Patients slip through healthcare's safety net amid Medicaid financing debate

The trade-off seemed simple in theory—hospitals would need less federal funding when the Affordable Care Act extended coverage to millions of Americans.

But 10 years later, the forecast seems a lot more cloudy—obscured by a host of separate but intertwined Medicaid supplemental payments and financing mechanisms. Few are satisfied with the current patchwork of disproportionate-share hospital payments and intergovernmental transfers that stitch together a convoluted state and federal financing system that can divert funding from the hospitals most in need, industry overseers say.

Hospitals, especially those predominantly serving the country’s most vulnerable, claim they continue to be shortchanged, while the federal government is several years behind on the ACA’s commitment to reduce healthcare spending.

“It became increasingly clear that it was nigh on impossible to prevent reprogramming resources in ways that was not the intention of the DSH provision, but still complied with the law,” said Katherine Baicker, dean of the University of Chicago Harris School of Public Policy and a healthcare economics professor.

The ACA extended coverage to around 20 million individuals, many of whom joined the Medicaid program. While hospitals benefited, they claim that a growing Medicaid reimbursement shortfall diluted those gains, compounded by the fact that a 2012 Supreme Court ruling allowed states to opt out of Medicaid expansion.

“These are the cracks we’re seeing in the promises of the ACA,” said Dr. Robert Pearl, a professor at Stanford University and former CEO of the Permanente Medical Group.

Supplemental payments were intended to bridge the Medicaid shortfall and help pay for the remaining uninsured. But as ACA provisions would roll back $44 billion in Medicaid DSH allotments, hospitals caution that many would be forced to pare down services or close.

The CMS also looks to revamp Medicaid’s supplemental payment system, but hospitals are worried that would destabilize the entire program.

Meanwhile, critics contend that hospitals must hold up their end of the bargain, citing some providers that have gamed the system to maximize revenue.

Hospitals and the federal government are at a standoff. Hospital groups agreed to Medicaid DSH program cuts under the ACA, but have successfully lobbied for delays, the latest of which postpones them until May. But the idea that DSH funding is a permanent feature is not defensible, said Jeff Goldsmith, founder and president of consultancy Health Futures.

“Hospitals got 20 million newly covered people as a result of this law; part of the deal was DSH payment reductions,” he said. “The idea that hospitals skate away without contributing is hard to defend.”

The ACA effectively reduced one economic and social justice challenge and simultaneously expanded another, said Den Bishop, president of Holmes Murphy & Associates, an insurance brokerage and consulting firm.

“An unintended consequence of the ACA was a massive expansion of the underinsured and undercompensated care,” he said. “We squeezed the balloon rather than letting air out of it socially and economically.”

Healthcare stakeholders, lawmakers, regulators and patients are left to wrestle and navigate a philosophical question that extends well beyond the ACA: Who should ultimately pay for the care of the most vulnerable Americans?

“There are so many dimensions to the politics and philosophy on how we pay for healthcare in this country that were never sorted out because of the fragmented, nontransparent combination of federal, state and private funds that all end up in some form of cross-subsidization,” said Marianne Udow-Phillips, executive director of the Center for Health and Research Transformation at the University of Michigan. “Is that appropriate policy?”

As expected, uncompensated care costs have dropped since the ACA went into effect, on average. Yet, the Medicaid shortfall—the gap between reimbursement levels and a hospital’s estimate of the cost to treat Medicaid beneficiaries—has risen, Modern Healthcare analyses show.

Despite their charitable mission, not-for-profit hospitals offered proportionally less uncompensated care than their for-profit peers.

Hospitals’ average uncompensated care cost—defined as the sum of patients’ outstanding bills (bad debt) and free or discounted care (charity care) in Medicare cost reports—as a percentage of operating expenses decreased from 3.87% in 2013 to 3.26% in 2018, according to a Modern Healthcare examination of 3,109 hospital cost reports.

Operating expenses increased 21.3% over that span while total uncompensated care only grew 2.1%. The average Medicaid shortfall per hospital increased about $1.3 million, Modern Healthcare found.

Typically, hospitals in Medicaid expansion states report lower unpaid costs of care for the uninsured but a higher Medicaid shortfall than hospitals in non-expansion states. Still, insured patients with high-deductible health plans are struggling to pay their bills, driving up uncompensated care costs.

