States Opting Out of Medicaid Expansion Risk Lower Ratings, Moody’s Says

The Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) and the Health Care and Education and Reconciliation Act (HCERA) (P.L. 111-152) require major cuts in funding for hospitals that serve a higher-than-average percentage of low-income, uninsured patients in every state. Specifically, both Medicare and Medicaid payments to disproportionate share hospitals (DSH) will drop October 1, 2013, when federal fiscal year (FFY) 2014 begins. The Medicaid expansion was supposed to make up much of the lost funding because adults with incomes up to 138 percent of the federal poverty level (FPL) would be covered, reducing the number of uninsured. When the Supreme Court decision in National Federation of Independent Businesses v Sebelius made the expansion of Medicaid optional, the plan for a continuum of affordability programs was disrupted.

Medicare DSH Payments

The Social Security Act provides for two types of DSH payments. Section 1886 of the Social Security Act provides for an additional payment, the DSH adjustment, to inpatient hospitals that serve a disproportionate percentage of patients who are Medicaid beneficiaries or uninsured. The formula for calculating the DSH adjustment is set out in the statute. PPACA added subsection (r) to section 1886, which reduces the potential payment by up to 75 percent beginning in FFY 2014, depending, in part, on the change in the percentage of uninsured adults under age 65. By FFY 2019, Medicare DSH payments will have been reduced by $49.9 billion.

Medicaid DSH Payments

States receive an allocation each year to be used for DSH payments. Soc. Sec. Act sec. 1923 allows states to design their DSH programs within certain parameters, and CMS must approve the state’s DSH program as part of the state Medicaid plan. The total allocation for state DSH payments will be reduced by $500 million for FFY 2014. Further cuts will be made each year through FFY 2019, resulting in total cuts of $14.1 billion.

The statute directs the HHS Secretary to develop a formula that makes deeper cuts to DSH allotments of states with the lowest rates of uninsured adults and those that do not target their Medicaid DSH payments to the hospitals with the most Medicaid inpatients.

Moody’s Analysis

The states with higher percentages of uninsured adults under age 65 would be most affected by the decision whether to expand Medicaid. In states that expand, the rate of uninsured adults will drop, mitigating the effect of the cuts to DSH payments. Hospitals in states that do not expand will lose the DSH funds without the increase in the number of insured adults unless state, local or other funds make up the difference.

Of the ten states with the highest levels of uninsured adults, only three governors have recommended expanding Medicaid—Florida, Montana, and Nevada. The other seven plan not to expand. Even though their allotments may not be reduced as much under the Secretary’s methodology, these states still are likely to have higher costs of uncompensated care. To the extent that states opting out of the expansion make up the difference with state funds, they may put a strain on their budgets, and, therefore, on their ratings.