At the Intersection of Health, Health Care and Policy Cite this article as: Evan S. Cole, Daniel Walker, Arthur Mora and Mark L. Diana Identifying Hospitals That May Be At Most Financial Risk From Medicaid Disproportionate-Share Hospital Payment Cuts Health Affairs, 33, no.11 (2014):2025-2033 doi: 10.1377/hlthaff.2014.0109
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Disproportionate-Share Hospitals By Evan S. Cole, Daniel Walker, Arthur Mora, and Mark L. Diana 10.1377/hlthaff.2014.0109 HEALTH AFFAIRS 33, NO. 11 (2014): 2025–2033 ©2014 Project HOPE— The People-to-People Health Foundation, Inc.
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Identifying Hospitals That May Be At Most Financial Risk From Medicaid Disproportionate-Share Hospital Payment Cuts Medicaid disproportionate-share hospital (DSH) payments are expected to decline by $35.1 billion between fiscal years 2017 and 2024, a reduction brought about by the Affordable Care Act (ACA) and recent congressional action. DSH payments have long been a feature of the Medicaid program, intended to partially offset uncompensated care costs incurred by hospitals that treat uninsured and Medicaid populations. The DSH payment cuts were predicated on the expectation that the ACA’s expansion of health insurance to millions of Americans would bring about a decline in many hospitals’ uncompensated care costs. However, the decision of twenty-five states not to expand their Medicaid programs, combined with residual coverage gaps, may leave as many as thirty million people uninsured, and hospitals will bear the burden of their uncompensated care costs. We sought to identify the hospitals that may be the most financially vulnerable to reductions in Medicaid DSH payments. We found that of the 529 acute care hospitals that will be particularly affected by the cuts, 225 (42.5 percent) are in weak financial condition. Policy makers should recognize that decreases in revenue may affect these hospitals’ ability to give vulnerable populations access to care. ABSTRACT
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efore the implementation of the Affordable Care Act (ACA) began, nearly fifty million people in the United States were estimated to be uninsured.1 For health care, this population relies primarily on hospitals—which were estimated to provide $44.6 billion worth of uncompensated care in 2013.2 The federal government helps hospitals absorb this expense through its Medicaid disproportionate-share hospital (DSH) payments. The DSH program allocates Medicaid funds to states, which distribute these funds to hospitals based on their volume of Medicaid patients and the dollar amount of uncompensated care they provide. The federal government distributes around $11 billion annually in Medicaid DSH funds.3 The ACA originally included decreases in Med-
Evan S. Cole ([email protected]) is an associate project director at the Georgia Health Policy Center, Georgia State University, in Atlanta. Daniel Walker is a Ph.D. candidate in the School of Public Health and Tropical Medicine, Tulane University, in New Orleans, Louisiana. Arthur Mora is a clinical assistant professor in the School of Public Health and Tropical Medicine, Tulane University. Mark L. Diana is an associate professor in the School of Public Health and Tropical Medicine, Tulane University.
icaid DSH payments that would have totaled $18.1 billion in the period 2014–20. The annual cuts would have ranged from $500 million to $5.6 billion in later years.4 The Protecting Access to Medicare Act of 2014 delayed the implementation of these reductions and increased the total to $35.1 billion. The cuts are now set to begin in fiscal year 2017 and end in fiscal year 2024. The delay may help hospitals prepare for the change in funding. However, the increase in the scale of reductions is dramatic. For example, California and Texas would have had an estimated 2.80 percent and 5.52 percent reduction, respectively, in fiscal year 2014 in their federal allocation of Medicaid DSH funds had the cuts begun as originally planned.5 Delaying the cuts until fiscal year 2017 could mean that California and Texas will face payment reductions in that N ov em b e r 2 0 1 4
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Disproportionate-Share Hospitals year of 10.08 percent and 19.87 percent, respectively. In fiscal year 2018 the DSH payment reductions to the two states could be 26.32 percent and 51.88 percent, respectively. Originally, the cuts in Medicaid DSH payments were justified by the expectation that the ACA’s expansion of health insurance would be accompanied by a decrease in uncompensated care costs. However, many states rejected the Medicaid expansion to people with incomes of up to 138 percent of the federal poverty level. The ACA is projected to leave 30.0 million people without insurance, and the lack of Medicaid expansion accounts for an estimated 3.6–5.2 million of these people.6,7 Persistent levels of uninsured patients combined with DSH payment reductions will shift the burden of these costs from the federal government to hospitals.8 To remain financially viable, hospitals may respond by reducing the amount of uncompensated care or other services they provide.9,10 For example, officials at Grady Memorial Hospital, a large safety-net hospital in Atlanta, stated that DSH payment cuts coupled with a lack of Medicaid expansion in Georgia may force them to eliminate services such as mental health and obstetrics and gynecology, which would affect the indigent population they serve.11 Administrators at Grady also believe that this combination of cuts and lack of expansion would eliminate the hospital’s current profit margin. The reduction in Medicaid DSH funding is unique among funding cuts in allowing states to determine how the reductions will be borne across hospitals. Unlike other ACA policies such as fee-for-service reductions, which will be applied universally to eligible hospitals, the distribution of Medicaid DSH payments will be at the discretion of each state’s regulators and elected officials. In a 2009 perspective piece, Michael Spivey and Arthur Kellermann described how states had worked for years to maximize their federal match for Medicaid DSH funds, using a set of rules from the Centers for Medicare and Medicaid Services (CMS) that fails to ensure that these funds are properly allocated to the hospitals providing the greatest amount of uncompensated care.12 As Spivey and Kellermann point out, hospitals providing as little as 1 percent of their total inpatient care to Medicaid patients can receive DSH funds, and states that distribute their DSH funds so liberally may be helping less deserving hospitals at the expense of safety-net institutions. For example, in 2008, 174 (approximately 96 percent) of Ohio’s hospitals received Medicaid DSH payments—with the largest DSH payment, representing 5.2 percent of all Ohio DSH 2026
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funds, going to one hospital. In contrast, thirtytwo (25 percent) of Wisconsin’s hospitals received Medicaid DSH payments in 2008, and one hospital received 36.5 percent of all of the state’s DSH funds.13 State policy makers will have to make three decisions that will greatly affect the future of hospital finance in their state: whether to expand Medicaid eligibility, how to distribute reductions in Medicaid DSH payments, and whether to change the distribution of the payments in response to the incentives created by the ACA and implemented in CMS’s rules. Hospitals’ financial health plays an important role in how the institutions manage to adapt to a changing environment.14 Compared to hospitals in states that are expanding Medicaid eligibility under the ACA, hospitals in states that are not expanding eligibility may have differences in financial health that could be exacerbated by reductions in Medicaid DSH payments. This study categorizes acute care hospitals in expansion and nonexpansion states and evaluates differences in financial health. The aim of this analysis was to identify hospitals that may be the most vulnerable financially to cuts in Medicaid DSH payments. Understanding the impact on hospital finances of states’ decisions to expand Medicaid eligibility or not—combined with reductions in Medicaid DSH payments—is critical as hospital managers develop a response to these changes and state policy makers aim to maintain access to high-quality health care for their constituents.
Study Data And Methods To identify hospitals that are sensitive to reductions in their Medicaid DSH payments, we categorized all hospitals that receive the payments using four variables that are relevant to CMS’s rules for reducing the payments. Two variables (Medicaid expansion and high or low DSH payments) are at the state level, and two (Medicaid DSH reliance and Medicaid volume or uncompensated care status) are hospital-specific. Following the categorization, we identified and compared the financial condition of two hospital groups of interest (hospitals with high reliance on DSH payments in high-DSH nonexpansion states and hospitals with high reliance on DSH payments in high-DSH expansion states) based on the potential adverse impact of cuts in Medicaid DSH payments on them. Data The data that we used to measure the financial condition of hospitals came from the 2011 American Hospital Association (AHA) Annual Survey and data for 2011 in the Healthcare Cost Report Information System (HCRIS). The
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Hospitals in nonexpansion states will be under additional stress as their DSH payments are reduced.
