DSH Cuts and Uncompensated Care Costs Impacting Hospital Reimbursement

Medicare payments to hospitals that serve a disproportionate share of poor people will continue to decrease in fiscal year (FY) 2015.  In FY 2015 CMS calculates that the total amount available for the Medicare disproportionate share hospital (DSH)  payment will decrease  by $1.225 billion compared to the amount available in FY 2014.  This decrease should come as no surprise to anyone as the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) required these reductions.  The thinking was that  DHS payment should decrease because as more and more individuals obtain health insurance coverage or are enrolled in an expanded Medicaid, there will be fewer and fewer people who will not be able to pay or have their hospital bills paid for them.  And this has been found to be just the case as the Office of the Assistant Secretary for Planning and Evaluation reported that uncompensated care was reduced by $5.7 billion in 2014.   The great majority of this reduction though came in states that had expanded Medicaid eligibility, putting hospitals in states that did not expand Medicaid eligibility in a particularly difficult spot; they will be receiving less in DSH payments, but the amount of uncompensated care is not decreasing.

DSH Payments

DSH payments began in the 1980s as a way to provide more money to hospitals that serve a poorer population of people who cannot afford to pay or have some other entity like insurance or a public health program pay for their hospital bills. Section 3133 of the ACA dramatically changed how DSH payments would be calculated.  All hospitals would receive 25 percent of what they would have received under the pre-ACA system.  The remaining amount would come from a pool of money the amount of which is calculated based on the change in the percentage of uninsured from the current year to the year just prior to the year the ACA was signed.  As the number of uninsured decreased so would the amount available to hospitals in their DSH payments. For FY 2014 CMS calculated that the percentage of uninsured declined from 18 percent during the year prior to the ACA’s adoption to 16 percent.  For FY 2015 CMS has calculated that the percentage of uninsured is 13.75 percent of the population.

Available Amount

These two reductions have resulted in a corresponding reductions in the amount available for uncompensated care payments, or the portion of the DSH payment not equaling 25 percent of what the DSH payment would have been if the changes in the ACA were no adopted.  For FY 2015 the amount of money for uncompensated care payments is $7.6 billion which is down from $9.033 billion in FY 2014.  CMS estimated in the Final rule updating the hospital inpatient prospective payment system (IPPS) for FY 2015 that hospitals would see approximately a 1.3 percent reduction in the amount of their DSH payments from FY 2014.

The percentage is less than one would expect because during this time period the amount available for the original 25 percent has increased from year to year somewhat offsetting the decrease in uncompensated care payments. This increase is primarily due to the increase in the number of Medicaid recipient due to the expansion of Medicaid, but it also is attributable to just an overall increase in the payment amount over time.  In FY 2014 $3.193 billion was avialable to pay the pre-ACA amount and in the FY 2015 this amount was increased to $3.345 billion. The number of Medicaid patients a hospital treats is used to determine the amount of the hospital pre-ACA DSH payment.

Uncompensated Care

An increase in the amount of Medicaid patients has resulted in a significant decrease in the cost of uncompensated care by hospitals.  HHS is reporting that FY 2014 hospitals incurred $5.7 billion less in uncompensated care costs due to an increase in the number of patients that are now covered by an expanded Medicaid.

This decrease in uncompensated care costs did not occur in states that did not expand Medicaid eligibility. Hospitals in those states find themselves in a difficult situation as they are receiving less DSH payments, but are not seeing an increase in revenue from patients with Medicaid or private insurance coverage.  Many of these hospitals rely heavily on DSH payments and decreases in the amount  of money they receive could have dire consequences for these institutions and the people they serve

How Will the Midterm Election Results Affect Medicaid Expansion?

Although the question of Medicaid expansion is resolved in most states, there are a few where the outcome of the gubernatorial elections—and any changes in the composition of the legislature—may extend Medicaid to people currently in the coverage gap, uninsured adults with incomes below the federal poverty level (FPL). It is also possible that the Arkansas “private option” waiver could be in danger, and it would not be replaced by expansion of traditional Medicaid. In Maine, Florida, and Wisconsin, the replacement of a Republican governor with a Democrat may make the difference.

Maine’s Three-Way Contest

Republican Governor Herbert LePage was running for reelection. He has vetoed Medicaid expansion legislation five times. Both Independent Eliot Cutler and Democrat Mike Michaud are running against him, and both support Medicaid expansion.

Maine has a tradition of electing independent candidates. Independent Angus King served as governor from 1995 until 2003. In 2012, he won the U.S. Senate seat formerly held by Olympia Snowe, who retired. In a previous race between Cutler, LePage, and a Democrat in 2010, Cutler came in second, 10,000 votes behind LePage, and the Democrat, third. This year, polls showed Cutler’s candidacy losing support, however.

