Medicaid Payment and Reimbursement

Healthcare provisions in massive legislation could improve care access but also reduce federal funding for some hospitals

November 24, 2021 12:03 am
  • A clause in a multitrillion-dollar social-spending bill would make subsidized commercial insurance available to low-income residents of states that haven’t expanded Medicaid.
  • The expansion of coverage would be funded in part by reductions to Medicaid disproportionate share payments to hospitals in those states.
  • Provider advocates say the cuts would leave some hospitals in a jam.

Mammoth legislation that could be passed by Congress in December includes provisions designed to boost healthcare coverage and access, but stakeholders worry about a pay-for that would affect disproportionate share hospitals (DSHs) in some states.

The $1.75 trillion bill known as the Build Back Better Act passed the House in a close vote Nov. 19 and now sits with the Senate, which is expected to make changes and perhaps whittle down the price tag. Democrats need the support of all 50 members to pass the bill via the budget reconciliation process.

Among other components relating to health insurance coverage, the bill would address what’s known as the Medicaid coverage gap. Affordable Care Act (ACA) premium tax credits would be offered through 2025 to low-income residents of the 12 states that have not expanded Medicaid, allowing them to buy insurance through the ACA marketplaces.

About 2.2 million residents of those states previously have been ineligible for the ACA credits because their incomes are too low. As the ACA was written, people with incomes below 100% of the federal poverty level were supposed to instead be eligible for Medicaid, but they can’t enroll because their states chose not to expand the program as authorized.

Cost-sharing reduction mechanisms would be available for this population, with plans required to have an actuarial value of 94% in 2022 and 99% in 2023-25. In a previous estimate, the Congressional Budget Office projected that Medicaid provisions similar to those in the pending bill would reduce the number of uninsured in the U.S. by 1.7 million over a three-year period.

DSH pay-for poses a concern

The subsidized coverage for Medicaid-eligible residents of non-expansion states would be funded by a 12.5% reduction in Medicaid DSH payments to hospitals in those states starting in FY23, with the cut set to stay in place permanently. That’s in addition to a $2 billion annual cut to the Medicaid DSH pool now scheduled for FY24-27 after various delays. If and when a state expands Medicaid, the 12.5% cut would be nullified.

The boost to Medicaid coverage in the non-expansion states “should not come at the expense of vital funding to hospitals and health systems located in those parts of the country that serve a large number of children, the poor, the disabled and the elderly,” Rick Pollack, president and CEO of the American Hospital Association, said in a written statement. “These cuts are unacceptable, especially while hospitals remain on the front lines of fighting COVID-19 and the deadly delta variant.”

In addition to the DSH decrease, federal funding through Section 1115 waivers to cover uncompensated care costs in non-expansion states would be limited. Specifically, assistance no longer would cover the population that would be eligible to move out of the Medicaid coverage gap. Four non-expansion states — Florida, Kansas, Tennessee and Texas — have used waivers to implement such pools, from which funding is directly available to providers.

“We adamantly oppose the proposed cuts to Medicaid disproportionate share hospital and uncompensated care payments,” Chip Kahn, president and CEO of the Federation of American Hospitals, said in a written statement. “These reductions will fail to motivate non-expansion states to expand Medicaid and will adversely impact access to care for millions of Americans in these states.”

The DSH cut would follow scheduled 6% Medicare payment cuts for all hospitals in 2022 due to the restoration of the 2% Medicare sequester and a 4% reduction stemming from a pay-for in the 2021 COVID-19 relief legislation. The latter cut could be alleviated through congressional action.

Impact on hospitals likely would vary

Among analyses of the bill’s financial impacts, Brookings found that hospital margins in the non-expansion states would improve by $11.9 billion per year starting in 2023. “The main reason for this improvement is that hospitals would now receive payment for some care that they already deliver but are not paid for,” wrote analyst Matthew Fiedler, a fellow in economic studies with the USC-Brookings Schaeffer Initiative for Health Policy. “Hospitals would also profit from higher volume as people gaining coverage sought more care.”

One caveat: The improvement would be relative to current law, which does not account for provisions in the 2021 COVID-19 relief legislation that expanded the availability of ACA marketplace-insurance tax credits for non-Medicaid populations over a two-year period (the pending bill would extend availability through 2025).

An analysis by the Urban Institute found that hospitals in non-expansion states would stand to net billions if the bill passes. They would receive $6.8 billion in new federal spending for people in the Medicaid gap, compared with a loss of $440 million in DSH payments.

However, the Urban Institute’s analysis notes that some hospitals could be adversely affected.

“The benefits of the changes would not necessarily go to the same hospitals that would sustain reductions in DSH allotments,” the authors wrote. “Thus, some hospitals may indeed be worse off with the proposed changes. Hospitals serving a disproportionately high share of undocumented people would see less benefit from reform than other hospitals and could see substantial DSH cuts.

“At the same time, the overall decline in the number of uninsured people could save spending on uncompensated care for the uninsured. If states and localities save on uncompensated care, the savings could be distributed to hospitals most in need after DSH cuts.”

America’s Essential Hospitals, which represents safety net hospitals, said passage of the bill would be detrimental to its members.

“Essential hospitals likely would not benefit from expanded marketplace coverage in states that opted against Medicaid expansion,” Bruce Siegel, MD, said in a written statement. “Yet, these hospitals, which care for the people this bill seeks to help, would bear the brunt of deep cuts to Medicaid disproportionate share hospital funding and other safety net support.”


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