Hospitals in 29 states and Washington, D.C., saw uncompensated care as a percentage of operating expenses decrease from 2013 to 2018. Only three of those states did not expand Medicaid. Ten states that expanded Medicaid had higher uncompensated care levels.

“The biggest lifeline for hospitals would be for states to expand Medicaid, particularly those in rural areas,” said Edwin Park, a research professor at Georgetown University who specializes in Medicaid financing.

Meanwhile, for-profit hospitals’ uncompensated care levels increased while not-for-profits’ fell.

For-profits’ uncompensated care as a percentage of expenses rose from an average of 4.1% in 2013 to 4.5% in 2018, according to Modern Healthcare’s data.

Not-for-profit hospitals’ ratios dropped from an average of 4.9% in 2013 to 4.4% over that span. The size of not-for-profit hospital systems has been growing at a rapid rate through mergers and acquisitions. Charity care and other iterations of uncompensated care have not kept up, research shows.

“There is a corporatization of not-for-profit healthcare,” said Ge Bai, an associate professor of accounting and health policy and management at Johns Hopkins University who has researched charity-care spending. “Profit motives dominate their charitable mission in many cases.”

Uncompensated care as a percentage of total expenses for all hospitals fell to a 25-year low in 2015, according to the American Hospital Association, which has since stopped tracking that metric. Between 2013 and 2015, charity care and bad debt reported on Medicare cost reports declined $8.6 billion, or 23%, according to the Medicaid and CHIP Payment and Access Commission. Hospitals blame the rising Medicaid shortfall.

It’s important to remember that many of these hospitals began as charitable entities, said Katherine Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation. The same ones continue to sue poor patients who can’t pay their bills, she said.

“Now we are in this awkward standoff where there is not a consensus on whose responsibility this is as they debate how much shortfall should hospitals come up with on their own versus the federal government,” Hempstead said.

Rising Medicaid shortfalls have caused hospitals to provide less charity care, executives say.

The average Medicaid shortfall rose by more than 61%, from $2.2 million in 2013 to $3.5 million in 2018, according to Modern Healthcare’s analysis of 1,347 hospital cost reports that included a shortfall. (Modern Healthcare excluded outliers and hospitals that didn’t report data for both the uncompensated care and Medicaid shortfall analyses; 1,327 hospitals did not report a Medicaid shortfall in 2018). MACPAC considers Medicaid shortfall data reported through Medicare cost reports to be unreliable, the commissioners noted. 

California still has 3 million uninsured and its Medicaid shortfall continues to grow, said Erica Murray, CEO of the California Association of Public Hospitals. “More people are enrolling in Medicaid and have access to a full array of services,” she said. “We are seeing a higher volume of services, so that deficit continues to grow.”

While California hospitals’ average uncompensated care fell from 3.7% of expenses to 2.2% over the five-year span, average Medicaid shortfall rose about $3.5 million, Modern Healthcare data show. Average uncompensated care per hospital decreased $1.2 million.

The $4 billion increase nationally in the Medicaid shortfall from 2013 to 2014 was more than twice as large as the $1.6 billion decline in unpaid costs of care for uninsured patients, according to DSH audits compiled by the Medicaid and CHIP Payment and Access Commission.

It’s important to note the flexibility as to how hospitals calculate their uncompensated care and Medicaid shortfall, said Thomas Miller, a resident fellow at the American Enterprise Institute, a conservative think tank.

“There is complexity if not fakery in uncompensated care accounting—there is a lot of elasticity to it,” he said. “There is a blurring of bad debt and what is truly charity care.” Uncompensated care levels conspicuously stay relatively stagnant regardless of how much funding hospitals receive, Miller added.

Parkland Health & Hospital System’s uncompensated care costs, which include the Medicaid shortfall, were more than $1 billion in 2018, of which approximately $392.3 million was charity care at the Dallas-based safety-net system. That was up from $879.7 million of uncompensated care costs in 2017, $364.1 million of which was charity care.

