Two items caught my eye last week that reminded me of the domino effect a state’s rejection of federal funding for the Affordable Care Act’s Medicaid option can have on its health care system.

First, a new report  “States  Refusing Medicaid Expansion Fuel Worst Losses” by Bloomberg’s Brian Chappatta explained that hospitals and health care systems  in states that did not opt into the ACA’s Medicaid option wound up paying higher interest rates on their bonds than those in other states. The reason?  Investors saw them as bigger credit risks because they would continue to be on the hook for higher levels of uncompensated care  since low-income residents wouldn’t get the Medicaid coverage intended for them under the ACA. According to Chappatta’s source in the municipal bond industry, things will get worse for hospitals if states don’t move forward on Medicaid.

“We’re going to see spread widening on hospitals in states that are not expanding versus states that are expanding,” said Todd Sisson of Wells Capital Management. “States that aren’t expanding Medicaid are still going to have a high percentage of the uninsured. The hospitals are going to lose a lot of money.”

Second, HHS released the final rules on how the reductions to Medicaid Disproportionate Share Hospital (DSH) payments would be implemented. In anticipation of a reduction in the number of uninsured people and lower uncompensated care costs, the Affordable Care Act included a reduction in DSH payments to hospitals that serve large numbers of low-income individuals.

The big questions on the DSH reg surrounded how to allocate DSH cuts to states that had so far rejected the federal funding for the ACA Medicaid option. As Washington and Lee Professor Tim Jost pointed out on the Health Affairs blog:

“These states will obviously have higher levels of uninsured residents and of uncompensated care.  A formula based on these factors, therefore, would result in lower DSH payment reductions for states that do not expand Medicaid.  On the other hand, it seems perverse to reward states that do not expand and to impose larger reductions on states that do.”

The final rule keeps the reductions in place for all states for 2014 and 2015.  Hopefully the dust will settle by then and more states will have accepted the Medicaid option and reduced uninsured rates.