As everyone in the healthcare industry (and the rest of the country) knows by now, on June 28, 2012, the U.S. Supreme Court upheld the provisions of the Patient Protection and Affordable Care Act of 2010, as amended by the Healthcare Education and Reconciliation Act of 2010 (“PPACA”) with the provision that the Department of Health and Human Services (“HHS”) may not withhold existing Medicaid funding from states that refuse to adopt the Medicaid expansion, but rather only new Medicaid funding associated with the expansion. In this issue of Health Reform IMPACT, we’ll address some of the major effects of the ruling on the healthcare industry, including primarily the effect of limiting the penalties for those states that do not adopt the Medicaid expansion. We will also discuss the industry impacts of the ruling.

Medicaid Expansion Ruling

The major consequence of the Court’s decision is that the Medicaid expansion – originally scheduled to become mandatory in all states starting in 2014 – is now optional. Many states may choose to accept the funds voluntarily, and, in fact, commenters have observed that, in that past, states have generally voluntarily subscribed to Medicaid expansions.[1] How many states will do so in this instance is unknown, however, and will depend on the unique circumstances, and possibly politics, of the state in question.[2] Under PPACA, the federal government will pay the full cost of covering those newly eligible for Medicaid for three years, from 2014 to 2016. The federal share will then gradually decline; it will be 90 percent, starting in 2020. For traditional Medicaid populations, the federal government pays an average of 57 percent of the total Medicaid costs in a state.

Will states opt out?

The heavy subsidization of this new Medicaid population by the federal government could make the expansion enticing to states, but many states are concerned about the additional costs that they must incur in order to administer an expanded program. In addition, some states are anticipating that, if individuals who are already eligible for Medicaid under current state rules learn about the expansion and apply for Medicaid, states will bear the increased financial burden because the new federal funds apply only to the newly eligible, or “expansion,” population. The Centers for Medicare & Medicaid Services (“CMS”) has estimated that state Medicaid spending would increase by more than 7 percent annually after the expansion.[3]

States may also wait for HHS to promulgate guidance on the issue. At the moment, there is no deadline for states to announce their choice to opt out because, until Thursday’s ruling, the expansion was mandatory.

Other Medicaid provisions in PPACA would likely apply even if a state chooses to opt out of the expansion. These provisions range from the mandated increase in primary care reimbursement rates to the mandated decreases in Disproportionate Share Hospital (“DSH”) funding. States also will have to determine how their decision will interact with the establishment of the Health Insurance Exchanges[4], whose development will proceed unchanged due to the Court’s upholding of the individual mandate, and must consider the flow of federal subsidies to support Exchanges in a particular state, keeping in mind the fact that Exchange subsidies are not available for very low income individuals (below 100 percent federal poverty level ).

There is large state variation in current adult eligibility levels, from under 25 percent to more than 200 percent of the federal poverty level (“FPL”).[5] If states like Montana, Nevada, and Texas, where Medicaid eligibility levels for adults are low, implement the expansion, Medicaid enrollment is expected to increase by at least 45 percent. If low-Medicaid eligibility states opt out of the expansion, however, they may create a coverage gap for individuals whose percentage of FPL is higher than the state’s current Medicaid eligibility levels but lower than the 100 percent FPL needed to qualify for Exchange subsidies. Conversely, in the District of Columbia, Massachusetts and Vermont, which already provide more expansive coverage to low income adults and parents, Medicaid enrollment is projected to increase by less than 10 percent.

