Medicaid Funding for Nonprofit Healthcare Organizations

Source: Courtney Burke, The Aspen Institute, June 2007

Medicaid, a publicly funded health insurance program, paid for approximately 16 percent of all healthcare delivered in the United States in 2005.1 Because nonprofit organizations comprise a notable percentage of health providers, and because many of these nonprofits disproportionately rely on Medicaid as a payment source, revenue for nonprofit organizations is inextricably linked to Medicaid. The percentage of healthcare providers that are nonprofit varies depending on the service they provide and the state in which they operate. For instance, nonprofits make up a larger percentage of all hospitals in comparison to their prevalence among all nursing homes. They are more common in Northeastern states compared with Southern and Western states. This is due to several factors, including states’ laws and regulations governing nonprofits, the competitiveness of the marketplace, and differences in states’ policies governing coverage and payment for healthcare services.

There is no doubt that the financial relationship between Medicaid and nonprofit organizations has significant implications for their missions, management and budgeting tactics. The effect of Medicaid funding on the mission of an organization is particularly striking in instances where less medically oriented social-service providers change their service delivery model to meet Medicaid reimbursement criteria. Understanding the extent of the financial affiliation between Medicaid and nonprofits is the first step in understanding the organizational effects—but doing so is difficult because the monetary relationship may vary by the type of service provided, state, or industry. Adding to the difficulty of estimating and understanding the financial relationship between Medicaid and nonprofits is the fact that there is no single database to track the flow of Medicaid money to nonprofits. The lack of a dedicated data system necessitates use of various sources to estimate the amount of Medicaid money going to nonprofits.

Each source has several caveats and only allows for imprecise estimates. Taking these caveats into account, this paper uses existing literature, analyses from industry trade organizations, and data from state officials, the Census Bureau, and Medicaid to make rough estimates of the potential amount of Medicaid money going to nonprofit healthcare providers.

The financial relationship between Medicaid and nonprofits may have additional effects on nonprofit organizations. Understanding the financial relationship between Medicaid and nonprofits can further illuminate the possible organizational effects and demonstrate Medicaid’s role in shaping the healthcare marketplace. This paper shows how and how much Medicaid funding flows to nonprofits, that Medicaid expenditures impact a significant number of nonprofits and a large portion of funds for nonprofit healthcare organizations, and that various trends and changes in the marketplace may affect nonprofit healthcare providers in different ways.

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