“It’s very clear we did see some gains in the ACA in terms of patients who can afford insurance and go on the exchanges,” said Katherine Yoder, Parkland’s vice president of government relations. “But there’s a huge patient population in that doughnut hole because they would’ve been eligible for Medicaid if the state expanded it. That has made it difficult to continue to provide services to those patients.”

The first round of Medicaid DSH cuts would cost Texas hospitals about $440 million in 2020, which amounts to nearly a quarter of the state’s total DSH payments, the Texas Hospital Association estimated. That would translate to about $22 million for Parkland, which it has prepared for, Yoder said.

The combination of DSH cuts, the proposed Medicaid Fiscal Accountability Rule, Delivery System Reform Incentive Payments set to run out in two years, modifications to the Medicaid waivers and the looming court case reviewing the constitutionality of the ACA could have a significant impact, Yoder said.

“Even with the ACA gains, we still have the largest number of uninsured in the country,” she said. “Texas will always have a large number of uninsured, even if we expanded Medicaid because of the immigrant population.”

New York and Massachusetts would likely suffer the biggest blows from the Medicaid DSH allotment reductions.

The fiscal year 2020 DSH allotment reductions would reduce New York’s payments by $1.3 billion, the most in the country, according to the most recent MACPAC analysis. That amounts to 34% of the state’s current Medicaid payments.

In total, DSH allotment reductions would amount to 31% of states’ current DSH payments. DSH allotment reductions will account for 55% of current DSH payments by fiscal year 2025.

But industry overseers question if the money is being directed appropriately, which is why Medicaid supplemental payments need an overhaul, many have said. There is no meaningful relationship between state DSH allotments and the number of “deemed” DSH hospitals, MACPAC said.

Part of the problem is the convoluted and obscure web of Medicaid financing mechanisms that direct supplemental funds, the University of Chicago’s Baicker said. “The challenge with DSH funding is that it is hard to write down a set of rules that guarantee the money sticks with hospitals serving vulnerable populations,” she said.

States draw down federal payments by putting up their own funding through state general funds, as well as taxes and contributions from healthcare providers, hospital districts or local governments. Some states’ shares are more than others; Texas, for instance, offers 40% and the federal government contributes 60%. The intent is to give doctors and hospitals more money to provide uncompensated care.

States can secure greater matching federal funds without necessarily increasing their net contribution to Medicaid. One way to do this is to make DSH payments to government-owned hospitals and divert those payments back to the state’s Medicaid agency via intergovernmental transfers.

Multiple sources told Modern Healthcare that some states are using financing mechanisms like intergovernmental transfers and provider taxes to redirect funding intended for safety-net hospitals. Some academic medical centers are receiving the payments even though they don’t serve many Medicaid patients, they said.

AMCs denied that practice as did the Association of American Medical Colleges, noting that teaching hospitals provide more than a quarter of all Medicaid discharges even though they represent just 5% of all short-term general hospitals. AMCs provide $7.25 billion in charity care and $11 billion in uncompensated care annually, 34% and 30% of the U.S. totals, respectively, the AAMC said.

States figure out how to maximize access to funding, and when one loophole closes, the states find another, experts said.

Hospitals receiving the largest share of state DSH payments in 30 of 42 states analyzed did not provide the largest share of total uncompensated care, a 2012 Government Accountability Office report found. Fifteen states made DSH payments to nearly 60 hospitals that either returned their DSH payments to the state or were not qualified to receive them. Forty-one states made DSH payments to 717 hospitals in 2010 that exceeded the individual hospital’s uncompensated care costs, according to the GAO.

In its 2019 report, the agency found that California, Illinois, Maryland and Missouri received Medicaid DSH funding that exceeded uncompensated care costs.

There is bipartisan interest in getting more funding from Washington and spending less through state circles, the American Enterprise Institutes’ Miller said. Intergovernmental transfers and provider taxes have been a means to boost and exploit DSH funding, he said.

“Some hospitals are getting more money than the care they are actually providing,” Miller said.

If local governments are pulling money from their hospital networks when federal funding comes in, it could have detrimental impacts, research shows.

Local governments reduced their subsidies to public hospitals by an average of $100 for every $100 in DSH funds received, according to an analysis of Southern California hospitals from Mark Duggan, director of the Stanford Institute for Economic Policy Research.

