Policy Changes Threaten Hospitals' Medicaid Payments

Medicaid payments to hospitals comprise a large portion of a hospital’s finances; however, policy changes occurring under the Affordable Care Act (ACA) may have several implications on the way hospitals receive payments from Medicaid.

Hospitals are compensated for services to Medicaid beneficiaries through on a combination of base payments and supplemental payments. A recent study published by the Henry J. Kaiser Family Foundation found that upcoming policy changes regarding supplemental payments in the midst of the expansion of the ACA can have significant impacts on hospital finances.

According to the report, Medicaid pays the hospital in a base rate, which is set by the state Medicaid agency for the specific patient services, and supplement payments, or the payments beyond the base rate that may or may not be based on specific services. Many hospitals receive Medicaid Disproportionate Share Hospital (DSH) payments if the hospital serves high proportions of Medicaid or low-income patients. How much Medicaid pays each hospital is still yet undefined because payment negotiations and health plans vary across differing hospitals. However, the American Hospital Association estimated that Medicaid pays up to 90% of the costs of patient care as of 2013.

The report found that Medicaid expansion played a significant role in the hospitals of states who implemented the expansion. In studying Ascension Health, the nation’s largest not-for-profit hospital system, Kaiser researchers discovered increases in Medicaid discharges and decreases in self-pay discharges. The expansion also demonstrated an overall decrease in uncompensated care, with total uncompensated care down 17% from $34.9 billion in 2013 to $28.9 billion in 2014 nationwide among states who participated in the expansion. For states that didn’t expand Medicaid, total uncompensated care remained nearly unchanged between 2013 and 2014.

However, projected policy changes seeking to limit several supplemental payments, including DSH payments, are concerning hospitals who have relied on Medicaid revenue for their financial viability. The ACA is calling for reductions in DSH payment beginning in 2018, which is planned to decrease by a total of $43 billion in the years 2018 to 2025. Many hospitals are concerned that the expected increase in patient revenue will not make up for the loss in DSH payments in the coming years.

Additionally, certain supplemental payments like the Upper Payment Limits will be phased out over the next 10 years in increments of 10%. Though a significant source of revenue, the policy change hopes to gives hospitals more time to make adjustments while this is occurring.

The study indicated that while Medicaid expansion demonstrated a financial benefit to hospitals, policy changes in supplemental payments could have a much larger negative effect on hospital finances.