5.7 Billion Reasons Hospital Third-Quarter Profits Look Good

As more Americans are covered by insurance under the Affordable Care Act, both the number and amount of unpaid medical bills are dropping. This is a trend investors can expect to see benefit hospital operators' third-quarter earnings, which will begin to be reported next month.

The Obama administration issued a report (link opens a PDF) last week on the impact of insurance expansion on so-called "uncompensated care," which is essentially costs hospitals incur when patients are uninsured and can't pay all or some of their medical bills. For just this year, uncompensated care costs are expected to be "$5.7 billion lower in 2014 than they otherwise would have been," according to the Office of the Assistant Secretary for Planning and Evaluation, or ASPE, of the U.S. Department of Health and Human Services. "This represents a 16 percent reduction from baseline uncompensated care spending."

This news is good for hospital companies like Tenet Healthcare Corp. , HCA HoldingsCommunity Heath Systems , Lifepoint Hospitals and Universal Health Services , which all have for years now seen expenses rise, particularly in the costly emergency room, where most uninsured Americans come for care. In recent years, uncompensated care costs have risen to historic levels as more people fell into the ranks of the uninsured as the economy worsened.

"Though hospitals are not the only providers of uncompensated care, on a cost basis they provide the majority of such care," the ASPE office of health policy report said. Hospitals incur 60% of uncompensated care costs while the remaining 40% are incurred by "publicly supported community providers and office-based physicians."

When hospital operators report their third-quarter earnings in October and November, investors might see the spread widening between revenue and expenses in the form of higher earnings. In the ASPE report, major for-profit chains were key to the analysis, with the decline in uncompensated care costs continuing to fall as Americans gained health coverage, particularly those who gained Medicaid coverage for poor Americans.

Tenet, for example, saw its percentage in the volume of uninsured admissions fall 5% from the first quarter of 2013 to the first quarter of 2014. Watch for this to continue to fall, because the signup for Medicaid is ongoing and not limited to an open enrollment period.

A wild card going forward for hospital operators will be whether the remaining two dozen or so states yet to go along with the health law's Medicaid expansion do so. Uncompensated care remains a problem, particularly in states that didn't expand Medicaid.

The federal government, which has historically picked up about half of the cost of Medicaid and left the balance for states, picks up the entire tab through 2016 under the expansion. States, over time, pick up some costs starting in 2017; but even by 2020, the federal government is paying for 90% of the costs of Medicaid expansion.

At least one hospital lobby said its member hospitals, which tend to be located in inner cities and rural areas and are operated by local governments, are bracing for continued high uncompensated care costs.

"Even in states that have expanded Medicaid, our members continue to face the burden of Medicaid payment rates that fall well short of the true cost of care," said Dr. Bruce Siegel, president and chief executive officer of America's Essential Hospitals. "Similarly, coverage expansion through the health insurance marketplace only goes so far toward easing the strain of uncompensated care: Even with ACA premium subsidies, the cost of insurance may remain out of reach for many people of limited financial means."

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The article 5.7 Billion Reasons Hospital Third-Quarter Profits Look Good originally appeared on Fool.com.

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