As of October  28, 2014, polls showed that Michaud and LePage were tied at 40 percent each, with Cutler at 13 percent. Senator King, who had previously endorsed Cutler, switched his support to Michaud. Cutler began to run what he called a “closing ad” on television. He told voters to “vote their conscience,”  and that if they believe he cannot win, they should vote for one of the other candidates. He has refused to withdraw, however, so any votes for Cutler among the 75,000 absentee ballots that already have been cast had to be counted.   As of Wednesday morning, November 5, 2014, with 86 percent of precincts reporting, LePage had 48.35 percent, Michaud had 43.31 percent, and Cutler, 8.34 percent.  Michaud has conceded. Thus, no change is likely.

Wisconsin’s Race

The incumbent, Governor Scott Walker (R), was challenged by Democrat Mary Burke, who supported Medicaid expansion. Walked has opposed it.  In the most recent poll, Walker and Burke were only one percentage point apart, within the 3 percent margin of error. The Republican-controlled legislature has never passed Medicaid expansion as provided in the Patient Protection and Affordable Care Act (P.L. 111-148), however. And because the state Medicaid program operates under a waiver that covers adults with incomes up to 100 percent of FPL, people with incomes too low for coverage through a health insurance exchange are not left out. Adopting the full ACA Medicaid expansion would require a change in the composition of the legislature. Walker having won reelection, no change is expected in Wisconsin.


Like Wisconsin, the Florida legislature has not passed Medicaid expansion. Governor Rick Scott (R) initially opposed it. During the   legislative session, however, he changed his mind and tried to persuade the legislature to pass it. He did not make expansion a high priority, dropping it to concentrate on other issues. Now, his opponent, Charlie Crist (D, but formerly Republican governor), strongly favors expansion. Crist even says he would consider using an executive order to achieve it. Scott has not said much about Medicaid during the campaign, and some sources now describe him as opposing it. Unless the legislative opposition weakens, a Medicaid expansion bill would not pass. Rick Scott won reelection, however, and the composition of the legislature is not expected to changes significantly.

Kansas: Brownback Reelected

Governor Sam Brownback (R) and the Republican-controlled legislature refused even to consider expanding Medicaid, although the proposals were supported by hospitals as well as Democrats. Brownback, too, was up for reelection, and his opponent, Paul Davis (D) supported Medicaid expansion. According to Real Clear Politics, the election was a toss-up. Some recent polls showed Davis ahead, while others showed Brownback leading.  Brownback won, however, with 49 percent of the vote. There also is a possibility for movement in the legislature. The Kansas Health Institute reports that several seats in the legislature are up for grabs, so that it is possible that the Democrats could gain a few more seats. There have been several important votes on which moderate Republicans voted with the Democrats. Some observers believe that ten key races, which are close, will set the balance of power in the Kansas legislature.

Arkansas Private Option Endangered?

Arkansas’ private option waiver, which squeaked through the legislature in both 2013 and 2014, is in the hands of the voters, especially those in a few key Arkansas House districts. In 2014, the reauthorization passed the Senate without a vote to spare. The Arkansas Times reports that in two close races, Democratic incumbents are opposed by candidates with strong Tea Party support. If they lose, it will likely be impossible to find the 75 percent supermajority needed for reauthorization. Results were not yet available as of  the morning of November 5.

States’ Projections for Medicaid Expansion Were Accurate

Medicaid spending and enrollment has increased in all states during fiscal years (FYs) 2014 and 2015 due to the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), according to a report from the Kaiser Family Foundation (KFF). Overall spending on Medicaid has increased 10.2 percent during FY 2014 with spending from state source increasing by 6.4 percent. These increases were in line with projections made by state Medicaid administrators. KFF projects that overall spending on Medicaid in FY 2015 will grow 14.3 percent. The higher rate of growth is due to the fact that FY 2105 will be the first full year of Medicaid expenditures since expansion occurred.

As would be expected, the majority of these increases occurred in the states that expanded Medicaid, but enrollment and spending also increased in states that did not choose to expand Medicaid eligibility to all adults with incomes below 133 percent of poverty. These findings are based on KFF’s 14th annual survey of Medicaid directors in all 50 states and the District of Columbia and conducted in conjunction with Health Management Associates. The findings of this study reflect earlier findings (see Hospital financials, access to care, state budgets improve under Medicaid expansion, September 17, 2014).