AHA survey contains information from approximately 6,300 US hospitals and captures information on various aspects of their organizational structure, ownership, system membership, services provided, personnel, and financial performance. Medicare-certified institutional providers are required to submit cost reports each year, and HCRIS contains information from over 5,900 of these institutions on facility characteristics, utilization, charges and costs, Medicare settlement data, and financial statements. Hospitals were identified as eligible for Medicaid DSH payments if they received the payments according to the 2008 Annual DSH Reports.13 Each state is required to submit such a report each year, and the reports are independently audited. States With High Or Low DSH Payments The Affordable Care Act directed CMS to impose a smaller percentage reduction on “low DSH states,” those in which less than 3 percent of the state’s Medicaid expenditures consist of DSH payments. As specified by CMS’s final rule on Medicaid DSH reductions,4 the average DSH reduction for the first year among the seventeen low-DSH states would be 1.3 percent, ranging from 0.5 percent to 2.3 percent. In comparison, the thirty-three “high DSH states” would have an average reduction of 4.7 percent, ranging from 1.9 percent to 7.1 percent. Of the $500 million in reductions in Medicaid DSH payments that were scheduled for fiscal year 2014, just $6.2 million was to come from hospitals in low-DSH states.5 Hospitals in highDSH states would face significantly greater reductions to their Medicaid DSH payments, in both relative and raw amounts. Therefore, we focused this analysis on hospitals located in high-DSH states. Expansion And Nonexpansion States The uninsurance rate is estimated to decrease in every state. However, states’ decisions to expand or not to expand their Medicaid eligibility to
138 percent of poverty will result in variations across states in the size of the decrease. We categorized twenty-five states as expansion states and twenty-five as nonexpansion states, according to the most recent information available as of the submission of this article.15 Hospitals in nonexpansion states will be under additional stress as their DSH payments are reduced, since their states’ uninsured populations will remain higher relative to those in expansion states. Sixteen of the twenty-five nonexpansion states were high-DSH states, as were seventeen of the twenty-five expansion states. Hospitals With High Or Low Reliance On DSH Payments Reductions in Medicaid DSH payments have the largest potential impact on hospitals for which the payments represent a significant portion of their total revenue. Among hospitals eligible for the payments for which data were available, Medicaid DSH payments accounted for 2.52 percent of total revenues, on average. We divided hospitals eligible for the payments into those with a high or low reliance on the payments, depending on whether their proportion of Medicaid DSH payments to total revenues was greater or less than 2.52 percent. To calculate this variable, we used the Medicaid DSH payments from the 2008 Annual DSH Reports and total revenue from the HCRIS data. Medicaid Volume And Uncompensated Care Status CMS is required to impose larger reductions on states that do not target DSH payments to hospitals that either have a high volume of Medicaid patients or provide a high level of uncompensated care. Under the CMS final rule,4 a hospital is considered to have a high volume of Medicaid patients if its Medicaid inpatient utilization rate is one standard deviation or more above the mean rate among all hospitals in the state that receive Medicaid payments. Hospitals are considered to provide a high level of uncompensated care if their ratio of uncompensated care costs to total Medicaid and uninsured care costs is greater than the average ratio among hospitals eligible for DSH payments in the state.4 To avoid greater subsequent reductions, states are therefore incentivized to further target their Medicaid DSH payments to hospitals with high volumes of Medicaid patients or high levels of uncompensated care. Some states may impose smaller reductions in the payments to such hospitals, at least initially. States that do not improve their targeting of Medicaid DSH payments may see greater reductions that will come at the expense of all hospitals, regardless of their volumes of Medicaid patients or levels of uncompensated care. Using CMS’s definitions,4 we calculated the N ov e m b e r 201 4
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Disproportionate-Share Hospitals Medicaid inpatient utilization rates for each hospital and state using the HCRIS data. We calculated uncompensated care averages using the 2008 Annual DSH Reports. Hospitals’ Financial Condition This study borrows from the method that Gloria Bazzoli and coauthors used to compare hospitals based on financial strength. Bazzoli and colleagues used operating margin as one measure of financial viability to categorize hospitals as having weak, moderate, or strong financial health.16 Operating margin, which excludes interest payments and income taxes, is a measure of profitability generated from the ongoing operations of the hospital. We calculated the margin as the difference between net patient revenues (including DSH payments) and operating expenses divided by net patient revenues. Using this measure, hospitals’ financial conditions were compared nationwide and categorized as weak (the bottom quartile of the range), strong (the top quartile), or moderate (the two middle quartiles). Groups Of Interest After the hospitals had been categorized, we focused on two groups. Group 1 consisted of the hospitals that had a high reliance on DSH payments and that were in highDSH states that were not expanding Medicaid eligibility. The hospitals in group 2 also had a high reliance on DSH payments and were in high-DSH states, but these hospitals were in states that were expanding Medicaid eligibility. ▸ GROUP 1: Hospitals in group 1 are perhaps in the most vulnerable position regarding reductions in Medicaid DSH payments. Hospitals with high volumes of Medicaid patients or that provide high levels of uncompensated care may initially be protected from reductions because of CMS’s incentive for states to concentrate Medicaid DSH payments on such hospitals. However, states may not be responsive to that incentive. And as DSH cuts increase between 2017 and 2024, hospitals with high Medicaid volume or high levels of uncompensated care may not be spared from the reductions. Overall, hospitals without high Medicaid volume or high levels of uncompensated care are particularly vulnerable: They may be more likely to see greater reductions as funding formulas seek to keep DSH payments to other hospitals unchanged. Additionally, the uninsurance rate will decrease for hospitals in nonexpansion states, but people with incomes of less than 138 percent of poverty will remain uninsured. If states concentrate their cuts on hospitals that do not have high Medicaid volumes or high levels of uncompensated care, these institutions may change their behavior by providing less uncompensated care or eliminating some services. This could shift 2028
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that care to the hospitals in these states that have high Medicaid volumes or high levels of uncompensated care. ▸ GROUP 2: Even in expansion states, hospitals with a high reliance on DSH payments may be at substantial risk. The ACA is estimated to leave thirty million people uninsured.7 If a hospital in an expansion state serves high volumes of newly enrolled Medicaid beneficiaries and of people who remain uninsured, DSH payments would still be important. But under the CMS final rule,4 those states with lower rates of uninsurance—the expansion states—will see deeper cuts in the payments. Initially, the hospitals in group 2 may not be at risk. However, as their state’s uninsurance rate declines and cuts in DSH payments increase, hospitals with a high reliance on the payments that see high volumes of Medicaid or uninsured patients may face heightened financial pressure. Hospitals with high Medicaid volumes or high levels of uncompensated care in states such as Arkansas that have decided to purchase private insurance for their expanded Medicaid population could be at risk if they cannot attract these privately insured patients. People with private insurance may have a greater choice of providers than if they were covered under traditional Medicaid. This could leave some hospitals with a combination of lower Medicaid DSH payments and a worsening payer mix. Limitations This study is subject to a few notable limitations. First, the analysis is crosssectional. A poor or excellent financial year for a hospital may be an anomaly. Similarly, a hospital could be categorized as having a high Medicaid volume or high level of uncompensated care one year, but not the next. Second, the 2008 data that we used from the Annual DSH Reports were the most recent available. However, the financial indicator data were from 2011. CMS officials have stated4 that they intend to predominantly use data from the DSH reports to identify hospitals with high volumes of Medicaid patients or high levels of uncompensated care, as well as to calculate total DSH payments. Therefore, we believe it was appropriate to use data from the Annual DSH Reports whenever possible. The third limitation concerns intergovernmental transfers, in which public hospitals pay the state a given amount that is then used as matching funds for the federal DSH payment. This process leaves the net gain for such hospitals undisclosed. As a result, public hospitals appear to benefit more financially from Medicaid DSH payments than they actually do. This could affect our measure of hospitals’ reliance on the payments. However, previous research
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has documented the prominent role of Medicaid revenues17 and DSH payments at public safetynet hospitals.18 Because our analysis categorizes hospitals instead of using their DSH payments for statistical testing, we believe that the impact of this limitation is minimized. Finally, the reader should note that this research was based on the CMS rule that was to be implemented in 2014 and 2015.4 Regulators at CMS stated that they intend to revisit this rule after 2015.4 However, with the delay in the implementation of the reductions, the regulators may change the DSH reduction methodology at the beginning of fiscal year 2017. Any substantial changes in it could affect the conclusions of this article.
Study Results The total sample identified in the AHA data was 4,407 acute care hospitals, of which 3,421 were located in high-DSH states. A total of 2,104 acute care hospitals were identified as eligible for Medicaid DSH payments and were successfully matched across the AHA, HCRIS, and Annual DSH Report data. We were unable to match 503 hospitals that were in the Annual DSH Reports with the other data sources. However, some of these hospitals may have closed or merged with other institutions in the period 2008–11. Additionally, sixty-four hospitals did not submit the data required to calculate the level of uncompensated care they provided.We included them in the study but categorized them as not having a high volume of Medicaid patients or a high level of uncompensated care. Finally, hospitals from Delaware, Maine, Massachusetts, Tennessee, and Washington were not included. Those states either did not submit a DSH report in 2008 or concentrated their DSH payments on a single psychiatric hospital. A significantly greater percentage of hospitals eligible for Medicaid DSH payments in nonexpansion states were in weak financial condition based on their operating margins, compared to similar hospitals in expansion states (Exhibit 1). Additionally, the proportion of hospitals that were in strong financial condition was greater in nonexpansion states than in the expansion states. The categorization of all hospitals in highDSH states is presented in Exhibit 2 (see online Appendix Exhibit A1 for a categorization of all hospitals in low DSH states).19 We categorized 377 acute care hospitals as institutions that had a high reliance on DSH payments and that were in high-DSH states that were not expanding Medicaid eligibility (group 1). In this group, 41.7 per-
cent (eighty-eight hospitals) with a high volume of Medicaid patients or a high level of uncompensated care and 43.4 percent (seventytwo hospitals) that did not have a high volume of Medicaid patients or a high level of uncompensated care were in weak financial condition, according to their operating margins. We identified 152 hospitals as institutions that had a high reliance on DSH payments and that were in high-DSH states that were expanding Medicaid (group 2). In this group, 45.8 percent (forty-four hospitals) with a high volume of Medicaid patients or a high level of uncompensated care and 37.5 percent (twenty-one hospitals) that did not have a high volume or high level of uncompensated care were in weak financial condition. Chi-square tests of hospitals in strong and weak financial conditions between groups 1 and 2 were not significant.
