(Bloomberg) — With 15 U.S. states opting out of President Barack Obama’s Medicaid expansion, hospitals that treat poor and uninsured patients are asking the government to delay $64 billion in planned funding cuts.

Medicaid funds to hospitals with a disproportionate share of low-income patients will be cut 50%, or $14.1 billion, from fiscal 2014 through 2019, according to draft regulations published in the Federal Register today. The American Hospital Association wants to delay by two years the start of the cuts for Medicaid and for $49.9 billion in reductions by Medicare, the health program for the elderly and disabled.

“They decided not to look at the effect of health care reform,” says Tom Nickels, senior vice president for federal relations in Washington for the hospital association. “They don’t penalize states that have chosen not to expand.”

The reductions are mandated by President Barack Obama’s Affordable Care Act, and were supposed to be offset by an increase in the number of patients who would gain insurance through an expansion of state Medicaid programs. With some Republican-led states deciding not to cooperate, a loss of funding without a gain in more insured patients would hamper hospitals ability to keep caring for underserved populations.

“It’s a kick in the gut,” says John Bluford, chief executive officer of Truman Medical Centers in Kansas City, Missouri, which estimates it may lose as much as $150 million in Medicaid payments over seven years. “These are real dollars. It would wipe out our margins.”

Tenet profit

The rules being circulated this week show Medicaid would reduce the so-called DSH payments by $500 million in the fiscal 2014 year starting in October. For 2015, $600 million more would be cut with the annual reductions reaching $5.6 billion in 2019.

For the first two years, the funding cuts won’t be based on whether states have opted to expand Medicaid. Tenet Healthcare Corp., the third-largest for-profit hospital chain in the U.S., estimated in February the Medicaid and Medicare cuts would cost it $35 million in government payments in the fourth quarter. Dallas-based Tenet has 26% of its beds in Florida and 20% in Texas, both states where the Republican governors have opted not to expand Medicaid.

HCA Holdings Inc., the largest for-profit U.S. hospital chain, has 25% of its beds in Texas and 25% in Florida, according to Brian Tanquilut, an analyst at Jefferies LLC in Los Angeles.

Saving grace

For-profit hospitals like Tenet are unlikely to pass along the costs of the cuts to consumers in the way of raising rates to non-government payers, Tanquilut says. “They’ll eat it.”

Cuts in the Medicare DSH payments also will be offset by a separate April 26 regulatory proposal that would lead to a 0.8% net raise in overall Medicare payments for services that elderly and disabled patients get after being admitted to hospitals, says Tanquilut.

The overall Medicare rate — which includes the Medicare cuts to hospitals that treat a large number of low-income patients — should keep HCA’s earnings before interest, taxes and amortization expenses within its February 2013 guidance, R. Milton Johnson, president and chief financial officer, said on an April conference call with investors.

The saving grace for for-profit hospitals, Tanquilut says, is that the ACA will bring financial benefits that nonprofit and public hospitals like Truman Medical won’t see. Large, urban hospitals that provide the biggest share of charity care and treat more Medicaid patients are most at risk, Moody’s Investors Service Inc. said in a March 14 report.

Tight bind

With only about one-fifth of their patients having commercial insurance, these safety-net hospitals typically have profit margins of about 2.3%, a third of the industrywide average for all hospitals, according to 2010 data from the National Association of Public Hospitals and Health Systems. Losing Medicaid funding and not gaining more insured patients would swing that margin from a profit to a loss of 6.1%.

Hospitals may try to recoup losses by limiting the amount of care they provide to the uninsured or reducing staff, says John Graves, an assistant professor at the Vanderbilt University School of Medicine in Nashville, Tennessee.

“They’re in a tight bind,” Graves says. “They have to recoup those losses through fewer services, shutting down.”

Lobbying lawmakers

Grady Health System in Atlanta, which had estimated it may lose $45 million annually in Medicaid payments, has been meeting with U.S. lawmakers to try to repeal or change the cuts, says John Haupert, chief executive officer at Grady.

“We’re having discussions with Congress and the administration to give states that don’t expand Medicaid an option to not extend the DSH cuts,” Haupert says. For some hospitals, “it’s a matter of their doors being opened or closed.”

Grady gets about 30% of its business from Medicaid, while Truman Medical gets about 60%.

In addition to the American Hospital Association, the National Association of Urban Hospitals also said it’s lobbying Congress to delay or revisit the Medicaid DSH cuts.

Emma Sandoe, a spokeswoman at the Centers for Medicare and Medicaid Services, says the agency wouldn’t comment on the pending cuts.

Medicaid opt-outs

President Barack Obama’s 2010 health care system overhaul promised to deliver an increased number of insured patients who could pay their bills, thus reducing the need for government assistance to hospitals burdened by uncompensated care. That promise would be accomplished by making 11 million more people become eligible for Medicaid, a program largely financed by the federal government yet controlled by each individual state.

As of May, at least 15 states, all with Republican governors, aren’t planning to participate, according to a tally by the Washington-based Advisory Board Co. States with high levels of uninsured patients leaning toward opting out of the expansion include Texas, Louisiana, Idaho, Georgia and South Carolina, according to Moody’s.

The looming DSH reductions may pressure states that are still weighing Medicaid expansion because they know they’ll face a financial quandary, Larry Gage, a senior adviser with Alvarez & Marsal, a New York-based professional services firm who was once president of the public hospitals association.

“There are hospitals already in danger of closing in the next six to 12 months,” Gage says.

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