Medicaid Plans to Resume Long-Delayed Hospital Payment Cuts

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By Victoria Pelham

The Trump administration is moving forward with cutting payments to hospitals that serve large numbers of low-income and uninsured patients.

A Centers for Medicare & Medicaid Services proposed rule (RIN:0938-AS63) released July 27 would implement the Obamacare-mandated reductions beginning in fiscal 2018 and would slash the Disproportionate Share Hospital allotments initially by $2 billion. The cuts would be distributed based on a state’s uninsured rate, uncompensated care, and Medicaid usage.

Originally slated for 2014, the changes to the program were enacted under the idea that all states would expand Medicaid under the Affordable Care Act, lessening the need for charity care and for hospitals’ DSH compensation.

The new rule also updates an earlier 2013 proposal that had spelled out the methodology for how to dole out the cuts, but that earlier rule punted the issue for future changes in light of questions over how Medicaid expansion would affect state health coverage rates.

Health-care attorney Barbara Eyman told Bloomberg BNA the changes make this proposal better for states that didn’t expand Medicaid compared with expansion states, because it will weigh heaviest the uninsured rate rather than considering the three factors equally.

Nonetheless, hospitals will still take a hit across the board, she said. And that could mean ramped-up pressure for Congress to delay or cancel the reductions amid so much health-care uncertainty. Eyman is with Eyman Associates in Washington.

"[The CMS proposed rule] makes it more real for states and hospitals exactly what the impact of these upcoming cuts are going to be,” she said.

The proposal will be published in the Federal Register July 28, with comments due Aug. 28.

State Medicaid DSH Payments to Fall

Under this rule, the federal government would taper off DSH funds by $2 billion in fiscal 2018 and grow that number by $1 billion annually to reach $8 billion in cuts by fiscal 2025.

State allotments would be measured based by 50 percent on a state’s uninsured rate, with both charity care rates and high Medicaid volume weighted at 25 percent each.

By shifting that formula, the CMS said the rule would “reduce the impact of the DSH allotment reduction for states with greater DSH need due to high uninsurance rates” and “give greater weight to more recent data.”

The determinations would also value the cuts based on whether or not a state is a “low DSH” state, which means they had traditionally spent less (up to 3 percent) on DSH as a proportion of their overall Medicaid spending, according to the Kaiser Family Foundation.

The fiscal 2018 cuts would likely see state payments fall by a range of 1.2 percent to 33.5 percent, according to a June issue brief from the Medicaid and CHIP Payment and Access Commission, which advises Congress. The advisory commission added that those figures would outpace hospital uncompensated care drops in 20 states.

Connecticut, Tennessee, and Washington are expected to see the sharpest impact.

At the time of the ACA’s passage, lawmakers expected coverage to grow under the law’s Medicaid expansion in all 50 states to include those up to 138 percent of the federal poverty level. As a result, lawmakers predicted less charity care, John Feore, a director with Avalere Health, told Bloomberg BNA. Given that and the need to make the ACA deficit-neutral, it made “policy sense” at the time.

But the U.S. Supreme Court’s ruling that left it up to states to determine whether or not to expand Medicaid left just 31 states (and the District of Columbia) opting in.

“The need for Medicaid DSH payments was a little larger than maybe originally envisioned under the ACA,” Feore said.

Hospitals Worried

The DSH payments are supposed to offset charity-care spending from providers such as safety-net or teaching hospitals, as well as low Medicaid reimbursements for facilities that serve large amounts of beneficiaries.

Eyman said they already “aren’t sufficient to cover the need,” because uncompensated care rates are still high in both Medicaid expansion and non-expansion states.

“There just isn’t enough DSH money to go around,” she said.

Take away billions of dollars from that pot, and the cuts would be steep for both hospitals and ultimately patients, Eyman said.

America’s Essential Hospitals, which represents nearly 300 safety-net providers, told Bloomberg BNA that the organization was troubled by the July 27 proposed rule. “Our hospitals simply can’t sustain cuts of this magnitude without reducing services or scaling back their workforce,” Erin O’Malley, the group’s director of policy, said in a statement.

Further, worries over these reductions are compounded by a possible Affordable Care Act repeal that O’Malley said could see charity care rise.

The proposal is under review by the essential hospitals, she said. They are taking a close look at its effects on both uncertainty and state-by-state differences. And the group asks the CMS to “ensure remaining DSH funds reach those providers with the greatest need and highest volume of uncompensated care.”

Pending Legislative Efforts

But safety-net hospitals are not just accepting the long-delayed changes. O’Malley said her organization plans to work with Congress to scrap the expected cuts.

“Our focus now remains on averting those cuts entirely,” she said in the statement.

Feore said he “can certainly see strong attempts from members of Congress [and hospitals]" to include tweaks to the cuts through one of the vehicles Congress will move in the coming months.

These include priorities such as the Children’s Health Insurance Program, which is set to expire without reauthorization by the end of September.

Recent Obamacare repeal efforts have included steps to scale back the DSH allotment reductions.

The House-passed American Health Care Act would have exempted nonexpansion states from DSH cuts and ultimately ended them for all expansion states after fiscal 2019.

In the Senate’s Better Care Reconciliation Act, under a section titled “Restoring Fairness in DSH Allotments,” lawmakers proposed keeping the cuts for Medicaid expansion states but freeing up nonexpansion states from the ACA mandate.

Under the House bill’s changes, 11 expansion states would see cuts deeper than the decline in uncompensated care, MACPAC predicted in its brief.

The CMS proposed rule is likely to bring renewed focus and attention to DSH cuts, Feore said.

But analysts agreed it’s uncertain what will happen in Congress.

To contact the reporter on this story: Victoria Pelham in Washington at

To contact the editor responsible for this story: Brian Broderick at

For More Information

The proposed rule is at

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