Discussion The objectives of this research were to identify the hospitals that may be the most financially vulnerable to reductions in Medicaid DSH payments and to analyze their financial condition. We found that nonexpansion states had a larger percentage of hospitals eligible for the payments that were in weak financial condition—based on their operating margins—compared to expansion states. However, when we focused on the hospitals in the two groups of interest—hospitals that had a high reliance on DSH payments and that were in high-DSH nonexpansion states and hospitals that had a high reliance on DSH payments and that were in high-DSH expansion states—the proportion of weak hospitals was similar in expansion and nonexpansion states. In all, 529
Exhibit 1 Financial Condition Of Acute Care Hospitals Eligible For Medicaid Disproportionate-Share Hospital Payments, 2011 Hospitals in: Expansion states (n=967)
Nonexpansion states (n=1,137)
−4.68 25.09
−3.91 21.31
Hospital operating margin Mean (%) Standard deviation (%)
Hospitals whose financial condition is: Strong 186 (19.2%)** Moderate 563 (58.2%) Weak 218 (22.5%)***
268 (23.6%) 536 (47.1%) 333 (29.3%)
SOURCE Authors’ analysis of data from the Healthcare Cost Report Information System. NOTES “Strong” financial condition is in the top quartile (5.08 percent or more). “Weak” is in the bottom quartile (below −8.00 percent). “Moderate” is in the two middle quartiles. **p < 0:05 ***p < 0:01
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Disproportionate-Share Hospitals Exhibit 2 Categorization Of Acute Care Hospitals In States Where Medicaid Disproportionate-Share Hospital (DSH) Payments Account For At Least 3 Percent Of State Medicaid Expenditures (“High DSH States”), 2011 Hospitals whose reliance on DSH payments is: High (n=529)
Low (n=1,258)
Financial condition Volume of Medicaid patients or level of uncompensated care
Strong
Moderate
Weak
No.
Strong
Moderate
Weak
96 56
8.3% 14.3
45.8% 48.2
45.8% 37.5
389 304
22.9% 18.1
58.9% 60.9
18.3% 21.1
16.1 10.8
42.2 45.8
41.7 43.4
329 236
28.3 25.4
48.0 51.7
23.7 22.9
Hospitals in expansion states High Not high Hospitals in nonexpansion states High Not high
Financial condition
No.
211 166
SOURCE Authors’ analysis of data from the Healthcare Cost Report Information System and 2008 Annual DSH Reports. NOTES All hospitals in the exhibit were eligible for DSH payments. Hospitals with a high reliance on the payments are those institutions whose proportion of Medicaid DSH payments to total revenues was greater than 2.52 percent; those with a low reliance had a proportion of less than 2.52 percent. Expansion states are those that have decided to expand eligibility for Medicaid to people with incomes of up to 138 percent of the federal poverty level. Strong, moderate, and weak financial conditions are explained in the notes to Exhibit 1. A hospital is considered to have a high volume of Medicaid patients if its Medicaid inpatient utilization rate is one standard deviation or more above the mean rate among all hospitals in the state that receive Medicaid payments. A hospital is considered to provide a high level of uncompensated care if its ratio of uncompensated care costs to total Medicaid and uninsured care costs is greater than the average ratio among hospitals eligible for DSH payments in the state.
42
◀ %
High reliance on DSH Of the 551 hospitals with weak operating margins, 42.1 percent had a high reliance on Medicaid DSH payments as a source of revenue.
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hospitals were in one of the two groups of interest. Of these hospitals, 225 (42.5 percent; weighted average of hospitals with weak financial condition under “high DSH reliance” in Exhibit 2) were in weak financial condition, and 68 (12.9 percent; weighted average of hospitals with strong financial condition under “high DSH reliance” in Exhibit 2) were in strong financial condition. Variations In Hospitals’ Financial Health An interesting finding of this analysis was the wide range of financial health among hospitals eligible for Medicaid DSH payments. Some of the hospitals were financially strong, while the weak could have significant negative operating margins. Of the 551 hospitals with weak operating margins, 42.1 percent had a high reliance on Medicaid DSH payments as a source of revenue. This raises the question of how hospitals operate under such financial distress. Li-Lin Liu and coauthors examined financially distressed hospitals and found that not-forprofit institutions were less likely to close because of financial distress if they were the sole hospital in a community, dependent on Medicare patients, or a small rural hospital.20 In addition, for-profit hospitals were more likely to be adversely affected financially by having a high volume of Medicare and Medicaid patients, compared to not-for-profit or governmental hospitals. The authors concluded that this association may be because of differences in the allocation of Medicaid DSH payments. In turn, that indicates the critical role of the
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payments in subsidizing many at-risk hospitals. Policy makers should recognize that many hospitals that will be affected by cuts in Medicaid DSH payments are already financially weak, and that decreases in revenue may affect their ability to provide vulnerable populations with access to care. As Medicaid DSH funds decrease during the next several years, it is possible that the financial condition of hospitals eligible for Medicaid DSH payments will systematically change, with a greater proportion of hospitals in nonexpansion states potentially shifting into a weak financial condition relative to hospitals in expansion states. An analysis by the Urban Institute estimated that if every state expanded its Medicaid program, hospitals would gain $180.3 billion over ten years from additional patient revenues.21 The future distribution of these financial gains tied to Medicaid expansion will obviously be realized only by hospitals located in states that expand their Medicaid eligibility. In expansion states, decreases in DSH payments to hospitals with a high reliance on the payments may be at least partially offset by the added revenue from the expansion. High-DSH-reliant hospitals in nonexpansion states are similar to such hospitals in expansion states in terms of their financial condition and will also experience significant DSH reductions but will not see increased revenue through expansion. In addition, hospitals that have a high reliance on DSH payments and that are in high-DSH nonexpansion states may face higher demand for
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States should weigh various strategies to reduce Medicaid DSH payments and plan to monitor the impact.
uncompensated care if other hospitals in their state reduce the level of uncompensated care or other less profitable services they provide. Going forward, this policy change may push more hospitals that have a high reliance on the payments and that are in high-DSH nonexpansion states into a weak financial condition. It may even cause the weakest hospitals to close. Furthermore, the financial disparity in all states between hospitals that are eligible for DSH payments and those that are not may increase with the cuts in the payments. These outcomes are worth monitoring because of their potential impact on access to care for lowincome patients. Changes In Hospitals’ Behavior Whether or not reductions in Medicaid DSH payments will alter hospitals’ behavior in providing uncompensated care remains an important question. Previous research has concluded that increasing the funding for uncompensated care at the state level can increase the provision of uncompensated care.22,23 Research on the effects of cuts to uncompensated care funds is more mixed. Anthony Lo Sasso and Dorian Seamster found no relationship between Medicaid DSH spending and the provision of uncompensated care.24 However, Hui-Min Hsieh and Gloria Bazzoli found that nonprofit hospitals in California reduced their uncompensated care services in response to reductions in Medicaid DSH payments in the Balanced Budget Act of 1997.9 Similarly, another study on the effect of reductions resulting from the 1997 act found that safety-net hospitals reduced their provision of uncompensated care.25 Based on these findings, policy makers and researchers should monitor hospitals’ responses to reductions in Medicaid DSH payments in their state. The responses will likely vary and have meaningful effects on access to care for lowincome and uninsured people. Medicare DSH Payments A relevant policy under the ACA that is not covered in this article is the reduction in Medicare DSH payments. Be-
ginning in fiscal year 2014, the federal government will withhold 75 percent of Medicare DSH payments, reduce that amount by the percentage of reduction in the national uninsurance rate (which is projected to be 5.6 percent),26 and distribute the remainder according to hospitals’ ratio of uncompensated care to the total amount of uncompensated care provided by all hospitals that are eligible for Medicare DSH payments.26 On the one hand, this will put greater financial stress on hospitals in nonexpansion states, since the pool of Medicare DSH dollars will decrease with the uninsurance rate while these hospitals may not benefit from having more insured patients. On the other hand, hospitals that provide the greatest amounts of uncompensated care in the nation will still receive a large share of Medicare DSH funds. Those hospitals without high volumes of Medicaid patients or high levels of uncompensated care will see greater reductions in their Medicare DSH payments, since they do not provide a large amount of uncompensated care relative to other hospitals in their state, let alone those across the nation. This combination of reductions without the financial benefits of expansion could place such hospitals in an even more vulnerable position than if they were faced with Medicaid DSH cuts alone. New State Policies It is likely that a wide variety of state policies will emerge going forward. State policy makers must choose whether to continue with the status quo or to respond to the incentives laid out by CMS and reallocate Medicaid DSH funds toward hospitals with high volumes of Medicaid patients or high levels of uncompensated care. To illustrate this point, consider Georgia, a high-DSH nonexpansion state. In 2008, 88 percent of all hospitals in Georgia received Medicaid DSH payments.13 Our analysis included 122 of these hospitals, 75 of which had high volumes of Medicaid patients or high levels of uncompensated care. The median and the mean DSH payments were predictably higher for those seventyfive hospitals, compared to hospitals with lower levels of Medicaid utilization or uncompensated care (the median payments were $923,386 and $516,530, respectively; the mean payments were $4,041,314 and $1,395,883, respectively). However, seventeen of the hospitals that did not have high volumes of Medicaid patients or high levels of uncompensated care were categorized as having a high reliance on DSH payments. Nine of the seventeen had a weak financial condition, and eleven were rural hospitals. In this case, greater cuts to hospitals without high volumes of Medicaid patients or high levels of uncompensated care could result in a disproportionate burden on some rural communities. N ov e m b e r 2 0 1 4
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Disproportionate-Share Hospitals The example also demonstrates a paradox for some states: Responding to CMS’s incentives may financially harm hospitals, but Medicaid DSH payments were never intended to constitute a significant level of revenue at hospitals without high volumes of Medicaid patients or high levels of uncompensated care. Thus, CMS’s final rule on reductions to Medicaid DSH payments4 could be considered a correction to policies that subsidized hospitals using these funds. Continuing with this scenario, Georgia policy makers have three responses to choose from. First, they could respond to the ACA incentives by allocating a greater proportion of funds to hospitals with high volumes of Medicaid patients or high levels of uncompensated care. Advantages to this approach could include the avoidance of cuts to vital services such as the ones that may occur at Grady Memorial Hospital, as well as the avoidance by the state of deeper cuts to DSH payments in subsequent years. The potential drawback is that such a policy could adversely affect some hospitals in rural Georgia, especially when concern over these facilities is already high.27 The second possible response is to continue with the status quo. This could be advantageous in sustaining financially vulnerable hospitals that do not have high volumes of Medicaid patients or high levels of uncompensated care, such as the eleven rural hospitals mentioned above. The disadvantages of this approach include a greater financial strain on hospitals that do have high Medicaid volumes or high levels of uncompensated care—institutions that provide a disproportionate share of indigent care—and the fact that all hospitals would be left with an even smaller pie of DSH payments in subsequent years, according to CMS’s rules.4 A third, more practical, approach for Georgia would be to pursue a strategy that balances the needs of hospitals with high volumes of Medicaid patients or high levels of uncompensated
care and the needs of rural hospitals that are financially vulnerable to these reductions. That is, the state could move forward with a policy that directed a greater percentage of funds to the former group of hospitals, while reserving another pool of Medicaid DSH funds for rural hospitals that have a high reliance on the funds and are in a weak financial condition—which would preserve care in certain areas of the state. Georgia’s scenario is just one example. The situation will vary greatly by state and may change significantly if more states expand their Medicaid programs, an option that many elected officials in nonexpansion states appear to be considering.28
Conclusion Further research will be needed at the national, state, and local levels on the consequence of reductions in Medicaid DSH payments under the Affordable Care Act. CMS has stated that it does “not have sufficient information on the relative impacts [of the reductions] that would result from state decisions to implement the new coverage group [the Medicaid expansion].”4(p57294) Differences between expansion and nonexpansion states must be explored, in terms both of the financial health of providers and of access to care for uninsured and lowincome people. States should weigh various strategies to reduce Medicaid DSH payments and plan to monitor the impact of the reductions. Effects will be different across health care markets, with a greater concentration of uncompensated care at fewer hospitals being one possibility. However, the literature on the effect of the reductions is sparse and mixed.9,24,25 Research at the local level should focus on alternative policies regarding access to care for vulnerable populations, particularly in states that do not expand Medicaid eligibility. ▪
Some of the results described in this article were presented as a poster at AcademyHealth Annual Research Meeting, San Diego, California, June 8, 2014.
