A common story during the health reform debate was that of an uninsured person who went to the hospital for treatment and left behind a mountain of unpaid medical bills.  Uninsured and under-insured patients account for billions of dollars in uncompensated health care each year, which reached a total $57.4 billion in 2008 according to a study from the Urban Institute.  Federal and state government programs end up compensating providers for most of the cost through add-on payments in Medicaid and Medicare.  However, providers, especially safety net hospitals, remain saddled with uncompensated care and bad debts.

Understanding Medicaid Disproportionate Share Hospital Payments:

Federal law requires state Medicaid programs to make disproportionate share hospital (DSH) payments to hospitals treating large numbers of low-income patients. Medicaid (DSH) payments are intended to recognize the tough financial situation faced by hospitals that serve low-income patients, who are likely to be uninsured or Medicaid enrollees. Hospitals often do not receive payment for services rendered to uninsured patients, and Medicaid payment rates are generally lower than that paid by Medicare or private health insurers.

Using a different, less focused formula, the federal Medicare program also has an add-on payment for DSH facilities.  However, in aggregate nationwide spending, Medicaid Disproportionate Share Hospital payments are about twice the size of Medicare DSH spending.

A good place to start for someone interested in Medicaid DSH payments is a recent brief from the Congressional Research Service (CRS) and an earlier report from the National Health Policy Forum. The Centers for Medicare and Medicaid Services (CMS) also has a helpful fact sheet on DSH payments.

The CRS brief describes the program’s structure and costs, how different state Medicaid agencies have implemented it, and changes to the program in the Affordable Care Act (ACA). Some key points:

Which Hospitals Qualify for Medicaid DSH Payments:

To qualify for Medicaid DSH payments, hospitals must have a low-income utilization rate of at least 25 percent – calculated using a formula in Section 1923(b)(3) of the Social Security Act (SSA) – or a Medicaid inpatient utilization rate that is one standard deviation above the state’s average. Each hospital must have a Medicaid utilization rate of at least 1 percent. Within those parameters, however, states can decide how many hospitals actually receive payments.  Therefore, Medicaid DSH payment levels vary widely from state to state.

How Medicaid DSH Payment Works:
  • The federal government reimburses states for some of their DSH payments. But unlike other Medicaid spending the federal contribution is capped.
  • Federal Medicaid DSH spending in fiscal year 2011 reached $11.3 billion, more than half of which went to five states – New York, California, Texas, New Jersey, and Pennsylvania.
  • Sixteen states qualify as low DSH states, meaning their federal DSH allotments are less than 3 percent of their total combined federal and state Medicaid spending for non-administrative services. You can find the precise definition in the Medicare Modernization Act of 2003 (MMA). Low-DSH states receive larger than average annual increases in federal DSH allotments, to help them catch up with other states.
  • More than 80 percent of total state and federal DSH payments go to hospitals, and the rest ends up with Institutions for Mental Disease (IMD) and other mental health providers. The breakdown between hospitals and IMDs varies significantly by state, however, with several states sending all DSH payments to hospitals and three states – Delaware, Maine, South Dakota – sending all payments to IMDs.
Affordable Care Act Cuts to DSH Payments:

Thanks to the ACA, 30 million more Americans are expected to become insured by 2022, according to the Congressional Budget Office’s (CBO) latest estimate. Most of the newly insured people will enroll in qualified health plans (QHP) through health insurance exchanges (HIX). The rest will become newly eligible for the ACA Medicaid expansion, which allows most adults with incomes up to 138 percent of the federal poverty level to enroll in Medicaid (in states that opt for ACA Medicaid expansion).

Since fewer people will be uninsured, in theory there will be less of a need for the DSH program to compensate hospitals who treat non-paying patients. The RAND Corporation estimates uncompensated care nationally would decrease $32 billion by 2016.

As a result, the ACA directs the Secretary of the Department of Health and Human Services (HHS), now Kathleen Sebelius, to reduce federal Medicaid DSH payments to states by $500 million in fiscal year 2014. The annual cuts increase to $5.6 billion in 2019 before falling slightly to $4 billion in 2020. The Middle Class Tax Relief and Job Creation Act of 2012 extended the cuts to 2021, meaning states will receive the same amount of federal DSH funding as they did in 2020.

Exactly how the HHS Secretary will divide those cuts is unclear. The ACA requires the Secretary to:

  • Make the largest cuts in federal DSH funding to states that have the lowest percentages of uninsured people and that do not make payments to hospitals with high volumes of Medicaid or uninsured patients.
  • Make smaller cuts to low-DSH states.

The rest, however, is for the Secretary to decide. CMS last month said it would release a proposed methodology for the Medicaid DSH cuts in spring 2013.

In addition to the cuts to Medicaid DSH payments, the Affordable Care Act will cut Medicare DSH payments by 75 percent.

DSH Cuts Could Hurt Hospitals In States Opting Out of Medicaid Expansion:

The Supreme Court’s decision in NFIB v. Sebelius gave states a choice of whether or not they expand Medicaid. Sellers Dorsey has an excellent resource for keeping track of what states are deciding to do. So far, 20 states and the District of Columbia have decided to expand or are leaning that way, 16 have decided or are expected not to, and 15 states are undecided. See my previous post for a discussion of the different factors involved with expanding Medicaid, Arguments For and Against States Opting for ACA Medicaid Expansion.

Hospitals in states that choose not to expand Medicaid will get stuck with lower DSH payments but still a large amount of uncompensated care. Dr. John A. Graves recently published an analysis of the problem in the New England Journal of Medicine, including a table with expected DSH reductions in each state.

The National Association of Public Hospitals and Health Systems (NAPH) published its own report on uncompensated care and the Medicaid expansion. It projects hospitals across the country will have to swallow $53.3 billion in uncompensated care beyond what was estimated when health reform became law. Such a large hit to hospital budgets could harm access to care for uninsured people and could force hospitals to recoup their costs by charging insured patients more.

It’s also important to note that even if every state expands Medicaid eligibility, the new Exchanges are fully successful, and employers maintain coverage, the ACA would only reduce the number of uninsured by about 45 percent.