The medicaid windfall: Medicaid expansions and the target efficiency of hospital safety-net subsidies

Federal hospital safety-net subsidy programs seek to defray costs of uncompensated hospital care, but eligibility criteria are based on Medicaid volume. Therefore, subsidies have poor “target efficiency”: hospitals that provide large amounts of uncompensated care may not receive subsidies (exclusion error), while hospitals that provide little uncompensated care may receive subsidies (inclusion error). Medicaid expansions may exacerbate poor targeting by increasing Medicaid patient volume while reducing uncompensated care. Using hospital administrative data from 2003 to 2019, I quantify the target efficiency of Medicare and Medicaid Disproportionate Share Hospital payments and the 340B drug discount program and quantify how changes in Medicaid eligibility affect safety-net subsidy receipt and target efficiency. I find that the ACA Medicaid expansion increased participation in Medicare DSH and 340B, especially among non-safety-net hospitals (inclusion errors) resulting in a shift of approximately $5B from safety-net to non-safety-net hospitals. I find the opposite for a Medicaid contraction in Tennessee in 2005. My results demonstrate an unintended consequence of Medicaid-based eligibility criteria: changes in Medicaid coverage affect the allocation of public subsidies for safety-net patients.