Supplemental Medicaid payments drive hospitals to seek out enrollees as patients

An increasing push by states to boost Medicaid funding has led some health systems to change their views on the program to the point of now seeking its enrollees as patients.

Mississippi, Nevada and North Carolina were the most recent states to obtain approval for supplemental Medicaid payments from the Centers for Medicare and Medicaid Services (CMS), said hospital executives. The Mississippi initiative leveraged $178 million in hospital taxes by hospitals to garner $658.2 million in new federal funds for them. Nevada similarly leveraged hospital taxes to garner an additional $875 million in additional federal Medicaid funding for its hospitals. North Carolina’s program, which is part of its Medicaid eligibility expansion, will provide hospitals $4 billion this year and $6.5 billion in fiscal year 2025.

Those states were followed this year by Tennessee, the District of Columbia and New Mexico submitting such supplemental plans to CMS. Hospital executives have said multiple other states also are considering similar Medicaid payment boosts for hospitals, including:

• Indiana
• Alabama
• Arkansas
• California
• Florida

New view

The result of such payment boosts  caused some hospital executives to change their perception of Medicaid as the worst payer.

The new Medicaid funds “change the landscape of how we think about payers,” Steve Filton, executive vice president and CFO for Universal Health Services, said at a September conference. “So, if we’re getting a big supplemental Medicaid payment in a state where we weren’t getting it before, it’s likely that reimbursement for Medicaid patients has become much more attractive.”

“So, we’re leaning into that business in certain states where it’s become more of a generous reimbursement, more of a fair reimbursement and [we’re] seeking out those patients where before we have not necessarily [done so] and that’s resulted in a reasonably significant improvement in our payer mix,” Filton said.

Similarly, Sam Hazen, CEO of HCA Healthcare, said in an October investors call that such supplemental Medicaid payments “have created reimbursement in some situations where it makes it easier for us to invest in services and capabilities that help the Medicaid beneficiaries and produce better environments for them to get care.”

He said Medicaid admissions have dropped 8% this year but that has been driven by ongoing Medicaid redeterminations. Such eligibility determinations were suspended for the first time nationwide under federal law during the COVID-19 pandemic and restarted in 2023.

“We are finding opportunities to improve offerings for Medicaid beneficiaries through some of our outpatient development in certain markets,” Hazen said.

Growing push

Kevin Hammons, president and CFO of Community Health Systems (CHS) similarly described such Medicaid supplemental payments as financially material to the health system and said hospital advocates are pushing for more states to adopt them.

Chip Kahn, president and CEO of the Federation of American Hospitals, said such Medicaid state-directed payments will be a leading priority next year of his hospital advocacy group.

“There is emerging pressure on state legislatures and governors where if you’re a hospital operator and you’re seeing what’s happening in other states and you’re continuing to struggle, essentially losing money with every admission that you bring in, then it makes sense to lobby your states legislature,” said Brian Tanquilut, an analyst for Jefferies. “It’s gotten easier to start the conversation in states that do not have supplemental payments or have supplemental payments but they’re still inadequate.”

State-directed payments (SDPs) to providers increased from $25.7 billion in 2020 to $69.3 billion by early 2023, according to a report by the Medicaid and CHIP Payment and Access Commission (MACPAC). Such payments were projected to increase from $78 billion for all of 2023 (or 15.6% of managed care spending) to about $99 billion by 2029 (or 16.5% of managed care spending), according to a recent CMS Medicaid payment rule. By July 2024, 38 states had at least one provider tax of more than 5.5% of net patient revenues — close to 6% federal maximum for such taxes, according to a recent Kaiser Family Foundation (KFF) report.

And provider rates could be boosted by 2024 CMS rules that permit states to pay hospitals at the average commercial payment rate when using directed payments. Those rates are substantially higher than the Medicare payment ceiling used for other Medicaid FFS supplemental payments, KFF noted.

Cautionary notes

A potential downside of the influx of new Medicaid funding is that it could spike healthcare labor costs in those states, said Hammons of for-profit CHS. After a nationwide labor cost surge in recent years, his system this year has managed to decrease wage growth to about 4% in 2024, which is still more than its 2.5%-3% historical rate.

“Because everyone is getting that money and if there is competition for labor in some of those markets, you can have some of your nonprofit providers out there being a little bit irrational in terms of how they use that money to go out and buy nurses and increase rates,” Hammons said.

The boost in Medicaid funding also has drawn concern from the federal government. Legislation (HR 8113) would require new state reporting on SDPs. Similarly, CMS issued a proposed rule in April 2023 to bar any undisclosed arrangements on how states distribute such funds to their hospitals.

“These arrangements appear designed to redirect Medicaid payments away from the providers that furnish the greatest volume of Medicaid-covered services toward providers that provide fewer or even no Medicaid-covered services,” said CMS.

The American Hospital Association (AHA) raised concerns that CMS’s rule would restrict states’ use of provider-based funding sources, such as provider taxes, to finance Medicaid payments.

“Limiting SDP amounts to the Medicare rate or an aggregate cap in total payments as a percentage of managed care spending would add to the financial stress hospitals currently face,” AHA wrote in November letter to Xavier Becerra, secretary of the Depart of Health and Human Services.