Hospital revenue is enhanced by state-directed Medicaid payments, health systems report

State-directed supplemental payments made through Medicaid are a growing source of hospital revenue, according to financial reporting from the for-profit hospital sector.

In reporting their Q2 financials, several of the nation’s largest health systems cited Medicaid supplemental payments as a boost. State-directed payments are a relatively new form of those payments, applying to Medicaid managed care, whereas disproportionate share hospital (DSH) payments and so-called upper-limit payments serve to enhance fee-for-service (FFS) reimbursement.

With managed care organizations (MCOs) comprising an increasingly dominant share of Medicaid coverage, state-directed payments have taken on added relevance since they were implemented in 2016 regulations. Roughly 74% of Medicaid beneficiaries are in an MCO, according to 2021 data from the Kaiser Family Foundation.

How the payments are manifesting

At HCA Healthcare, a 16% increase in year-over-year adjusted EBITDA for Q2 included “a modest benefit” from Medicaid supplemental payments, Mike Marks, executive vice president and CFO, said during an investor call. The YOY dollar increase was roughly $125 million, stemming in part from a supplemental payment program that began Jan. 1 in Nevada.

That state is taxing private hospitals to fund the program, with levies of 3.176% on inpatient revenue and 3.74% on outpatient revenue. Supplemental payments to hospitals include both FFS payments and state-directed payments, and potentially new payments to rural hospitals.

Going into the year, HCA Healthcare projected a headwind of between $100 million and $200 million stemming from Medicaid supplemental payments. Six months later, the updated projection is for a tailwind in that same range, Marks said.

“These programs are complex and have a lot of variability quarter to quarter,” he said.

Tenet Healthcare’s Q2 results reflected a $30 million positive adjustment from Medicaid supplemental revenue in Texas in prior years, the company’s leaders said.

A burgeoning payment program

Among the state-directed payments to Medicaid providers that CMS had approved as of early 2023, annual spending was projected to total more than $69 billion, reported the Medicaid and CHIP Payment and Access Commission (MACPAC). Such payment arrangements were approved for 40 states, Washington, D.C., and Puerto Rico during the preceding 18 months.

There is wide variation in state-directed payment policies, with 18 states funneling more than $500 million per year to providers and other states making no such payments (the payments are not an option for states that don’t have Medicaid managed care), according to a 2023 report by the Government Accountability Office (GAO).

To the relief of provider advocates, a 2024 final rule from CMS confirmed that the limit for directed payments to providers is the average statewide commercial-insurance rate for a service.

“We found [the rule] to be positive and supportive, and actually good for the provider industry,” Marks said. He said the payments have become “core to Medicaid” as a mechanism for helping providers better cover the cost of care. According to a 2020 survey by the American Hospital Association, Medicaid pays 88 cents for every dollar spent by hospitals on treating beneficiaries (which is 4 cents better than Medicare).

CMS said allowing the commercial rate for state-directed payments is needed to sustain and improve healthcare access in Medicaid, which also connects to issues of health equity given the demographics of program beneficiaries.  

“Higher payments are expected to grow the pool of providers who serve Medicaid patients and improve access to providers that limit the number of Medicaid patients they serve,” states an analysis published by the Commonwealth Fund.

Funding the payments

Financing arrangements for state-directed payments are a source of concern for some policy analysts amid efforts to curb federal healthcare spending. In taxing providers to cover a portion of the payments, states can reduce their own net payments yet still receive the same allocation from the federal government.

That structure represents an “effective increase in the federal government’s share of the net directed payments,” the GAO wrote. Such an arrangement also could reduce the incentive for states to operate their Medicaid programs efficiently.

In its Q2 investor call, Community Health Systems noted that a rise in the other operating expenditures category stemmed mostly from an increase in provider taxes related to the supplemental payments. That’s a worthwhile price to pay, the company’s leaders said.

“We will take an increase in provider tax payments with the additional revenue at any point,” said Kevin Hammons, president and CFO.

In this year’s regulations, CMS said each provider receiving a state-directed payment must attest that it does not participate in a hold-harmless tax arrangement. The clause is an effort to prevent scenarios where provider taxes are used to increase Medicaid payments in a way that contravenes federal regulatory language.

Although CMS does not plan to enforce the hold-harmless policy until 2028 for existing arrangements, new arrangements will be subject to heightened scrutiny.

“In these arrangements, providers appear to have prearranged agreements to redistribute Medicaid payments … from the providers that furnish relatively higher percentages of Medicaid-covered services toward providers that provide lower percentages of, or even no, Medicaid-covered services, with the effect of ensuring that taxpaying providers are held harmless for all or a portion of their cost of the healthcare-related tax,” CMS wrote in a bulletin.

Here to stay

Unlike healthcare payment policies such as subsidies for purchasing insurance through the Affordable Care Act marketplaces, the fate of state-directed payments does not seem tied to the election. With the 2024 regulations linking the payments to commercial rates, providers can count on them as a continuing source of revenue.

“We feel good about the sustainability of these programs,” Sun Park, executive vice president and CFO with Tenet Healthcare, said during the company’s investor call. “There’s a good mix of red and blue states that are providing these programs to support the important access that we provide.”

Still, the payments only go so far.

“When taken together with historical Medicaid reimbursement, they’re still well short of the cost to treat Medicaid patients,” HCA’s Marks said. “We believe it is important to understand this backdrop when discussing these programs.”