Will Medicaid gains offset DSH cuts?

The Disproportionate Share Hospital (DSH) program was developed to provide financial assistance for hospitals that care for large numbers of Medicaid and uninsured patients. During the development of the Affordable Care Act (ACA), policymakers reevaluated the program’s funding as they expected the Medicaid expansion to decrease hospitals’ frequency of uncompensated care. Subsequently, Congress predicted health systems would require fewer DSH payments and scheduled funding cuts to finance the ACA.

Source: Marc Dalmulder (Flickr/CC)

Source: Marc Dalmulder (Flickr/CC)

New research examines this scenario with a focus on the state of California in 2019, when DSH reductions are scheduled to be steepest. Specifically, the researchers aimed to calculate whether future insurance expansion gains will sufficiently offset scheduled DSH reductions. The authors examined each of California’s 20 public DSH hospitals and quantified the 2010 costs resulting from care provided to Medicaid and uninsured patients during both hospitalizations and outpatient visits. To project forward to 2019, they adjusted for several factors including inflation, population changes in insurance status, and each hospital CFO’s estimate of patient retention.

The projected costs were then compared to DSH allocations under 2 possible scenarios:  small or large reductions. Future payments are yet to be calculated, but will be dependent upon California’s percentage of uninsured residents and the precision with which the state targets funds to hospitals with high volumes of Medicaid and uncompensated care. Under both scenarios, the authors calculated a significant budgetary difference with a resultant shortfall of $826 or $982 million for the respective scenarios. The authors conclude that these findings may threaten the financial stability of safety net hospitals and recommend leaders develop local strategies to mitigate financial risk.

The findings of this study are undoubtedly noteworthy, but hospitals and policymakers should recognize that the ACA included a variety of payment and delivery reforms that aim to improve efficiency of care. These changes will occur in many of the study hospitals concurrently with the DSH reductions and if successful may mitigate the projected shortfall.

While these projections have the potential to disrupt the financial stability of the safety net, it is worth noting that these reductions are temporary. Payments return to full levels in 2023.

commentary by Kyle Fischer, MD, MPH

Abstract

Safety-net hospitals rely on disproportionate-share hospital (DSH) payments to help cover uncompensated care costs and underpayments by Medicaid (known as Medicaid shortfalls). The Affordable Care Act (ACA) anticipates that insurance expansion will increase safety-net hospitals’ revenues and will reduce DSH payments accordingly. We examined the impact of the ACA’s Medicaid DSH reductions on California public hospitals’ financial stability by estimating how total DSH costs (uncompensated care costs and Medicaid shortfalls) will change as a result of insurance expansion and the offsetting DSH reductions. Decreases in uncompensated care costs resulting from the ACA insurance expansion may not match the act’s DSH reductions because of the high number of people who will remain uninsured, low Medicaid reimbursement rates, and medical cost inflation. Taking these three factors into account, we estimate that California public hospitals’ total DSH costs will increase from $2.044 billion in 2010 to $2.363– $2.503 billion in 2019, with unmet DSH costs of $1.381–$1.537 billion. PMID: 24889948 —  Neuhausen AC et al. Health Affairs. 2014; 33 (6): 988-96.