Disproportionate Share Hospital funding to states doesn’t match up with key benchmarks, report finds

• A report from the Medicaid and CHIP Payment and Access Commission notes that Disproportionate Share Hospital payments don’t always align with key metrics such as uninsured rates and uncompensated care costs.
• DSH payment cuts of $8 billion per year over four years are scheduled to begin in FY24, potentially exacerbating the imbalance in state distributions.
• DSH hospitals with higher shares of Medicaid-enrolled and low-income patients had negative margins in FY18, the most recent year for which financial data was available.

A new report highlights drawbacks with the system of Medicaid Disproportionate Share Hospital (DSH) payments, noting the payments historically haven’t been proportional to key criteria.

The report, issued to Congress by the Medicaid and CHIP Payment and Access Commission (MACPAC), includes a chapter on the federally funded system of DSH payments, which are allocated to hospitals by states. The report finds “a lack of meaningful relationship between DSH allotments [to states] and measures of need for DSH funds.”

Those measures include:

• Changes in the number of uninsured individuals
• Amounts and sources of hospitals’ uncompensated care costs
• Number of hospitals that have high levels of uncompensated care and also provide essential community services for low-income, uninsured and vulnerable populations

Those disparities arise in part because “DSH allotments are largely based on states’ historical DSH spending before federal limits were established in 1992,” the report states.

Given the imbalance between relevant measures and DSH funding, hospitals in some states may be at a particular disadvantage when scheduled DSH payment cuts are implemented starting in FY24. The variation among states “is projected to continue after federal DSH allotment reductions take effect,” the report notes.

DSH payment cuts continue to loom

Cuts to the Medicaid DSH program were included in the Affordable Care Act (ACA) as a mechanism to fund the accompanying coverage expansions. The date at which the cuts take effect has been postponed several times, most recently in the 2020 year-end Consolidated Appropriations Act, which delayed the reductions until FY24.

Starting then, cuts of $8 billion per year are scheduled to be implemented for four years. The decrease in FY24 is projected to amount to 57.8% of the unreduced allotment.

The impact of the reduction could vary significantly from one state to the next, MACPAC projects. State reductions will amount to the maximum 90% of unreduced allotments in Massachusetts and Rhode Island, for example, and more than 80% in Ohio and Michigan. But the decrease will be less than 20% in 17 states with historically low DSH allotments.  

States may take “different approaches to reductions, with some states applying them to all DSH hospitals and others reducing DSH payments only at specific hospitals,” the report notes.

That variation is in keeping with states’ diverging approaches to DSH payment distribution, including how much of a state’s total funding is targeted to deemed DSH hospitals (those that are statutorily required to receive DSH payments based on their share of Medicaid-enrolled and low-income patients).

In 2019, MACPAC recommended that Congress require the secretary of the Health and Human Services to “distribute reductions in a way that gradually improves the relationship between DSH allotments and the number of non-elderly low-income individuals in a state, after adjusting for differences in hospital costs in different geographic areas.”

The recommendation has not been heeded.

Costs of uncompensated care continue to climb

In 2019, the number of uninsured was 29.6 million (9.2% of the population), an increase of 1 million from the year before, according to the report. The total in 2020 likely increased, perhaps significantly, as unemployment rates surged during the COVID-19 pandemic.

The recently signed COVID-19 relief legislation included funding to bring down the cost of premiums in the ACA insurance marketplaces. The Congressional Budget Office projected the new legislation would reduce the number of uninsured by 1.7 million.

Rising uninsured rates correlate to increases in bad debt and charity care. Uncompensated care totaled $40.7 billion among all hospitals in FY18 — an increase of $2.8 billion (7.1%) from the prior year.

A more positive trend was seen in the Medicaid shortfall, which measures the difference between payment and cost of care for treating Medicaid beneficiaries. That deficit shrunk by $3.2 billion (14%) from FY17 to FY18, according to an American Hospital Association survey cited in the MACPAC report.

The precise impact of the pandemic on DSH hospitals isn’t clear

For most measures cited in the report, data was not available for 2020, when hospitals dealt with the financial turmoil of the pandemic.

“Safety-net providers that serve a high share of Medicaid and uninsured patients are particularly vulnerable to financial pressures caused by the pandemic because prior to the pandemic they often had low operating margins,” the report states. “In addition, Medicaid-enrolled patients, the majority of whom identify as Black, Hispanic, Native American, or other non-white race or ethnicity, have been disproportionately affected by COVID-19.”

In FY18, U.S. hospitals had an aggregate operating margin of 0.6% after accounting for DSH payments. In comparison, deemed DSH hospitals had a collective operating margin of -2.3%. Those hospitals comprised about 12% of all hospitals as of 2016.