Impact On Industry Segments

The complex interactions between the Medicaid program, the various insurance affordability subsidies and tax credits in PPACA, and the state-based Exchanges currently under development leave many unanswered questions. However, while no crystal ball is available, here are some preliminary thoughts on the ruling’s effect on various industry segments:

The Commercial Insurance Market

Commercial insurers subject to PPACA’s guaranteed issue provision are relying on the now-upheld individual mandate to broaden their pools of insurable individuals to include more healthy individuals and thereby spread their underwriting risk. However, under PPACA, for those not eligible for Medicaid, the minimum coverage that people will be required to buy starting in 2014 is at a much higher cost-sharing than typical employer-based coverage.[6] With standard 20 percent coinsurance, a bronze plan would have an estimated deductible of $4,375 for a single individual and double that for a family. This compares with an average single deductible of $2,498 in 2010 in the non-group market and an average of $675 in employer-sponsored PPO plans with deductibles in 2011. If a significant number of healthy non-Medicaid eligible individuals choose to pay the penalty rather than obtain coverage, insurers could face financial risk.

Hospitals and Other Healthcare Providers

Hospitals and other healthcare providers may see an increase in the number of insured patients and a decrease in uncompensated care costs as a result of the upholding of the individual mandate. However, this potential increase in revenue may be offset by the fact that (a) Medicaid expansion is now optional for states, [7] (b) DSH reductions remain in effect for hospitals, and (c) PPACA contains billions of dollars in reimbursement reductions in coming years for hospitals. Community and safety-net hospitals in states that do not adopt the Medicaid expansion may be particularly hard hit.

Accountable Care Organizations (“ACOs”) and New Care Delivery Models

ACOs now have a stamp of legitimacy and permanency due to the ruling.  An uptick in the funding of new types of care delivery entities should result.

Device and Pharma

Medical device and pharmaceutical companies should gain more customers as more people qualify for and obtain health insurance, and manufacturers of biosimilars should benefit from PPACA’s approval pathway for these types of drugs. However, the excise tax on device makers under PPACA will remain and the pharmaceutical industry will still be subject to PPACA’s physician payment “sunshine” provisions.

Technology Companies and Others Involved in Integration

As the trend to coordinated care increases under PPACA, investors will likely infuse more capital into technology, management, and infrastructure companies that can support clinical and legal integration of healthcare providers in various segments of the care spectrum.

[1] See “High Court Limits on Medicaid Expansion May Be Moot,” Law360, June 28, 2012.
[2] Some states have already implemented the Medicaid expansion. Starting in April 2010, PPACA provided states a new state plan option to cover adults with incomes up to 133percent FPL to get an early start on the 2014 Medicaid expansion. Since April of 2010, eight states (CA, CT, CO, DC, MN, MO, NJ, WA) have received approval to expand Medicaid to adults early through the new option and/or a Section 1115 waiver. See “States Getting a Jump Start on Health Reform’s Medicaid Expansion,” Kaiser Commission on Medicaid and the Uninsured, April 2012. Also, as of January 1, 2012, 29 states had approved or submitted plans to overhaul or build new Medicaid eligibility systems, taking advantage of a 90 percent federal funding match for the design, development, and implementation of major upgrades or new Medicaid eligibility systems, up from the regular 50 percent administrative matching rate. See, “Performing Under Pressure: Annual Findings of a 50-State Survey of Eligibility, Enrollment, Renewal, and Cost-Sharing Policies in Medicaid and CHIP,” Kaiser Commission on Medicaid and the Uninsured and the Georgetown University Center for Children and Families, 2012.
[3] See “National Health Expenditure Projections: Modest Annual Growth Until Coverage Expands And Economic Growth Accelerates,” Keehan et al., Health Affairs, June 2012.
[4] See our earlier issue of Health Reform IMPACT, “A Quick Primer On Exchanges.”
[5] This document shows the current stats on each state’s Medicaid income eligibility levels:
[6] See “Patient Cost-Sharing Under the Affordable Care Act,” Kaiser Family Foundation, April 2012.
[7] Indeed, the Court’s ruling calls into question somewhat the expected influx of newly-insured individuals. According to the Congressional Budget Office, about 17 million of the 33 million newly-insured would be eligible for the expanded Medicaid program, at a cost to the federal government of $930 billion from 2014 to 2022.
See “Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act,” March 2012.