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For states not expanding Medicaid, DSH cuts will deal a tough blow

Juliette Mullin, Editor

Earlier this month, CMS finalized its plans to implement the first two years of Medicaid disproportionate share hospital (DSH) payment cuts mandated by the Affordable Care Act (ACA). The announcement brought some tough—though not unexpected—news for safety-net hospitals in states that have opted not to expand Medicaid next year.

Despite lobbying, states that do not expand Medicaid will still see deep DSH cuts

The DSH payment reductions have been a major source of anxiety for hospitals in states that have opted not to expand Medicaid.

The cuts 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. Altogether, the ACA requires $18.1 billion in total reductions from fiscal year (FY) 2014 through FY 2020, effectively halving the size of the safety-net program.

However, the Supreme Court's ruling on the ACA allowed states to opt out of the expansion. In theory, this meant that hospitals in states that do not expand Medicaid would lose DSH funding without benefiting from an influx of new Medicaid patients.

In an effort to avoid the financial blow in 2014, hospitals have urged the Obama administration to delay the scheduled pay cuts. And initially, the Obama administration appeared to be listening: In President Obama's proposed budget for FY 2014, the DSH cuts were delayed by one year, starting instead in 2015.

But the proposal was never converted into regulation or legislation, and this month's final rule puts the reductions on track to start on Oct. 1, 2013.

How the cuts will work: Medicaid expansion won't be a factor in first two years

Per the ACA, CMS must reduce DSH payments by $500 million in FY 2014 and $600 million in FY 2015. In the ACA, lawmakers outlined five key factors that would determine the impact of the DSH cuts on each state. According to the final rule, the CMS methodology for the cuts must:

  • Implement smaller reductions in "low-DSH states" (i.e. the 16 states for which the DSH allotment in FY 2000 was less than 3% of their federal and state Medicaid spending);
  • Implement larger reductions in states that have the lowest percentage of uninsured individuals during the most recent year with available data;
  • Implement larger reductions in states that do not send most DSH payments to hospitals with high Medicaid volumes;
  • Implement larger reductions in states that do not send most DSH payments to hospitals with high levels of uncompensated care; and
  • Consider the extent to which DSH was included in budget-neutrality calculations for coverage expansion.

First of all, Medicaid expansion rolls out in calendar year 2014, but the FY 2014 DSH cuts will not be based on post-expansion insured rates. This means that the first year of cuts will not account for lower rates of uninsured residents in states that expanded Medicaid in 2014. However, future cuts likely will account for expansion in some way, meaning states that expanded Medicaid could eventually bear the brunt of the DSH cuts.

CMS acknowledges this limitation in its final rule. "Currently, we do not have sufficient information on the relative impacts that would result from state decisions to implement the new coverage group, and thus we have determined to propose a [DSH Health Reform Methodology] only for the first two years during which the DSH funding reductions are in effect," the rule states.

Secondly, some states expanding Medicaid will be somewhat protected from the DSH cuts by their status as "low DSH states." The DSH reduction for the country's 16 low DSH states is much less significant: Overall, their DSH payments would be cut by 1.20% in FY 2014, while "regular DSH states" would lose 4.42% of their payments.

At least eight of the low DSH states—including Montana, Oregon, and New Mexico—are expected to participate in the Medicaid expansion (or an alternate low-income coverage expansion model). As such, some states expanding Medicaid will be protected—at least partially—from the DSH cuts.

The takeaway: While it's certainly probable that the Obama administration ultimately will limit DSH cuts in states that do not expand Medicaid, it may not be for several years. In the meantime, barring an unexpected delay from the Obama administration, safety-net hospitals in non-expansion states should brace for this added pressure on their finances.

  • Are you ready for a new wave of insured patients in 2014? Watch this video to learn how to prepare for the coverage expansion "tsunami."

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