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NOTES 1 DeNavas-Walt C, Proctor BD, Smith JC. Income, poverty, and health insurance coverage in the United States: 2012 [Internet]. Washington (DC): Census Bureau; 2013 Sep [cited 2014 Aug 21]. Available from: http://www.census.gov/prod/2013 pubs/p60-245.pdf 2 Coughlin TA, Holahan J, Caswell K, McGrath M. An estimated $84.9 billion in uncompensated care was provided in 2013; ACA payment cuts could challenge providers. Health Aff (Millwood). 2014;33(5):807–14. 3 Mitchell A. Medicaid disproportionate share hospital payments [Internet]. Washington (DC): Congressional Research Service; 2013 Dec 2 [cited 2014 Aug 21]. Available from: http://fas.org/sgp/crs/misc/ R42865.pdf 4 Centers for Medicare and Medicaid Services. Medicaid program; state Disproportionate Share Hospital allotment reductions. Final rule. Fed Regist. 2013;78(181):57293–313. 5 Centers for Medicare and Medicaid Services. Medicaid program; state Disproportionate Share Hospital allotment reductions. Proposed rule. Fed Regist. 2013;78(94):28551–69. 6 Kaiser Commission on Medicaid and the Uninsured. The coverage gap: uninsured poor adults in states that do not expand Medicaid [Internet]. Washington (DC): The Commission; 2014 Apr 2 [cited 2014 Aug 21]. (Issue Brief). Available from: http:// kff.org/health-reform/issue-brief/ the-coverage-gap-uninsured-pooradults-in-states-that-do-not-expandmedicaid/ 7 Price CC, Eibner C. For states that opt out of Medicaid expansion: 3.6 million fewer insured and $8.4 billion less in federal payments. Health Aff (Millwood). 2013;32(6): 1030–6. 8 Graves JA. Medicaid expansion optouts and uncompensated care. N Engl J Med. 2012;367(25):2365–7. 9 Hsieh HM, Bazzoli GJ. Medicaid Disproportionate Share Hospital payment: how does it impact hospitals’ provision of uncompensated care? Inquiry. 2012;49(3):254–67. 10 Coughlin TA, Long SK, Sheen E, Tolbert J. How five leading safety-net hospitals are preparing for the challenges and opportunities of health care reform. Health Aff (Millwood). 2012;31(8):1690–7. 11 Blau M. This Georgia hospital shows why rejecting Medicaid isn’t easy. Washington Post. 2013 Jun 26. 12 Spivey M, Kellermann AL. Rescuing
13
14
15
16
17
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the safety net. N Engl J Med. 2009; 360(25):2598–601. Medicaid.gov. Medicaid Disproportionate Share Hospital (DSH) payments [Internet]. Baltimore (MD): Centers for Medicare and Medicaid Services; [cited 2014 Aug 22]. Available from: http://www .medicaid.gov/Medicaid-CHIPProgram-Information/By-Topics/ Financing-and-Reimbursement/ Medicaid-Disproportionate-ShareHospital-DSH-Payments.html Sussman JB, Halasyamani LK, Davis MM. Hospitals during recession and recovery: vulnerable institutions and quality at risk. J Hosp Med. 2010; 5(5):302–5. Kaiser Family Foundation. Status of state action on the Medicaid expansion decision, as of December 11, 2013 [Internet]. Menlo Park (CA): KFF; [cited 2013 Dec 21]. (Note that this source is updated constantly, so the information now available at this web address is not the same as that the authors accessed in December 2013, on which their calculations are based). Available from: http:// kff.org/health-reform/stateindicator/state-activity-aroundexpanding-medicaid-under-theaffordable-care-act/ Bazzoli GJ, Lindrooth RC, Clement JP, Zhao M, Chukmaitov A. Did the strong get stronger and the weak get weaker? Examining changes in hospital financial condition. J Health Care Finance. 2006;33(2):55–69. Zaman O, Cummings LC, Laycox S. America’s safety net hospitals and health systems, 2010: results of the annual NAPH Hospital Characteristics Survey [Internet]. Washington (DC): National Association of Public Hospitals and Health Systems; 2012 May [cited 2014 Aug 22]. Available from: http://essentialhospitals.org/ wp-content/uploads/2013/12/ NPH214.pdf Fagnani L, Tolbert J (National Association of Public Hospitals and Health Systems, Washington, DC). The dependence of safety net hospitals and health systems on the Medicare and Medicaid Disproportionate Share Hospital payment programs [Internet]. New York (NY): Commonwealth Fund; 1999 Nov [cited 2014 Aug 22]. Available from: http://www.commonwealth fund.org/usr_doc/fagnani_depend safetynethospitals_351.pdf To access the Appendix, click on the Appendix link in the box to the right of the article online.
20 Liu L, Jervis KJ, Younis M, Forgione DA. Hospital financial distress, recovery and closure: managerial incentives and political costs. Journal of Public Budgeting, Accounting, and Financial Management. 2011; 23(1):31–68. 21 Dorn S, Buettgens M, Holahan J, Carroll C. The financial benefit to hospitals from state expansion of Medicaid [Internet]. Washington (DC): Urban Institute; 2013 Mar [cited 2014 Aug 22]. Available from: http://www.urban.org/uploaded pdf/412770-The-Financial-Benefitto-Hospitals-from-State-Expansionof-Medicaid.pdf 22 Gaskin DJ. Altruism or moral hazard: the impact of hospital uncompensated care pools. J Health Econ. 1997;16(4):397–416. 23 Thorpe KE, Phelps CE. The social role of not-for-profit organizations: hospital provision of charity care. Econ Inq. 1991;29(3):472–84. 24 Lo Sasso AT, Seamster DG. How federal and state policies affected hospital uncompensated care provision in the 1990s. Med Care Res Rev. 2007;64(6):731–44. 25 Bazzoli GJ, Lindrooth RC, Kang R, Hasnain-Wynia R. The influence of health policy and market factors on the hospital safety net. Health Serv Res. 2006;41(4 Pt 1):1159–80. 26 Centers for Medicare and Medicaid Services. Medicare program; hospital inpatient prospective payment systems for acute care hospitals and the long-term care hospital prospective payment system and fiscal year 2014 rates; quality reporting requirements for specific providers; hospital conditions of participation; payment policies related to patient status. Final rules. Fed Regist. 2013; 78(160):50495–1040. 27 Robeznieks A. Georgia governor acts to bolster faltering rural hospitals. Modern Healthcare [serial on the Internet]. 2014 Apr 30 [cited 2014 Aug 22]. Available from: http:// www.modernhealthcare.com/ article/20140430/NEWS/ 304309961 28 Millman J. 23 states still haven’t expanded Medicaid. Which could be next? Washington Post Wonkblog [blog on the Internet]. 2014 Aug 29 [cited 2014 Sep 4]. Available from: http://www.washingtonpost.com/ blogs/wonkblog/wp/2014/08/29/ 23-states-still-havent-expandedmedicaid-which-could-be-next
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Disproportionate-Share Hospitals By Evan S. Cole, Daniel Walker, Arthur Mora, and Mark L. Diana 10.1377/hlthaff.2014.0109 HEALTH AFFAIRS 33, NO. 11 (2014): 2025–2033 ©2014 Project HOPE— The People-to-People Health Foundation, Inc.
