

While all expansion states would be impacted by the introduction of mandatory federal work requirements for expansion populations, the financial impact on hospitals would vary across states depending on the size of the state’s Medicaid expansion population. Additionally, safety-net hospitals in expansion states have benefited from reduced uncompensated care costs, a benefit that would be reversed.

Safety-net hospitals in 14 states could see Medicaid revenues decline by 10 percent or more, and safety-net hospitals in 11 states could see uncompensated care costs increase by 50 percent or more (Exhibit 3). (Appendix A1 and Appendix A2 contain additional information about the impacts on safety-net hospitals and rural hospitals in each state.) We estimate that safety-net hospitals in the District of Columbia and Nevada will see the largest reductions in operating margins, because these hospitals are heavily dependent on revenues from Medicaid patients, where nearly 40 percent of their total revenues comes from Medicaid patients. The large coverage losses predicted in these two states will result in large declines in both Medicaid and total revenues for safety-net hospitals, which will have an adverse impact on operating margins.

How Medicaid Coverage Losses Impact Rural Safety-Net Hospitals

Among safety-net hospitals, those in rural areas would be most severely impacted by mandatory federal work requirements for the Medicaid expansion population.⁶ Rural hospitals already run on slim operating margins and operate at a loss with respect to patient care margins. Negative patient care margins mean that payments to hospitals for treating patients are insufficient to cover operating costs. Therefore, hospitals need to find other revenue sources (such as the sale of medical and surgical supplies and drugs to people other than patients) to cover these losses, which may or may not be sustainable in the long term. For the 316 rural safety-net hospitals in expansion states, the proposed work requirement policy would reduce net operating income by 24.6 percent to 28.0 percent, further eroding operating margins for these already struggling hospitals (Exhibit 4).

Hospitals in rural communities have been closing at an alarming rate. Since 2005, 194 rural hospitals have either closed or converted to providing only outpatient services, and a further reduction in operating margins would likely intensify this trend.⁷ More than 700 rural hospitals (a third of all rural hospitals) are currently at risk of closing because of serious financial problems, including losses on patient services, insufficient revenues from other sources to offset these losses, and low financial reserves, and more than 300 are at immediate risk of closure.⁸

Discussion

The Affordable Care Act’s Medicaid expansion improved many hospitals’ financial stability, allowing them to hire new staff and maintain or offer new services to their communities. These improvements would be jeopardized if people enrolled through the expansion were to lose health insurance coverage because of mandatory federal work requirements.

Between 5.1 million and 5.8 million people could lose their Medicaid coverage and become uninsured as a result of the federal work requirements. The 2027 implementation date means that states may not have sufficient time to modify their systems to automatically verify whether people are employed or exempt at the same rates seen previously in Arkansas and New Hampshire. Without this infrastructure, many Medicaid expansion enrollees will be forced to manually verify their community engagement activity or exemption status, increasing the likelihood that eligible people will lose coverage because of the reporting process.

Alongside impacting hospital and Medicaid enrollees, the work requirement policy also will affect each hospital’s surrounding community, particularly hospitals in poor or rural areas. The combined effects of Medicaid work requirements on safety net hospitals and community health centers could leave communities with little to no access to primary, specialty, or emergency care, significantly increasing travel times for routine and emergency health needs.⁹

With many rural hospitals already experiencing negative operating margins, further reductions in Medicaid revenue and increases in uncompensated care could force hospitals to reduce costs by eliminating services that would affect all members of their community; cause them to offset the loss of revenue in part by increasing rates to privately insured patients; or accelerate hospital closures.¹⁰

The direct effect on hospitals is just one aspect of the economic impact work requirements could have on Medicaid expansion states.¹¹ The policy also could reduce access to health care for all people in the community and increase the costs for everyone, as hospitals raise rates to make up the lost revenue.