According to the Centers for Medicare and Medicaid Services (CMS), the federal government disburses $11.5 billion annually in disproportionate-share hospital (DSH) payments to states.  DSH payments are intended to offset the cost of treating the uninsured (uncompensated care) and Medicaid shortfalls in public hospitals.  A recent study published in Health Affairs on the impact of reduction of DSH payments suggests safety net hospitals in California could face as much as a $1.5 billion shortfall by 2019^.[1]

One of the provisions of the Affordable Care Act (ACA) is structured to progressively reduce DSH payments starting FY2014.  This is predicated on the successful expansion of Medicaid—by allowing more individuals to be eligible for Medicaid, hospitals would care for fewer uninsured patients, thus needing less funding to cover uncompensated care costs.  The architects of the ACA presumed hospitals would make up for the reduction in DSH payments by retaining newly eligible Medicaid enrollees as they are reimbursed at 100 percent of “cost” under the ACA.  The game-changer was the Supreme Court ruling which made Medicaid expansion optional.

Hospitals in states that did not expand Medicaid (such as Georgia or Virginia) will be the hardest hit when DSH payment reductions take effect.  These hospitals will lose funding to cover uncompensated care, while at the same time be unable to take advantage of  revenue opportunities  available in other states by providing care to newly eligible Medicaid enrollees.   The best strategy for these states is to minimize their state’s DSH reductions by targeting DSH payments more effectively to safety net hospitals with high uncompensated care costs.

Hospitals in states like California that expanded Medicaid are better positioned to handle a reduction in DSH funding, particularly if safety net hospitals are successful in retaining the newly eligible Medicaid enrollees who are otherwise free to seek care at other institutions.  Will this approach work effectively, though, if new Medicaid enrollees “move up” out of safety net hospitals with their new-found insurance coverage?  Is Medicaid a blessing or a curse for safety net hospitals over the longer term?

The study authors noted that the size of DSH funding gap will be determined mainly by the rate of health care spending growth.  Demonstration projects and pilot programs, such as bundled payment initiatives and accountable care organizations (ACO), will become even more crucial in the effort to improve efficiency and cut costs.  Legislatures should be more involved in figuring out how to cover future shortfalls from DSH payment reduction with policies such as providing additional subsidies or restructuring Medicaid reimbursement policies in their state to fully take advantage of the 100 percent federal match for newly eligible Medicaid enrollees.

It would require an act of Congress to delay the reduction in DSH payments, as seen in FY2013 (Bipartisan Budget Act of 2013) and FY2014 (Protecting Access to Medicare Act of 2014) budget negotiations.  Politics over budget and spending at the national level has been contentious at best and delaying the reduction in DSH payments would increase the national budget.  Congress would have to determine whether to offset cuts elsewhere, propose revenue enhancements, or increase the deficit, none of which are particularly attractive options.  As many states have not yet expanded Medicaid, it is safe to assume that there would be intense pressure on Congress to address the potential fallout from DSH funding cuts before any reduction would take place.

Taking one step more than the study does, will the combination of these pressures further accelerate the trend of hospital consolidation that we are seeing today?  And, if so, what does that mean for tomorrow’s healthcare safety net?

This article was written with contributions from Selene Mak.

_{[1] Neuhausen, K., Davis, A. C., Needleman, J., Brook, R. H., Zingmond, D., & Roby, D. H. (2014). Disproportionate-Share Hospital Payment Reductions May Threaten The Financial Stability Of Safety-Net Hospitals. Health Affairs, 33(6), 988-996.}