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Identifying Hospitals That May Be At Most Financial Risk From Medicaid Disproportionate-Share Hospital Payment Cuts Medicaid disproportionate-share hospital (DSH) payments are expected to decline by $35.1 billion between fiscal years 2017 and 2024, a reduction brought about by the Affordable Care Act (ACA) and recent congressional action. DSH payments have long been a feature of the Medicaid program, intended to partially offset uncompensated care costs incurred by hospitals that treat uninsured and Medicaid populations. The DSH payment cuts were predicated on the expectation that the ACA’s expansion of health insurance to millions of Americans would bring about a decline in many hospitals’ uncompensated care costs. However, the decision of twenty-five states not to expand their Medicaid programs, combined with residual coverage gaps, may leave as many as thirty million people uninsured, and hospitals will bear the burden of their uncompensated care costs. We sought to identify the hospitals that may be the most financially vulnerable to reductions in Medicaid DSH payments. We found that of the 529 acute care hospitals that will be particularly affected by the cuts, 225 (42.5 percent) are in weak financial condition. Policy makers should recognize that decreases in revenue may affect these hospitals’ ability to give vulnerable populations access to care. ABSTRACT
B
efore the implementation of the Affordable Care Act (ACA) began, nearly fifty million people in the United States were estimated to be uninsured.1 For health care, this population relies primarily on hospitals—which were estimated to provide $44.6 billion worth of uncompensated care in 2013.2 The federal government helps hospitals absorb this expense through its Medicaid disproportionate-share hospital (DSH) payments. The DSH program allocates Medicaid funds to states, which distribute these funds to hospitals based on their volume of Medicaid patients and the dollar amount of uncompensated care they provide. The federal government distributes around $11 billion annually in Medicaid DSH funds.3 The ACA originally included decreases in Med-
Evan S. Cole ([email protected]) is an associate project director at the Georgia Health Policy Center, Georgia State University, in Atlanta. Daniel Walker is a Ph.D. candidate in the School of Public Health and Tropical Medicine, Tulane University, in New Orleans, Louisiana. Arthur Mora is a clinical assistant professor in the School of Public Health and Tropical Medicine, Tulane University. Mark L. Diana is an associate professor in the School of Public Health and Tropical Medicine, Tulane University.
icaid DSH payments that would have totaled $18.1 billion in the period 2014–20. The annual cuts would have ranged from $500 million to $5.6 billion in later years.4 The Protecting Access to Medicare Act of 2014 delayed the implementation of these reductions and increased the total to $35.1 billion. The cuts are now set to begin in fiscal year 2017 and end in fiscal year 2024. The delay may help hospitals prepare for the change in funding. However, the increase in the scale of reductions is dramatic. For example, California and Texas would have had an estimated 2.80 percent and 5.52 percent reduction, respectively, in fiscal year 2014 in their federal allocation of Medicaid DSH funds had the cuts begun as originally planned.5 Delaying the cuts until fiscal year 2017 could mean that California and Texas will face payment reductions in that N ov em b e r 2 0 1 4
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Disproportionate-Share Hospitals year of 10.08 percent and 19.87 percent, respectively. In fiscal year 2018 the DSH payment reductions to the two states could be 26.32 percent and 51.88 percent, respectively. Originally, the cuts in Medicaid DSH payments were justified by the expectation that the ACA’s expansion of health insurance would be accompanied by a decrease in uncompensated care costs. However, many states rejected the Medicaid expansion to people with incomes of up to 138 percent of the federal poverty level. The ACA is projected to leave 30.0 million people without insurance, and the lack of Medicaid expansion accounts for an estimated 3.6–5.2 million of these people.6,7 Persistent levels of uninsured patients combined with DSH payment reductions will shift the burden of these costs from the federal government to hospitals.8 To remain financially viable, hospitals may respond by reducing the amount of uncompensated care or other services they provide.9,10 For example, officials at Grady Memorial Hospital, a large safety-net hospital in Atlanta, stated that DSH payment cuts coupled with a lack of Medicaid expansion in Georgia may force them to eliminate services such as mental health and obstetrics and gynecology, which would affect the indigent population they serve.11 Administrators at Grady also believe that this combination of cuts and lack of expansion would eliminate the hospital’s current profit margin. The reduction in Medicaid DSH funding is unique among funding cuts in allowing states to determine how the reductions will be borne across hospitals. Unlike other ACA policies such as fee-for-service reductions, which will be applied universally to eligible hospitals, the distribution of Medicaid DSH payments will be at the discretion of each state’s regulators and elected officials. In a 2009 perspective piece, Michael Spivey and Arthur Kellermann described how states had worked for years to maximize their federal match for Medicaid DSH funds, using a set of rules from the Centers for Medicare and Medicaid Services (CMS) that fails to ensure that these funds are properly allocated to the hospitals providing the greatest amount of uncompensated care.12 As Spivey and Kellermann point out, hospitals providing as little as 1 percent of their total inpatient care to Medicaid patients can receive DSH funds, and states that distribute their DSH funds so liberally may be helping less deserving hospitals at the expense of safety-net institutions. For example, in 2008, 174 (approximately 96 percent) of Ohio’s hospitals received Medicaid DSH payments—with the largest DSH payment, representing 5.2 percent of all Ohio DSH 2026
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funds, going to one hospital. In contrast, thirtytwo (25 percent) of Wisconsin’s hospitals received Medicaid DSH payments in 2008, and one hospital received 36.5 percent of all of the state’s DSH funds.13 State policy makers will have to make three decisions that will greatly affect the future of hospital finance in their state: whether to expand Medicaid eligibility, how to distribute reductions in Medicaid DSH payments, and whether to change the distribution of the payments in response to the incentives created by the ACA and implemented in CMS’s rules. Hospitals’ financial health plays an important role in how the institutions manage to adapt to a changing environment.14 Compared to hospitals in states that are expanding Medicaid eligibility under the ACA, hospitals in states that are not expanding eligibility may have differences in financial health that could be exacerbated by reductions in Medicaid DSH payments. This study categorizes acute care hospitals in expansion and nonexpansion states and evaluates differences in financial health. The aim of this analysis was to identify hospitals that may be the most vulnerable financially to cuts in Medicaid DSH payments. Understanding the impact on hospital finances of states’ decisions to expand Medicaid eligibility or not—combined with reductions in Medicaid DSH payments—is critical as hospital managers develop a response to these changes and state policy makers aim to maintain access to high-quality health care for their constituents.
Study Data And Methods To identify hospitals that are sensitive to reductions in their Medicaid DSH payments, we categorized all hospitals that receive the payments using four variables that are relevant to CMS’s rules for reducing the payments. Two variables (Medicaid expansion and high or low DSH payments) are at the state level, and two (Medicaid DSH reliance and Medicaid volume or uncompensated care status) are hospital-specific. Following the categorization, we identified and compared the financial condition of two hospital groups of interest (hospitals with high reliance on DSH payments in high-DSH nonexpansion states and hospitals with high reliance on DSH payments in high-DSH expansion states) based on the potential adverse impact of cuts in Medicaid DSH payments on them. Data The data that we used to measure the financial condition of hospitals came from the 2011 American Hospital Association (AHA) Annual Survey and data for 2011 in the Healthcare Cost Report Information System (HCRIS). The
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Hospitals in nonexpansion states will be under additional stress as their DSH payments are reduced.
