The new health reform law’s central message to America’s hospitals is a classic good news/bad news story. First, the good news. Hospital exposure to 46 million uninsured Americans showing up in their ERs is about to drop by two-thirds over the next several years.  Medicaid alone is predicted to take on 15 million of them, as the states—with temporarily enhanced federal assistance—expand eligibility to cover all non-seniors who fall below 133 percent of the federal poverty level ($24,350 for a family of three). And assuming the individual insurance mandate survives likely court challenges, another 17 million uninsured will be required to buy subsidized private health insurance through new state health insurance exchanges beginning in 2014. This adds up to 32 million people who hospitals will no longer have to treat for free under the federal EMTALA law and their own charity-care policies.

Now the bad news. While this may mean an end to the era of chronic unreimbursed care, it also brings on a new age of chronic under-reimbursed care. Without fundamental changes in how hospitals operate, increased losses will make it difficult for many of them to survive.

Take those new Medicaid patients. Medicaid already requires hospitals to lose an average of $110,000 for every $1 million it costs to treat them. And while the new law provides temporary increases in Medicaid doctor payments, there is no such relief for hospitals. Moreover, given persistent federal and state budget shortfalls, no credible source is predicting higher hospital reimbursement rates. Far more likely is that they will further deteriorate as financially stressed states come under renewed pressure to maintain doctor payments to keep at least some of them in the system after the special federal aid ends in 2015 (non-profit hospitals are required by law to accept Medicaid patients regardless of reimbursement levels).

Still, many hospitals may be better off in the short run, since 15 million even partially funded Medicaid patients are better than having to treat them for free as hospitals do now. However, these patients, in going from uninsured to comprehensively insured, will be demanding more – a lot more – new non-ER driven services (assuming they can find the doctors to admit them—60% of all doctors don’t take new Medicaid patients). Few hospitals have excess capacity lying around, so any big increase in Medicaid demand will inevitably force them to boost service capacity at cost levels that are certain to put them even deeper in the red.

But at least hospitals will have those 17 million new privately insured patients to shift costs to, right? Hospitals have long been able to soak private insurers for higher reimbursements in order to recover their losses on Medicaid (and Medicare) patients. That’s because the insurers can simply turn around and charge $1,788 in higher private insurance premiums to make up the difference. Only now with health reform, it may not work out that way.

That’s because the federal rules for the new state insurance exchanges contain some nasty landmines that are actually more likely to force insurers to be seeking subsidies rather than providing them. These rules include overly rich mandated benefits, excessively restrictive patient cost-sharing limits, uneconomic medical-loss-ratio mandates, unrealistic premium controls, continued medical inflation, and the probability of serious adverse selection—all of which combine to violate every one of my ten commandments for workable health insurance exchanges. As worded in the new law, these rules virtually guarantee insurer losses, to the point where the only carriers likely to show up and play in the exchanges will be the ones that have sufficient employer insurance business to shift exchange losses to—a rapidly shrinking market with its own set of dire economic problems. And current individual-only insurers need not apply. The net result: the ability of exchange insurers to subsidize Medicaid and Medicare hospital losses could be close to nil.

In case you’re wondering why any rational insurer would want to participate in the exchanges at all, the answer is simple: fear and hope. The fear is that insurers that stay out will be barraged by even more political demonization, along with an even greater fear of a resurgent public option that could put them out of business altogether. The hope is that the government will ultimately figure out how unworkable the current exchange rules really are and then change them with enlightened regulation and amendment. Although this would be my preferred outcome (and the sooner the better), a more realistic hope may be that insurers will ultimately prevail upon Congress to revive the original House proposal to force doctors and hospitals to accept reimbursements based on money-losing Medicare rates. That may salvage the insurers but  put an even greater burden on hospitals.

Speaking of Medicare, won’t health reform enable it to resume paying hospitals their costs for treating America’s elderly? In a word, no. All the revenue from the new Medicare payroll and “unearned” income taxes and the half-billion in cuts to Medicare Advantage will be diverted to pay for the new health reform entitlements, not to shore up Medicare’s parlous finances. Now, throw in aging boomers, continued medical inflation, even richer Medicare benefits, “market-basket” adjustments, employer incentives to push retirees into Medicare’s drug program, and trillion-dollar federal deficits as far as the eye can see. Does anyone believe Medicare will even maintain hospital reimbursements at current money-losing levels? Certainly not the Medicare actuary who has forecast that Medicare rates will actually fall below Medicaid’s by the end of this decade.

In Part 2, I’ll examine hospitals’ continued ability to shift government losses to private employers.