Medicaid Expansion

The ACA required states to expand eligibility to all individuals with incomes below 133 percent of poverty or lose all federal Medicaid funding. The Supreme Court in National Federation of Business v Sebelius found that this expansion radically changed the nature of Medicaid from a voluntary program providing states with funding to care for the poor and disabled to a program of limited universal coverage—and that those changes were unconstitutional. Following the Supreme Court’s decision states could decide to expand Medicaid or not. During 2014, 25 states and the District of Columbia choose to expand Medicaid and received 100 percent federal funding for the individuals enrolled under the expanded criterion. Those states will receive 100 percent funding for 2014, 2015 and 2016. In 2017 the federal funding will decrease to 95 percent. Funding will continue to decrease to 94 percent in 2018, to 93 percent in 2019, and to 90 percent in 2020 and beyond. During 2015, an additional two states expanded Medicaid eligibility and an additional two states are seeking CMS approval of a waiver to expand Medicaid coverage in their states.

Overall Spending

The average growth in spending on Medicaid was 10.2 percent in FY 2014. In the states that expanded Medicaid the increase in spending averaged 13.1 percent, and in states that did not expand Medicaid the average increase in growth was 5.6 percent. State legislatures did a good job of appropriating sufficient funds to cover this growth, KFF reported. State legislatures appropriated an additional 13.1 percent for Medicaid spending in states that expanded Medicaid, and state legislatures that did not expand Medicaid appropriated an additional 6.8 percent for Medicaid expenditures, which was more than the growth amount of 5.6 percent.

Enrollment Growth

Across the country Medicaid enrollment increased 8.3 percent in FY 2014 and is projected to increase 12.2 percent during FY 2015, KFF reported. Enrollment in states that expanded Medicaid grew by 12.2 percent, and in states that did not expand enrollment Medicaid enrollment increased 2.8 percent during FY 2014. In FY 2015 enrollment in states that have expanded Medicaid is projected to increase 18 percent and 5.2 percent in states that have not expanded Medicaid, according to KFF.

The increase in enrollment in states that did not expand Medicaid eligibility is attributed to individuals who were eligible for Medicaid prior to the ACA but who never applied. The reasoning is that due to increased media attention and outreach efforts these individuals now learned that they might be eligible for Medicaid, even though they were eligible all along. Medicaid directors have estimated that 20 percent of new enrollees were eligible prior to the ACA expansion of Medicaid eligibility, reported KFF.

KFF expects these trends to continue as additional states decide to expand Medicaid eligibility. KFF notes that Congress has increased the amount of federal funding to states for Medicaid during recessions and that this may occur again. Finally, the economy can also impact Medicaid funding, as legislatures have to make decisions based upon receipt of tax revenues. All of these factors could change the rates of change in Medicaid enrollment and spending.

Will Health Care Spending Improve by 2014’s End?

An October 2014 installment of the New England Journal of Medicine (NEJM) reported discrepancies in health care spending trends based on the Bureau of Economic Analysis (BEA) comparative 2013 and 2014 data. Although the BEA noted a marked gain in the first quarter of 2014, a second look two months later found that health care spending actually had dropped. The NEJM questioned how it could be that health care expansion had little effect on health care spending.

Calculation Method

The initial May 2014 BEA report realized a 10 percent gain, but the reassessment showed a spending loss of 0.9 percent. The NEJM noted that the discrepancy may have occurred due to the types of methods used to calculate the spending growth rates. Spending in the first quarter of 2014 was compared with spending in the fourth quarter of 2013, and the percent change was compounded to convert it to an annual rate. The NEJM noted that other methods could produce different outcomes.

Enrollment Conditions

The BEA and CMS projected growth in health care spending (CMS 5.6 percent; BEA 6.3 percent) attributed to the Patient Protection and Affordable Care Act (ACA) (P.L.111-148) and the improving economy, but BEA reported expanded coverage had little effect on health care spending in the first quarter of 2014. The NEJM attributes this to the fact that “many ACA enrollments occurred toward the end of the quarter and even people who enrolled earlier did not begin spending health care dollars right away.” The NEJM also points to the harsh winter conditions of 2013.


The NEJM further reports that despite the close tie between long-term health spending and economic growth, sudden economic changes, such as the recession rebound, are slow to impact health care spending. The BEA compared two potential economic growth scenarios: (1) the estimated growth path for a situation in which the recession did not occur; and (2) the estimated growth path for a situation in which health care spending responded immediately to the recession. The BEA found that the no-recession scenario assumed a “continuation of pre-recession real per capita economic growth,” while the second scenario showed a downward trend on health spending.

Nonetheless, the NEJM says that prescription drug costs and use, higher patient volumes, and continued expansion of health care benefits through the ACA will increase health care spending by approximately 5 percent.