AHA survey contains information from approximately 6,300 US hospitals and captures information on various aspects of their organizational structure, ownership, system membership, services provided, personnel, and financial performance. Medicare-certified institutional providers are required to submit cost reports each year, and HCRIS contains information from over 5,900 of these institutions on facility characteristics, utilization, charges and costs, Medicare settlement data, and financial statements. Hospitals were identified as eligible for Medicaid DSH payments if they received the payments according to the 2008 Annual DSH Reports.13 Each state is required to submit such a report each year, and the reports are independently audited. States With High Or Low DSH Payments The Affordable Care Act directed CMS to impose a smaller percentage reduction on “low DSH states,” those in which less than 3 percent of the state’s Medicaid expenditures consist of DSH payments. As specified by CMS’s final rule on Medicaid DSH reductions,4 the average DSH reduction for the first year among the seventeen low-DSH states would be 1.3 percent, ranging from 0.5 percent to 2.3 percent. In comparison, the thirty-three “high DSH states” would have an average reduction of 4.7 percent, ranging from 1.9 percent to 7.1 percent. Of the $500 million in reductions in Medicaid DSH payments that were scheduled for fiscal year 2014, just $6.2 million was to come from hospitals in low-DSH states.5 Hospitals in highDSH states would face significantly greater reductions to their Medicaid DSH payments, in both relative and raw amounts. Therefore, we focused this analysis on hospitals located in high-DSH states. Expansion And Nonexpansion States The uninsurance rate is estimated to decrease in every state. However, states’ decisions to expand or not to expand their Medicaid eligibility to
138 percent of poverty will result in variations across states in the size of the decrease. We categorized twenty-five states as expansion states and twenty-five as nonexpansion states, according to the most recent information available as of the submission of this article.15 Hospitals in nonexpansion states will be under additional stress as their DSH payments are reduced, since their states’ uninsured populations will remain higher relative to those in expansion states. Sixteen of the twenty-five nonexpansion states were high-DSH states, as were seventeen of the twenty-five expansion states. Hospitals With High Or Low Reliance On DSH Payments Reductions in Medicaid DSH payments have the largest potential impact on hospitals for which the payments represent a significant portion of their total revenue. Among hospitals eligible for the payments for which data were available, Medicaid DSH payments accounted for 2.52 percent of total revenues, on average. We divided hospitals eligible for the payments into those with a high or low reliance on the payments, depending on whether their proportion of Medicaid DSH payments to total revenues was greater or less than 2.52 percent. To calculate this variable, we used the Medicaid DSH payments from the 2008 Annual DSH Reports and total revenue from the HCRIS data. Medicaid Volume And Uncompensated Care Status CMS is required to impose larger reductions on states that do not target DSH payments to hospitals that either have a high volume of Medicaid patients or provide a high level of uncompensated care. Under the CMS final rule,4 a hospital is considered to have a high volume of Medicaid patients if its Medicaid inpatient utilization rate is one standard deviation or more above the mean rate among all hospitals in the state that receive Medicaid payments. Hospitals are considered to provide a high level of uncompensated care if their ratio of uncompensated care costs to total Medicaid and uninsured care costs is greater than the average ratio among hospitals eligible for DSH payments in the state.4 To avoid greater subsequent reductions, states are therefore incentivized to further target their Medicaid DSH payments to hospitals with high volumes of Medicaid patients or high levels of uncompensated care. Some states may impose smaller reductions in the payments to such hospitals, at least initially. States that do not improve their targeting of Medicaid DSH payments may see greater reductions that will come at the expense of all hospitals, regardless of their volumes of Medicaid patients or levels of uncompensated care. Using CMS’s definitions,4 we calculated the N ov e m b e r 201 4
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Disproportionate-Share Hospitals Medicaid inpatient utilization rates for each hospital and state using the HCRIS data. We calculated uncompensated care averages using the 2008 Annual DSH Reports. Hospitals’ Financial Condition This study borrows from the method that Gloria Bazzoli and coauthors used to compare hospitals based on financial strength. Bazzoli and colleagues used operating margin as one measure of financial viability to categorize hospitals as having weak, moderate, or strong financial health.16 Operating margin, which excludes interest payments and income taxes, is a measure of profitability generated from the ongoing operations of the hospital. We calculated the margin as the difference between net patient revenues (including DSH payments) and operating expenses divided by net patient revenues. Using this measure, hospitals’ financial conditions were compared nationwide and categorized as weak (the bottom quartile of the range), strong (the top quartile), or moderate (the two middle quartiles). Groups Of Interest After the hospitals had been categorized, we focused on two groups. Group 1 consisted of the hospitals that had a high reliance on DSH payments and that were in highDSH states that were not expanding Medicaid eligibility. The hospitals in group 2 also had a high reliance on DSH payments and were in high-DSH states, but these hospitals were in states that were expanding Medicaid eligibility. ▸ GROUP 1: Hospitals in group 1 are perhaps in the most vulnerable position regarding reductions in Medicaid DSH payments. Hospitals with high volumes of Medicaid patients or that provide high levels of uncompensated care may initially be protected from reductions because of CMS’s incentive for states to concentrate Medicaid DSH payments on such hospitals. However, states may not be responsive to that incentive. And as DSH cuts increase between 2017 and 2024, hospitals with high Medicaid volume or high levels of uncompensated care may not be spared from the reductions. Overall, hospitals without high Medicaid volume or high levels of uncompensated care are particularly vulnerable: They may be more likely to see greater reductions as funding formulas seek to keep DSH payments to other hospitals unchanged. Additionally, the uninsurance rate will decrease for hospitals in nonexpansion states, but people with incomes of less than 138 percent of poverty will remain uninsured. If states concentrate their cuts on hospitals that do not have high Medicaid volumes or high levels of uncompensated care, these institutions may change their behavior by providing less uncompensated care or eliminating some services. This could shift 2028
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that care to the hospitals in these states that have high Medicaid volumes or high levels of uncompensated care. ▸ GROUP 2: Even in expansion states, hospitals with a high reliance on DSH payments may be at substantial risk. The ACA is estimated to leave thirty million people uninsured.7 If a hospital in an expansion state serves high volumes of newly enrolled Medicaid beneficiaries and of people who remain uninsured, DSH payments would still be important. But under the CMS final rule,4 those states with lower rates of uninsurance—the expansion states—will see deeper cuts in the payments. Initially, the hospitals in group 2 may not be at risk. However, as their state’s uninsurance rate declines and cuts in DSH payments increase, hospitals with a high reliance on the payments that see high volumes of Medicaid or uninsured patients may face heightened financial pressure. Hospitals with high Medicaid volumes or high levels of uncompensated care in states such as Arkansas that have decided to purchase private insurance for their expanded Medicaid population could be at risk if they cannot attract these privately insured patients. People with private insurance may have a greater choice of providers than if they were covered under traditional Medicaid. This could leave some hospitals with a combination of lower Medicaid DSH payments and a worsening payer mix. Limitations This study is subject to a few notable limitations. First, the analysis is crosssectional. A poor or excellent financial year for a hospital may be an anomaly. Similarly, a hospital could be categorized as having a high Medicaid volume or high level of uncompensated care one year, but not the next. Second, the 2008 data that we used from the Annual DSH Reports were the most recent available. However, the financial indicator data were from 2011. CMS officials have stated4 that they intend to predominantly use data from the DSH reports to identify hospitals with high volumes of Medicaid patients or high levels of uncompensated care, as well as to calculate total DSH payments. Therefore, we believe it was appropriate to use data from the Annual DSH Reports whenever possible. The third limitation concerns intergovernmental transfers, in which public hospitals pay the state a given amount that is then used as matching funds for the federal DSH payment. This process leaves the net gain for such hospitals undisclosed. As a result, public hospitals appear to benefit more financially from Medicaid DSH payments than they actually do. This could affect our measure of hospitals’ reliance on the payments. However, previous research
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has documented the prominent role of Medicaid revenues17 and DSH payments at public safetynet hospitals.18 Because our analysis categorizes hospitals instead of using their DSH payments for statistical testing, we believe that the impact of this limitation is minimized. Finally, the reader should note that this research was based on the CMS rule that was to be implemented in 2014 and 2015.4 Regulators at CMS stated that they intend to revisit this rule after 2015.4 However, with the delay in the implementation of the reductions, the regulators may change the DSH reduction methodology at the beginning of fiscal year 2017. Any substantial changes in it could affect the conclusions of this article.
Study Results The total sample identified in the AHA data was 4,407 acute care hospitals, of which 3,421 were located in high-DSH states. A total of 2,104 acute care hospitals were identified as eligible for Medicaid DSH payments and were successfully matched across the AHA, HCRIS, and Annual DSH Report data. We were unable to match 503 hospitals that were in the Annual DSH Reports with the other data sources. However, some of these hospitals may have closed or merged with other institutions in the period 2008–11. Additionally, sixty-four hospitals did not submit the data required to calculate the level of uncompensated care they provided.We included them in the study but categorized them as not having a high volume of Medicaid patients or a high level of uncompensated care. Finally, hospitals from Delaware, Maine, Massachusetts, Tennessee, and Washington were not included. Those states either did not submit a DSH report in 2008 or concentrated their DSH payments on a single psychiatric hospital. A significantly greater percentage of hospitals eligible for Medicaid DSH payments in nonexpansion states were in weak financial condition based on their operating margins, compared to similar hospitals in expansion states (Exhibit 1). Additionally, the proportion of hospitals that were in strong financial condition was greater in nonexpansion states than in the expansion states. The categorization of all hospitals in highDSH states is presented in Exhibit 2 (see online Appendix Exhibit A1 for a categorization of all hospitals in low DSH states).19 We categorized 377 acute care hospitals as institutions that had a high reliance on DSH payments and that were in high-DSH states that were not expanding Medicaid eligibility (group 1). In this group, 41.7 per-
cent (eighty-eight hospitals) with a high volume of Medicaid patients or a high level of uncompensated care and 43.4 percent (seventytwo hospitals) that did not have a high volume of Medicaid patients or a high level of uncompensated care were in weak financial condition, according to their operating margins. We identified 152 hospitals as institutions that had a high reliance on DSH payments and that were in high-DSH states that were expanding Medicaid (group 2). In this group, 45.8 percent (forty-four hospitals) with a high volume of Medicaid patients or a high level of uncompensated care and 37.5 percent (twenty-one hospitals) that did not have a high volume or high level of uncompensated care were in weak financial condition. Chi-square tests of hospitals in strong and weak financial conditions between groups 1 and 2 were not significant.
