CMS takes second look at Medicaid hospital pay cuts

A proposed rule would re-evaluate the methodology for disproportionate share payments in 2016. Hospitals welcome the change but want a delay in the scheduled reductions.

By — Posted June 3, 2013

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The hospital industry sees a federal proposal's more cautious approach to reducing indigent care payments as a step in the right direction, but it continues to press Congress to delay such cuts.

Although the Centers for Medicare & Medicaid Services can't halt the reductions, the agency plans to issue a methodology that would incentivize states to do a better job targeting dollars to those hospitals that need the most support.

Hospitals use Medicaid disproportionate share hospital payments to compensate for low-income patients who can't pay their bills. Such payments were set up for a series of scheduled reductions, however, when the hospital industry, as part of health system reform negotiations, agreed to certain pay cuts in exchange for the higher numbers of patients who are expected to gain insurance coverage under the Affordable Care Act in 2014.

What upset this balance was the U.S. Supreme Court's 2012 ruling that took away the law's enforcement mechanisms to mandate expansion of the Medicaid program, said Paul Hencoski, a partner with the audit, tax and advisory services firm KPMG LLP. With expansion becoming optional, more than half the states since have said they won't be extending eligibility to up to an effective rate of 138% of the federal poverty level, as outlined in the law.

This left CMS with the challenge of writing a rule in which cuts to indigent care payments were supposed to be tied to reductions in uninsured in the states, but such targets might not be realized in the wake of the Supreme Court's decision and states opting out of Medicaid expansion, Hencoski said. The result is that hospitals in nonexpansion states may end up treating more uninsured individuals who can't enroll in Medicaid, while receiving less federal support to pay for uncompensated care. The National Assn. of Public Hospitals and Health Systems, drawing from various data sources, has estimated that all hospitals by 2019 will face more than $53 billion in cumulative costs beyond what they would have expected to absorb under original ACA projections.

On May 13, CMS provided some clarity on how it would address this issue, at least in the near term. In a proposed rule, the agency included a reduction methodology only for fiscal years 2014 and 2015. The formula for reducing payments takes several factors into account, including the percentage of uninsured in each state. “CMS will revisit the methodology and promulgate new rules to govern DSH reductions in fiscal years 2016 and beyond,” according to a statement from the agency. Comments on the proposed rule are due by July 12.

Rick Pollack, executive vice president of the American Hospital Assn., said CMS' proposal “appears to have been accomplished in a responsible way based on our preliminary analysis.” He said the hospital association will continue to review the proposal and its impact on states.

Health care observers said the approach would buy the federal government some time to determine the full impact of the ACA's coverage expansions. Because no one knows what the reductions of uninsured will be under the ACA coverage expansions in the next few years, CMS is proposing to enact a methodology for just two years so it can determine whether the rule was “effective in doing what we intended it to do in terms of achieving the statutory reductions in the aggregate levels of DSH spending, while not adversely or unfairly impacting any subset of providers,” Hencoski said.

Reductions still will go through

The DSH cuts under the ACA were supposed to run from fiscal 2014 through 2020, but subsequent legislative actions have extended those cuts to 2022, said Beth Feldpush, NAPH's senior vice president for policy and advocacy. These additional reductions typically have been used to help offset a temporary pay patch to Medicare's sustainable growth rate formula.

Feldpush emphasized that in its proposed rule-making, CMS is not granting hospitals a reprieve from the Medicaid DSH cuts. The scheduled reductions, which over the next two fiscal years total $500 million and $600 million respectively, are hard-wired into the law. “What CMS said was: We're only going to put out the methodology for how we implement the first two years of the cuts, and then we're going to come back later and revise, refine or continue to move forward with the current methodology for those later years,” Feldpush said.

NAPH was encouraged that CMS' proposed methodology emphasizes how well states target DSH payments toward high-volume hospitals or those with high uncompensated care levels. The agency weighs this factor more heavily than it does the percentage of uninsured a state has, she said.

“We think that's the right approach, because as the total pool of dollars shrinks substantially over the years,” it makes sense to direct the remaining DSH money toward those hospitals providing the bulk of uncompensated care and serving the most vulnerable patients, she said.

The hospital groups ultimately want Congress to delay the DSH reductions. The AHA believes that Medicaid and Medicare DSH cuts “should be delayed for two years in order to better ascertain whether coverage expansions have been implemented,” Pollack said.

NAPH said the cuts moved too much too fast. “We have long been advocating for not only a reduction in the level of reduction in the cuts, but since the Supreme Court decision, a delay in their implementation,” Feldpush said. In a statement, she stressed that no matter how the cuts are made, states should do right by the uninsured “and move forward with [Medicaid] expansion as quickly as possible.”

The American Medical Association has approved numerous policies supporting adequate DSH payments for Medicare and Medicaid.

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ACA's projected hospital cuts

The Affordable Care Act designated yearly reductions for Medicaid disproportionate share hospital payments from fiscal 2014 through 2020, although Congress ended up extending such cuts through 2022. Although CMS can't halt these cuts, a proposed rule it issued on May 13 would allow it to test a reduction methodology for these payments for fiscal 2014 and 2015.

Fiscal year Reduction (federal share)
2014 $500 million
2015 $600 million
2016 $600 million
2017 $1.8 billion
2018 $5.0 billion
2019 $5.6 billion
2020 $4.0 billion
2021 $4.0 billion
2022 $4.1 billion

Sources: National Assn. of Public Hospitals and Health Systems, based on published federal figures; Medicaid State Disproportionate Share Hospital Allotment Reductions Proposed Rule, Centers for Medicare & Medicaid Services, May 13 (link)

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