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Vorys Health Care Advisors

CMS Addresses DSH Cuts; Impact on States That Do Not Expand Medicaid Remains Unclear

Posted in Affordable Care Act, Health Care, Health Care Reform, Medicaid

Earlier this week, the Centers for Medicare & Medicaid Services (CMS) released a proposed rule that cuts federal payments to hospitals for uncompensated care.  What still remains unclear, however, is how these cuts will impact states that do not expand their Medicaid programs.

The Affordable Care Act (ACA) requires significant cuts to Disproportionate Share Hospital (DSH) payments beginning in federal fiscal year 2014.  These payments compensate hospitals for the cost of providing uncompensated care to uninsured and underinsured individuals.  Congress imposed the cuts on the theory that ACA reforms, such as expansion of Medicaid to additional low-income populations, would decrease the number of individuals without health insurance, thus decreasing the amount of uncompensated care provided by hospitals.

The Supreme Court decision on the constitutionality of the Medicaid expansion made it optional for states.  The Court did not, however, address the DSH cuts.  A number of states have announced that they will not expand Medicaid, and policymakers in other states, including Ohio, continue to vigorously debate the issue.  States that choose not to expand Medicaid may not see the reduction in the number of uninsured that expansion states will.  Since the ACA links the cuts in part to states’ relative levels of uninsured, one consequence is that states that choose to expand Medicaid could see a larger reduction in DSH funds than those that do not.

The ACA specified the aggregate amount of annual DSH cuts ($18.1 billion through 2020), but outlined only general principles for how the cuts would be implemented and required the Secretary of Health and Human Services to design a methodology for the cuts based on those principles. Currently, each states receives an annual allotment of DSH funds and has a great deal of discretion on how to allocate those funds to hospitals within the state.  The ACA specified that the methodology designed by CMS must impose smaller reductions on low DSH states (as defined in statute) and larger reductions on states with the lowest percentages of uninsured individuals and those that do not target DSH payments to hospitals with high volumes of Medicaid inpatients or high levels of uncompensated care.  Finally, CMS must take into account any DSH allotment amounts that a state included in a budget neutrality calculation for a coverage expansion approved under a Section 1115 waiver.

CMS has proposed a methodology that would allocate cuts to state DSH allotments in FY 2014 and 2015.  The total required cuts ($500 million for 2014 and $600 million for 2015) would be allocated proportionately between high DSH and low DSH states.  Then CMS would calculate a reduction for each state by applying a formula that gives equal weight to factors that represent the state’s insured numbers relative to other states and the extent to which it targets DSH funds to high Medicaid volume and high uncompensated care hospitals.  Applying the proposed methodology, CMS estimates that Ohio’s DSH allotment would be reduced by $23.4 million in FY 2014, a reduction of 5.41 percent from what it otherwise would receive for that year.

In the preamble to the proposed rule, CMS addresses the dilemma regarding states that do not adopt the Medicaid expansion, noting that it needs additional information on the impact of state decisions to implement the expansion.  Further, CMS asserts that the data necessary to address the issue may not be available until 2016.  Therefore, CMS proposes to apply its methodology for FY 2014 and 2015 and to address FY 2016 and beyond in future rulemaking.