Toward Accountable Payment

Four takeaways from the proposed rules for Medicare and Medicaid DSH cuts

Rob Lazerow and Tom Liu

With open enrollment for the Affordable Care Act's health insurance exchanges to start Oct. 1, CMS is focused on securing the infrastructure and funding needed to offset the cost of coverage expansion.

This includes implementing the ACA's cuts to both Medicare and Medicaid Disproportionate Share Hospital (DSH) payments—reductions the law included by arguing that providers will need less supplemental funding as the number of uninsured individuals declines.

To address a range of questions we've received from members about CMS's recent two proposed rules on the DSH payment cuts, here's a brief summary of each and four takeaways for hospitals and health systems.

Medicare DSH payments: 75% redistributed based on low-income beneficiary care days

The proposed rule for the Medicare cuts reduces the amount of Medicare DSH payments that hospitals receive under the current formula to 25% of current levels.

The remaining 75%, which CMS estimates to be $9.25B for FY 2014, will be prospectively adjusted to account for estimated changes in the uninsured population. This pool will be distributed among hospitals based on the relative amount of uncompensated care they provide, as defined by the sum of a hospital’s Medicare Supplemental Security Income days and Medicaid days.

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Under this new Medicare DSH payment methodology, CMS will provide two payments to hospital providers—one that pays hospitals on a per discharge basis and a second periodic payment based on how much uncompensated care was provided.

Medicaid DSH payments: States retain discretion over allocation

While the ACA outlined a schedule of Medicaid DSH payment reductions through FY 2020, the current proposed rule only applies to FY 2014 and FY 2015. The Medicaid proposed rule reduces Medicaid DSH payments by $500M for FY 2014 and $600M for FY 2015, adhering to the amounts specified in the ACA. These reductions are allocated by state, such that more funding will go to states that:

  • Are currently considered "low-DSH states"
  • Have higher uninsured rates
  • Target DSH payments to hospitals with high Medicaid utilization
  • Target DSH payments to hospitals with high uncompensated care costs

States still have discretion over how they choose to allocate the cuts across hospitals in their state.

Four takeaways

1. States’ decisions to expand Medicaid in 2014 will not impact Medicare or Medicaid DSH payment redistribution for FY 2014 or FY 2015. When calculating the Medicare and Medicaid DSH cuts, CMS is using a two to three year lag in the data, insulating providers from downside if states expand Medicaid eligibility. CMS has also recognized that the proposed Medicaid DSH formula potentially mitigates some of the gains from Medicaid expansion, and is exploring potential modifications to the rule for FY 2016.

2. The benefits from coverage expansion may not help in the near term. The DSH cuts were included in the ACA based in part on the rationale that coverage expansion would reduce the need for DSH payments. However, several states have decided against expanding their Medicaid programs, and concerns have surfaced about health insurance exchange rollout due to low public awareness and implementation challenges. If coverage expands slower than initially anticipated, hospitals would feel the immediate effects of the DSH cuts (and reductions in annual market basket updates) without fully gaining the benefits of coverage expansion.

3. Hospitals with limited cash on hand may face cash flow issues if disbursement occurs infrequently. In contrast to prior payment methods, 75% of Medicare DSH payments will now be withheld and disbursed on a periodic basis. CMS has not determined the frequency of disbursements, an issue they will hopefully address in the final rule.

4. Considerable uncertainty remains around implementation. Both the Medicare and Medicaid DSH cuts remain only proposed rules at this point, and CMS is currently accepting comments on both. In addition, there have been proposals from both President Obama and Rep. John Lewis to delay some or all of these cuts for one to two years.

  • Comments on the Medicare proposal are due by 5 p.m. ET on June 25. Comments on the Medicaid proposal are due by 5 p.m. ET on July 12.

Learn More

Our updated Customized Medicare Inpatient Payment Assessment calculates the impact of the proposed Medicare DSH payment cuts on your institution. Access it on your Customized Assessment Portal.

For more details on the recent proposed Medicare FY 2014 inpatient payment changes, including a discussion of the proposed Medicare DSH payment methodology, watch our on-demand webconference, "Medicare Inpatient Payment Update."

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