Discussion The objectives of this research were to identify the hospitals that may be the most financially vulnerable to reductions in Medicaid DSH payments and to analyze their financial condition. We found that nonexpansion states had a larger percentage of hospitals eligible for the payments that were in weak financial condition—based on their operating margins—compared to expansion states. However, when we focused on the hospitals in the two groups of interest—hospitals that had a high reliance on DSH payments and that were in high-DSH nonexpansion states and hospitals that had a high reliance on DSH payments and that were in high-DSH expansion states—the proportion of weak hospitals was similar in expansion and nonexpansion states. In all, 529
Exhibit 1 Financial Condition Of Acute Care Hospitals Eligible For Medicaid Disproportionate-Share Hospital Payments, 2011 Hospitals in: Expansion states (n=967)
Nonexpansion states (n=1,137)
−4.68 25.09
−3.91 21.31
Hospital operating margin Mean (%) Standard deviation (%)
Hospitals whose financial condition is: Strong 186 (19.2%)** Moderate 563 (58.2%) Weak 218 (22.5%)***
268 (23.6%) 536 (47.1%) 333 (29.3%)
SOURCE Authors’ analysis of data from the Healthcare Cost Report Information System. NOTES “Strong” financial condition is in the top quartile (5.08 percent or more). “Weak” is in the bottom quartile (below −8.00 percent). “Moderate” is in the two middle quartiles. **p < 0:05 ***p < 0:01
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Disproportionate-Share Hospitals Exhibit 2 Categorization Of Acute Care Hospitals In States Where Medicaid Disproportionate-Share Hospital (DSH) Payments Account For At Least 3 Percent Of State Medicaid Expenditures (“High DSH States”), 2011 Hospitals whose reliance on DSH payments is: High (n=529)
Low (n=1,258)
Financial condition Volume of Medicaid patients or level of uncompensated care
Strong
Moderate
Weak
No.
Strong
Moderate
Weak
96 56
8.3% 14.3
45.8% 48.2
45.8% 37.5
389 304
22.9% 18.1
58.9% 60.9
18.3% 21.1
16.1 10.8
42.2 45.8
41.7 43.4
329 236
28.3 25.4
48.0 51.7
23.7 22.9
Hospitals in expansion states High Not high Hospitals in nonexpansion states High Not high
Financial condition
No.
211 166
SOURCE Authors’ analysis of data from the Healthcare Cost Report Information System and 2008 Annual DSH Reports. NOTES All hospitals in the exhibit were eligible for DSH payments. Hospitals with a high reliance on the payments are those institutions whose proportion of Medicaid DSH payments to total revenues was greater than 2.52 percent; those with a low reliance had a proportion of less than 2.52 percent. Expansion states are those that have decided to expand eligibility for Medicaid to people with incomes of up to 138 percent of the federal poverty level. Strong, moderate, and weak financial conditions are explained in the notes to Exhibit 1. A hospital is considered to have a high volume of Medicaid patients if its Medicaid inpatient utilization rate is one standard deviation or more above the mean rate among all hospitals in the state that receive Medicaid payments. A hospital is considered to provide a high level of uncompensated care if its ratio of uncompensated care costs to total Medicaid and uninsured care costs is greater than the average ratio among hospitals eligible for DSH payments in the state.
42
◀ %
High reliance on DSH Of the 551 hospitals with weak operating margins, 42.1 percent had a high reliance on Medicaid DSH payments as a source of revenue.
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hospitals were in one of the two groups of interest. Of these hospitals, 225 (42.5 percent; weighted average of hospitals with weak financial condition under “high DSH reliance” in Exhibit 2) were in weak financial condition, and 68 (12.9 percent; weighted average of hospitals with strong financial condition under “high DSH reliance” in Exhibit 2) were in strong financial condition. Variations In Hospitals’ Financial Health An interesting finding of this analysis was the wide range of financial health among hospitals eligible for Medicaid DSH payments. Some of the hospitals were financially strong, while the weak could have significant negative operating margins. Of the 551 hospitals with weak operating margins, 42.1 percent had a high reliance on Medicaid DSH payments as a source of revenue. This raises the question of how hospitals operate under such financial distress. Li-Lin Liu and coauthors examined financially distressed hospitals and found that not-forprofit institutions were less likely to close because of financial distress if they were the sole hospital in a community, dependent on Medicare patients, or a small rural hospital.20 In addition, for-profit hospitals were more likely to be adversely affected financially by having a high volume of Medicare and Medicaid patients, compared to not-for-profit or governmental hospitals. The authors concluded that this association may be because of differences in the allocation of Medicaid DSH payments. In turn, that indicates the critical role of the
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payments in subsidizing many at-risk hospitals. Policy makers should recognize that many hospitals that will be affected by cuts in Medicaid DSH payments are already financially weak, and that decreases in revenue may affect their ability to provide vulnerable populations with access to care. As Medicaid DSH funds decrease during the next several years, it is possible that the financial condition of hospitals eligible for Medicaid DSH payments will systematically change, with a greater proportion of hospitals in nonexpansion states potentially shifting into a weak financial condition relative to hospitals in expansion states. An analysis by the Urban Institute estimated that if every state expanded its Medicaid program, hospitals would gain $180.3 billion over ten years from additional patient revenues.21 The future distribution of these financial gains tied to Medicaid expansion will obviously be realized only by hospitals located in states that expand their Medicaid eligibility. In expansion states, decreases in DSH payments to hospitals with a high reliance on the payments may be at least partially offset by the added revenue from the expansion. High-DSH-reliant hospitals in nonexpansion states are similar to such hospitals in expansion states in terms of their financial condition and will also experience significant DSH reductions but will not see increased revenue through expansion. In addition, hospitals that have a high reliance on DSH payments and that are in high-DSH nonexpansion states may face higher demand for
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States should weigh various strategies to reduce Medicaid DSH payments and plan to monitor the impact.
uncompensated care if other hospitals in their state reduce the level of uncompensated care or other less profitable services they provide. Going forward, this policy change may push more hospitals that have a high reliance on the payments and that are in high-DSH nonexpansion states into a weak financial condition. It may even cause the weakest hospitals to close. Furthermore, the financial disparity in all states between hospitals that are eligible for DSH payments and those that are not may increase with the cuts in the payments. These outcomes are worth monitoring because of their potential impact on access to care for lowincome patients. Changes In Hospitals’ Behavior Whether or not reductions in Medicaid DSH payments will alter hospitals’ behavior in providing uncompensated care remains an important question. Previous research has concluded that increasing the funding for uncompensated care at the state level can increase the provision of uncompensated care.22,23 Research on the effects of cuts to uncompensated care funds is more mixed. Anthony Lo Sasso and Dorian Seamster found no relationship between Medicaid DSH spending and the provision of uncompensated care.24 However, Hui-Min Hsieh and Gloria Bazzoli found that nonprofit hospitals in California reduced their uncompensated care services in response to reductions in Medicaid DSH payments in the Balanced Budget Act of 1997.9 Similarly, another study on the effect of reductions resulting from the 1997 act found that safety-net hospitals reduced their provision of uncompensated care.25 Based on these findings, policy makers and researchers should monitor hospitals’ responses to reductions in Medicaid DSH payments in their state. The responses will likely vary and have meaningful effects on access to care for lowincome and uninsured people. Medicare DSH Payments A relevant policy under the ACA that is not covered in this article is the reduction in Medicare DSH payments. Be-
ginning in fiscal year 2014, the federal government will withhold 75 percent of Medicare DSH payments, reduce that amount by the percentage of reduction in the national uninsurance rate (which is projected to be 5.6 percent),26 and distribute the remainder according to hospitals’ ratio of uncompensated care to the total amount of uncompensated care provided by all hospitals that are eligible for Medicare DSH payments.26 On the one hand, this will put greater financial stress on hospitals in nonexpansion states, since the pool of Medicare DSH dollars will decrease with the uninsurance rate while these hospitals may not benefit from having more insured patients. On the other hand, hospitals that provide the greatest amounts of uncompensated care in the nation will still receive a large share of Medicare DSH funds. Those hospitals without high volumes of Medicaid patients or high levels of uncompensated care will see greater reductions in their Medicare DSH payments, since they do not provide a large amount of uncompensated care relative to other hospitals in their state, let alone those across the nation. This combination of reductions without the financial benefits of expansion could place such hospitals in an even more vulnerable position than if they were faced with Medicaid DSH cuts alone. New State Policies It is likely that a wide variety of state policies will emerge going forward. State policy makers must choose whether to continue with the status quo or to respond to the incentives laid out by CMS and reallocate Medicaid DSH funds toward hospitals with high volumes of Medicaid patients or high levels of uncompensated care. To illustrate this point, consider Georgia, a high-DSH nonexpansion state. In 2008, 88 percent of all hospitals in Georgia received Medicaid DSH payments.13 Our analysis included 122 of these hospitals, 75 of which had high volumes of Medicaid patients or high levels of uncompensated care. The median and the mean DSH payments were predictably higher for those seventyfive hospitals, compared to hospitals with lower levels of Medicaid utilization or uncompensated care (the median payments were $923,386 and $516,530, respectively; the mean payments were $4,041,314 and $1,395,883, respectively). However, seventeen of the hospitals that did not have high volumes of Medicaid patients or high levels of uncompensated care were categorized as having a high reliance on DSH payments. Nine of the seventeen had a weak financial condition, and eleven were rural hospitals. In this case, greater cuts to hospitals without high volumes of Medicaid patients or high levels of uncompensated care could result in a disproportionate burden on some rural communities. N ov e m b e r 2 0 1 4
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Disproportionate-Share Hospitals The example also demonstrates a paradox for some states: Responding to CMS’s incentives may financially harm hospitals, but Medicaid DSH payments were never intended to constitute a significant level of revenue at hospitals without high volumes of Medicaid patients or high levels of uncompensated care. Thus, CMS’s final rule on reductions to Medicaid DSH payments4 could be considered a correction to policies that subsidized hospitals using these funds. Continuing with this scenario, Georgia policy makers have three responses to choose from. First, they could respond to the ACA incentives by allocating a greater proportion of funds to hospitals with high volumes of Medicaid patients or high levels of uncompensated care. Advantages to this approach could include the avoidance of cuts to vital services such as the ones that may occur at Grady Memorial Hospital, as well as the avoidance by the state of deeper cuts to DSH payments in subsequent years. The potential drawback is that such a policy could adversely affect some hospitals in rural Georgia, especially when concern over these facilities is already high.27 The second possible response is to continue with the status quo. This could be advantageous in sustaining financially vulnerable hospitals that do not have high volumes of Medicaid patients or high levels of uncompensated care, such as the eleven rural hospitals mentioned above. The disadvantages of this approach include a greater financial strain on hospitals that do have high Medicaid volumes or high levels of uncompensated care—institutions that provide a disproportionate share of indigent care—and the fact that all hospitals would be left with an even smaller pie of DSH payments in subsequent years, according to CMS’s rules.4 A third, more practical, approach for Georgia would be to pursue a strategy that balances the needs of hospitals with high volumes of Medicaid patients or high levels of uncompensated
care and the needs of rural hospitals that are financially vulnerable to these reductions. That is, the state could move forward with a policy that directed a greater percentage of funds to the former group of hospitals, while reserving another pool of Medicaid DSH funds for rural hospitals that have a high reliance on the funds and are in a weak financial condition—which would preserve care in certain areas of the state. Georgia’s scenario is just one example. The situation will vary greatly by state and may change significantly if more states expand their Medicaid programs, an option that many elected officials in nonexpansion states appear to be considering.28
Conclusion Further research will be needed at the national, state, and local levels on the consequence of reductions in Medicaid DSH payments under the Affordable Care Act. CMS has stated that it does “not have sufficient information on the relative impacts [of the reductions] that would result from state decisions to implement the new coverage group [the Medicaid expansion].”4(p57294) Differences between expansion and nonexpansion states must be explored, in terms both of the financial health of providers and of access to care for uninsured and lowincome people. States should weigh various strategies to reduce Medicaid DSH payments and plan to monitor the impact of the reductions. Effects will be different across health care markets, with a greater concentration of uncompensated care at fewer hospitals being one possibility. However, the literature on the effect of the reductions is sparse and mixed.9,24,25 Research at the local level should focus on alternative policies regarding access to care for vulnerable populations, particularly in states that do not expand Medicaid eligibility. ▪
Some of the results described in this article were presented as a poster at AcademyHealth Annual Research Meeting, San Diego, California, June 8, 2014.
