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How CMS plans to cut safety-net hospital payments

Proposal would limit pay cuts in states that do not expand Medicaid

Topics: Reimbursement, Finance, Medicaid, Strategy, Health Policy, Market Trends, Payer and Regulatory Policy

May 14, 2013

CMS has explained how it plans to scale back its disproportionate share hospital (DSH) payments, outlining a proposal that aims to protect safety-net hospitals in states that choose not to expand Medicaid.

The agency on Monday issued a proposed rule detailing the payment reductions, which are mandated by the Affordable Care Act (ACA).

The Medicaid DSH payment reductions were developed as an offset for the cost of the ACA's Medicaid expansion and are based on the assumption that the ACA's coverage expansions would reduce a larger portion of hospitals' uncompensated-care costs. The ACA requires $18.1 billion in total reductions from fiscal year (FY) 2014 through FY 2020. However, the U.S. Supreme Court's ruling on the ACA allowed states to opt out of the expansion.

Details of proposed rule

Under the proposed rule, CMS would gradually reduce funding to the $11 billion DSH program, beginning with a $500 million reduction in FY 2014. Reductions to the program then would increase to $1.8 billion in FY 2017 before a final reduction of $5 billion in FY 2018.

In recent months, DSH executives in states that have declined to participate in the Medicaid expansion expressed concern that they would lose Medicaid funding. In addition, they would see little or no reduction in uncompensated-care costs, Kaiser Health News' "Capsules" reports.

To address those concerns, CMS proposed using states' percentage of uninsured residents to calculate DSH payment reductions over the next two years. The proposed rule notes, "Consequently, hospitals in states [that expand Medicaid] may experience a deeper reduction in DSH payments than they would if all states were to implement the new coverage group."

According to AP/U-T San Diego, hospitals in some states stand to lose tens of millions of dollars in funding under the proposed rule. For example, Texas hospitals could lose more than $56 million in FY 2014, hospitals in Pennsylvania could lose nearly $34 million, and those in Missouri could lose about $26 million.

The proposed rule is open for public comment through July 12 and likely would take effect on Oct. 1, unless Congress approves President Obama's FY 2014 budget proposal, which would delay the cuts until FY 2015.

Reactions to proposed rule

The proposed rule drew praise from the National Association of Public Hospitals and Health Systems (NAPH), which advocates for safety-net hospitals, Modern Healthcare reports. NAPH Senior Vice President for Advocacy Beth Feldpush in a statement said, "We obviously agree 100% with that caution, and we think Congress should delay all of the DSH cuts to allow for policymakers to have a more informed and rational discussion on this, as well."

Further, NAPH said the cuts should be delayed until the impact of Medicaid expansion on the uninsured becomes clearer. "The Affordable Care Act's disproportionate share hospital reductions are neither justified nor sustainable," the group said.

Similarly, American Hospital Association Executive Vice President Rick Pollack in a statement said that the proposal is written "in a responsible way based on our preliminary analysis." He added, "[S]ince some states have yet to decide whether to expand Medicaid, this proposed rule will not discourage expansion, nor will it penalize hospitals in those states that have yet to make a decision" (Daly, Modern Healthcare, 5/13 [subscription required]; Galewitz, "Capsules," Kaiser Health News, 5/14; Kennedy, AP/U-T San Diego, 5/13; Kelly, Reuters, 5/13).

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