Seeking to phase out Medicare DSH payments, MedPAC outlines potential changes to reimbursement for safety net providers

Safety net hospitals could benefit from a new payment system that replaces disproportionate share hospital (DSH) and uncompensated care payments in Medicare, according to pending recommendations from the Medicare Payment Advisory Commission (MedPAC).

In 2024, a proposed new “Medicare safety net index” would be used to compensate hospitals based on:

• Share of inpatient and outpatient claims filed for beneficiaries receiving the Part D low-income subsidy
• Uncompensated care (UC) costs as a share of revenue
• Half the Medicare share of a hospital’s inpatient days

As described in public meetings late last year and in January, the index would be designed to overcome inefficiencies in the present system. Hospitals with high shares of Medicare patients tend to get lower DSH payments, while UC payments are not focused on Medicare beneficiaries.

“The purpose of adding Medicare shares is to acknowledge that Medicare profitability is substantially below where it was when the DSH program was enacted in 1985,” MedPAC policy analyst Jeffrey Stensland, PhD, said during a presentation in December. “It also eliminates the Medicare subsidy of Medicaid [a byproduct of the DSH payment system] and aligns Medicare funds more directly with the costs of serving Medicare beneficiaries.”

Features and impact of the new index

The Medicare safety net index, which is expected to be included in MedPAC’s official recommendations to Congress in March, would funnel a portion of Medicare Advantage (MA) payments directly to hospitals. While MA plans would be off the hook for making those payments, they would lose the advantage they gain from the higher benchmarks that result from fee-for-service DSH and UC payments.

Payments would be made as a percentage add-on to Medicare claims for both inpatient and outpatient services and would not factor into beneficiary cost-sharing.

Using 2019 metrics, MedPAC found that implementing the safety net index and adding $1 billion in fee-for-service payments to the safety net pool would have improved Medicare margins from -0.9% to 4.2% for hospitals that would have been projected to place high in the index.

Adding another $500 million in redirected MA payments would have boosted all-payer margin for that group of hospitals from 3.1% to 4.4%. However, to achieve similar improvement in 2024, funding would need to be about $2 billion instead of $1.5 billion. It remains to be seen whether Congress would authorize such funding.

The new index would create a scenario where for “every low-income beneficiary that a provider decides to care for, there is an additional payment, an additional increment to the rate,” said Amol Navathe, MD, PhD, MedPAC vice chair and director of the payment insights team at the University of Pennsylvania’s Perelman School of Medicine. “That is the type of incentive that we want to create … which I should note is not the way that the DSH system is currently designed.”

Potential drawbacks and workarounds

Some commission members worried about hospitals that could be at a disadvantage under the new index because they serve large shares of low-income patients who aren’t Medicare beneficiaries.

“The DSH payments have been subsidizing non-Medicare patients for many years,” noted Cheryl Damberg, PhD, director of the RAND Center of Excellence on Health System Performance.

Robert Cherry, MD, chief medical and quality officer at UCLA Health, pointed to government facilities that may not place on the proposed index but that nonetheless “largely exist as safety net hospitals.”

“I have been in many, many of those facilities,” said Lynn Barr, founder of Caravan Health. “They are held together with duct tape. There is no extra money for them … these large, urban, county hospitals that spend every single dollar they can on patient care and don’t have the ability to absorb this loss.”

A stopgap could entail ensuring a transition of several years between existing DSH and UC funding and the new system. Alternatively, a stop-loss policy could be incorporated to ensure no hospital experiences a Medicare payment change of more than 5% in any given year.

Although the index would not address issues with the overall healthcare safety net, “Our goal here is much more targeted, which is supporting the portion of the safety net that would be the Medicare portion,” said Michael Chernew, PhD, MedPAC chair and professor of healthcare policy at Harvard Medical School. “There will be some losers — and it may be appropriate for us to call that out — simply because of how the Medicare part is working as opposed to the all-payer part.”

Accommodations for clinicians

Through a separate proposed formula, clinicians would receive a lump-sum add-on payment equal to their allowed charges for low-income Medicare beneficiaries multiplied by 15% for primary care clinicians and 5% for specialists, according to a presentation during MedPAC’s December meeting. The add-on would not be budget neutral or subject to beneficiary cost sharing, and it would not affect MA.

For primary care providers in the highest quintile of treating low-income patients, the payment should amount to at least $10,000 per clinician per year, according to preliminary projections.

Targeted financial support for clinicians operating in the safety net does not exist in the Medicare payment system for physicians, MedPAC analysts and commission members noted. Implementing such payments would address “some of the access metrics among that subgroup of the population and the fact that their inability to access care results in delays in care, presenting to the emergency room for things that could have been prevented had they been seen in an ambulatory setting,” Damberg said.

Such an approach could improve access specifically for beneficiaries who are dually eligible for Medicare and Medicaid, said David Grabowski, PhD, professor in the Department of Health Care Policy at Harvard Medical School.

“There are so many areas where Medicare and Medicaid don’t work very well together … where you think, OK, Medicare is the primary payer and Medicaid is kind of paying the cost-sharing, and it turns out they don’t pay full cost-sharing,” he said. “I think this recommendation can help level the playing field.”