Drops in Bad Debt May Not Result in Better Operating Performance

Bad debt and charity care are decreasing for the first time in years, and the drop is significantly larger in states that expanded Medicaid, according to a new report from Moody’s Investors Service. However, authors of the report noted that hospitals in Medicaid expansion states “are not uniformly transforming lower bad debt expense into higher cash flow and are not reporting financial results that are marginally better or different from those in states that have not expanded Medicaid.”


Reduction in bad debt in hospitals in Medicaid expansion states has been impressive. During 2014, these states had reductions averaging 13 percent; some had reductions of 40 percent or more. Hospitals in non-expansion states had an increase in bad debt through much of the year. (Medicaid Expansion Linked to Lower Bad Debt Amid Improving Hospital Financials, Moody’s Investors Service, June 3, 2015)


Hospitals in all states improved their financial performance and there was no significant difference in the degree of improvement among expansion and non-expansion states. The authors of the report noted several reasons for this:


  • Many hospitals have difficulty translating bad debt reductions into stronger margins.
  • Hospitals in Medicaid expansion states had a lower bad debt rate than those in non-expansion states even before this component of the Affordable Care Act was implemented in 2013: 4.8 percent of median hospital revenue for hospitals in expansion states compared to 7.5 percent of median hospital revenue to hospitals in non-expansion states.
  • Macroeconomic factors, especially the improving economy and lower unemployment have a bigger impact than reductions in one expense line item.
  • Reductions in bad debt are overshadowed by other expense growth including salaries and pensions and strategic investments in population health management.
  • Hospitals in non-expansion states derive some benefit from “the ‘woodwork effect’ whereby more people enroll in insurance because there is more awareness of the issue.”


Moody’s expects more states to expand eligibility and that bad debt will then decline in the first year in those states. This would have a positive impact on these hospitals’ financial performance. The authors caution, however, that “a reduction in bad debt will not in and of itself result in stronger margins.” More important are the overall economic environment and hospitals’ ability to control other expenses.



(Note: iProtean thanks Moody’s Investors Service for permission to quote liberally from its report, Medicaid Expansion Linked to Lower Bad Debt Amid Improving Hospital Financials. iProtean subscribers can read the full report in several of the Finance courses’ Resources sections.)



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