More Medicaid programs are planning inpatient hospital payment cuts

• The share of states planning cuts or freezes to Medicaid inpatient hospital rates jumped in FY21.
• Medicaid programs have added 4 million enrollees this year.
• The hospital revenue shift toward Medicaid will hurt revenue growth over the coming year, a rating agency says.

Despite the ongoing COVID-19 pandemic and the hundreds of thousands of hospitalizations it has produced, states seem to be shifting sharply toward cutting hospital inpatient payment rates.

In FY20, 29 states increased their fee-for-service (FFS) Medicaid inpatient hospital rates, while 14 cut or froze them. But for FY21, 20 states plan increases and 20 plan cuts or freezes, according to the latest Kaiser Family Foundation (KFF) survey of state Medicaid directors.

FY21 cuts were planned in some states with large hospitalizations during the pandemic.

For instance, Arizona is planning an FY21 cut and has had 20,312 COVID-19 hospitalizations, according to covidtracking.com data. Nationwide, 426,343 COVID-19 hospitalizations have occurred since the start of the pandemic.

COVID-19 hospitalizations in other states planning to cut or freeze hospital Medicaid rates include:

• 18,440 in Alabama
• 8,500 in Minnesota
• 7,915 in Colorado
• 6,237 in Mississippi
• 6,069 in Arkansas

Medicaid and CHIP enrollments increased by 4 million from February to June 2020, or by nearly 5.7%, according to recent CMS data.

“It’s obviously not surprising that states are looking for places to make Medicaid cuts as they’ve seen enrollment spikes and tax revenue declines,” said Chad Mulvany, director of healthcare finance policy, strategy and development, for HFMA.

The planned cuts come with hospitals losing $202 billion from March through June 30 due to lockdowns, elective surgery bans and patient avoidance of care, according to an advance estimate by the American Hospital Association (AHA). Losses were projected to increase to $323 billion by the end of 2020.

“It’s frustrating that they are looking at hospitals because these are institutions that have suffered significant impacts from the pandemic, while taking broad steps to support their communities and ensure the safety of the people in the state,” Mulvany said.  

Some states with high COVID-19 rates did not provide aggregate hospitalization data, and some with high numbers of hospitalizations did not provide Medicaid payment rate information. Only 43 states responded to the KFF survey.

Some federal assistance has been provided

The planned state Medicaid cuts come with the federal government having provided a 6.2-percentage-point increase in Medicaid matching funds retroactive to Jan. 1. The funding boost for states is designed to ensure continued coverage for current enrollees as well as coverage of coronavirus testing and treatment and will continue until the end of the quarter in which the public health emergency (PHE) ends.

Other federal COVID-19 assistance included a June 2020 announcement of $15 billion in provider relief grants specifically for Medicaid and CHIP providers that were not funded in a prior distribution, which was geared to Medicare FFS providers.

About half of state Medicaid directors told KFF that the federal provider relief funds were “inadequate.”

Before the impending state Medicaid hospital cuts, hospitals already faced $19.7 billion in Medicaid underpayments, according to the latest AHA analysis. Hospitals received payment of only 89 cents for every dollar they spent caring for Medicaid patients in 2018, and for 61% of hospitals, Medicaid payments were less than cost.

In 2019, Medicaid accounted for a median 15.2% of revenue among the not-for-profit hospitals rated by Moody’s, according to a recent report. However, the share of revenue derived from Medicaid varies widely. For instance, CommonSpirit Health — the second-largest not-for-profit hospital chain — derived 21% of gross patient revenues from Medicaid, according to a recent Fitch Ratings report.

In a separate report on for-profit hospitals, Moody’s noted that the pandemic-era shift of more patients from employer-sponsored health plans to uninsured or to Medicaid and CHIP will hinder earnings growth over the next 12 to 18 months.

“Employer-provided health insurance pays significantly higher reimbursement rates than government-based programs, like Medicaid and Medicare,” Moody’s wrote.

Trends in Medicaid rate changes

Other provider-related trends in Medicaid rate changes, as seen in the KFF survey, included:

• 41 states increased rates for at least one provider type in FY20
• 17 states cut at least one provider rate in FY20
• 35 states planned a rate increase for at least one provider type in FY21
• 21 states planned rate cuts or freezes for at least one provider type in FY21

Most of the rate restrictions are freezes for inpatient hospitals and nursing facilities, the survey found.

Three states — Colorado, Nevada and Wyoming — cut rates across all or nearly all provider categories.

“These reductions were related to the states’ budget shortfalls for FY 2021,” according to the survey authors.

Six states reported currently planning no payment changes for FY21 in at least one category of provider, but two of those said rate freezes or cuts were likely pending final budget negotiations.