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NOTES 1 DeNavas-Walt C, Proctor BD, Smith JC. Income, poverty, and health insurance coverage in the United States: 2012 [Internet]. Washington (DC): Census Bureau; 2013 Sep [cited 2014 Aug 21]. Available from: http://www.census.gov/prod/2013 pubs/p60-245.pdf 2 Coughlin TA, Holahan J, Caswell K, McGrath M. An estimated $84.9 billion in uncompensated care was provided in 2013; ACA payment cuts could challenge providers. Health Aff (Millwood). 2014;33(5):807–14. 3 Mitchell A. Medicaid disproportionate share hospital payments [Internet]. Washington (DC): Congressional Research Service; 2013 Dec 2 [cited 2014 Aug 21]. Available from: http://fas.org/sgp/crs/misc/ R42865.pdf 4 Centers for Medicare and Medicaid Services. Medicaid program; state Disproportionate Share Hospital allotment reductions. Final rule. Fed Regist. 2013;78(181):57293–313. 5 Centers for Medicare and Medicaid Services. Medicaid program; state Disproportionate Share Hospital allotment reductions. Proposed rule. Fed Regist. 2013;78(94):28551–69. 6 Kaiser Commission on Medicaid and the Uninsured. The coverage gap: uninsured poor adults in states that do not expand Medicaid [Internet]. Washington (DC): The Commission; 2014 Apr 2 [cited 2014 Aug 21]. (Issue Brief). Available from: http:// kff.org/health-reform/issue-brief/ the-coverage-gap-uninsured-pooradults-in-states-that-do-not-expandmedicaid/ 7 Price CC, Eibner C. For states that opt out of Medicaid expansion: 3.6 million fewer insured and $8.4 billion less in federal payments. Health Aff (Millwood). 2013;32(6): 1030–6. 8 Graves JA. Medicaid expansion optouts and uncompensated care. N Engl J Med. 2012;367(25):2365–7. 9 Hsieh HM, Bazzoli GJ. Medicaid Disproportionate Share Hospital payment: how does it impact hospitals’ provision of uncompensated care? Inquiry. 2012;49(3):254–67. 10 Coughlin TA, Long SK, Sheen E, Tolbert J. How five leading safety-net hospitals are preparing for the challenges and opportunities of health care reform. Health Aff (Millwood). 2012;31(8):1690–7. 11 Blau M. This Georgia hospital shows why rejecting Medicaid isn’t easy. Washington Post. 2013 Jun 26. 12 Spivey M, Kellermann AL. Rescuing
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the safety net. N Engl J Med. 2009; 360(25):2598–601. Medicaid.gov. Medicaid Disproportionate Share Hospital (DSH) payments [Internet]. Baltimore (MD): Centers for Medicare and Medicaid Services; [cited 2014 Aug 22]. Available from: http://www .medicaid.gov/Medicaid-CHIPProgram-Information/By-Topics/ Financing-and-Reimbursement/ Medicaid-Disproportionate-ShareHospital-DSH-Payments.html Sussman JB, Halasyamani LK, Davis MM. Hospitals during recession and recovery: vulnerable institutions and quality at risk. J Hosp Med. 2010; 5(5):302–5. Kaiser Family Foundation. Status of state action on the Medicaid expansion decision, as of December 11, 2013 [Internet]. Menlo Park (CA): KFF; [cited 2013 Dec 21]. (Note that this source is updated constantly, so the information now available at this web address is not the same as that the authors accessed in December 2013, on which their calculations are based). Available from: http:// kff.org/health-reform/stateindicator/state-activity-aroundexpanding-medicaid-under-theaffordable-care-act/ Bazzoli GJ, Lindrooth RC, Clement JP, Zhao M, Chukmaitov A. Did the strong get stronger and the weak get weaker? Examining changes in hospital financial condition. J Health Care Finance. 2006;33(2):55–69. Zaman O, Cummings LC, Laycox S. America’s safety net hospitals and health systems, 2010: results of the annual NAPH Hospital Characteristics Survey [Internet]. Washington (DC): National Association of Public Hospitals and Health Systems; 2012 May [cited 2014 Aug 22]. Available from: http://essentialhospitals.org/ wp-content/uploads/2013/12/ NPH214.pdf Fagnani L, Tolbert J (National Association of Public Hospitals and Health Systems, Washington, DC). The dependence of safety net hospitals and health systems on the Medicare and Medicaid Disproportionate Share Hospital payment programs [Internet]. New York (NY): Commonwealth Fund; 1999 Nov [cited 2014 Aug 22]. Available from: http://www.commonwealth fund.org/usr_doc/fagnani_depend safetynethospitals_351.pdf To access the Appendix, click on the Appendix link in the box to the right of the article online.
20 Liu L, Jervis KJ, Younis M, Forgione DA. Hospital financial distress, recovery and closure: managerial incentives and political costs. Journal of Public Budgeting, Accounting, and Financial Management. 2011; 23(1):31–68. 21 Dorn S, Buettgens M, Holahan J, Carroll C. The financial benefit to hospitals from state expansion of Medicaid [Internet]. Washington (DC): Urban Institute; 2013 Mar [cited 2014 Aug 22]. Available from: http://www.urban.org/uploaded pdf/412770-The-Financial-Benefitto-Hospitals-from-State-Expansionof-Medicaid.pdf 22 Gaskin DJ. Altruism or moral hazard: the impact of hospital uncompensated care pools. J Health Econ. 1997;16(4):397–416. 23 Thorpe KE, Phelps CE. The social role of not-for-profit organizations: hospital provision of charity care. Econ Inq. 1991;29(3):472–84. 24 Lo Sasso AT, Seamster DG. How federal and state policies affected hospital uncompensated care provision in the 1990s. Med Care Res Rev. 2007;64(6):731–44. 25 Bazzoli GJ, Lindrooth RC, Kang R, Hasnain-Wynia R. The influence of health policy and market factors on the hospital safety net. Health Serv Res. 2006;41(4 Pt 1):1159–80. 26 Centers for Medicare and Medicaid Services. Medicare program; hospital inpatient prospective payment systems for acute care hospitals and the long-term care hospital prospective payment system and fiscal year 2014 rates; quality reporting requirements for specific providers; hospital conditions of participation; payment policies related to patient status. Final rules. Fed Regist. 2013; 78(160):50495–1040. 27 Robeznieks A. Georgia governor acts to bolster faltering rural hospitals. Modern Healthcare [serial on the Internet]. 2014 Apr 30 [cited 2014 Aug 22]. Available from: http:// www.modernhealthcare.com/ article/20140430/NEWS/ 304309961 28 Millman J. 23 states still haven’t expanded Medicaid. Which could be next? Washington Post Wonkblog [blog on the Internet]. 2014 Aug 29 [cited 2014 Sep 4]. Available from: http://www.washingtonpost.com/ blogs/wonkblog/wp/2014/08/29/ 23-states-still-havent-expandedmedicaid-which-could-be-next
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