Los Angeles County reduced its subsidies to LAC + USC Medical Center 1-for-1 after it received Medicaid DSH funding. The hospital’s performance declined as the number of births dropped from 18,000 in 1990 to 6,000 in 1995, he found. “Historically, a lot of the money was banked by hospitals to increase their financial assets,” Duggan said. “That money could’ve been used to hire more nurses or make capital improvements in hospitals, but it tended not to be.”

Part of the thrust behind the CMS’ proposed Medicaid fiscal accountability rule was to better track where the funds are coming from and how they are being used.

“There are definitive instances where states or providers violate the rules, and that leads to disallowances, where they have to pay this back,” Georgetown’s Park said.

One of those instances is when Texas made improper payments to private hospitals in Dallas and Tarrant counties, according to HHS. The feds clawed back $25.3 million of $74 million in matching Medicaid funds it paid to the state via the upper payment limit program for providing uncompensated care.

Affiliates of several private health systems paid to staff public hospitals via not-for-profit entities. That amounted to an in-kind donation, the CMS claimed, which the area health systems denied. Since intergovernmental transfers must be funded via local tax revenue or patient revenue from the public entity, the arrangement was invalid, the agency said. Both then-Baylor Health Care System and Tenet  Healthcare Corp. reported receiving supplemental payments that exceeded their contributions under their affiliation agreements, according to the CMS.

“We have seen a proliferation of payment arrangements that mask or circumvent the rules where shady recycling schemes drive up taxpayer costs and pervert the system,” CMS Administrator Seema Verma said in a November statement.

There is substantial interest in exploring alternatives like direct healthcare provision or direct subsidies of providers versus through DSH programs, University of Chicago’s Baicker said. “Dollars travel with the patients instead of providers,” she said.

In addition to DSH payments, the upper-payment limit is another supplemental payment intended to cover the difference between Medicaid fee-for-service base payments and the amount that Medicare would have paid for the same service. But upper-payment limits, like other supplemental payments, are often misappropriated, industry overseers have found.

MACPAC found that 17 states overspent on upper payment limit funds by $2.2 billion in 2016. Commissioners said they had no data on how the supplemental payments were spent and that the CMS was not properly enforcing existing rules.

“One of the issues around DSH is the degree to which those payments go to hospitals with the largest number of Medicaid and uninsured,” said Deborah Bachrach, a partner at the consultancy Manatt Health. “There is an increasing sense that there should be both more transparency and better targeting of those dollars so they go to safety-net hospitals.”

But reworking these financing mechanisms requires a broad view of the entire system, said Kip Piper, a senior adviser at ADVI Health.

“States aren’t going to have tens of billions to backfill from the general fund if financing mechanisms go into jeopardy,” he said. “There is a lot of anxiety with that. There are so many different elements—once you start pulling on one, the whole house of cards falls down.”

Finding a path forward remains a challenge given what’s at stake.

One Medi-Cal beneficiary who lives in Los Angeles found out she had a small tumor growing inside her brain, said Martine Brousse, a patient advocate at AdvimedPro. The earliest appointment she could get was three weeks away, requiring her to find transportation for the minimum one-hour drive.

Low Medi-Cal reimbursement and limited physician networks often leave beneficiaries in the lurch, Brousse said. “That is not right to wait three weeks for a biopsy,” she said. “Medi-Cal is literally a lifesaver for so many, but unfortunately until funding places Medi-Cal on at least the same level of Medicare, you are going to have a shortage in quantity and of quality providers. Not having access to care like your neighbor with private insurance stresses the system. People are going to stay sick and it’s going to cost more.”

Hospitals point to examples like these to stave off the Medicaid DSH cuts. The AHA said in a statement that eliminating the cuts for two years will ensure hospitals can continue to serve the most vulnerable.

MACPAC has recommended that the cuts should start at $2 billion instead of $4 billion in the first year, proposing more gradual reductions over a longer span. HHS should target states with left-over, unspent funds from the prior year first. Then, the agency should favor states with higher shares of the nation’s poor, commissioners suggested.

Cuts would cripple Illinois’ safety net, said Danny Chun on behalf of the Illinois Health and Hospital Association. About 40% of Illinois hospitals are either operating with less than a 2% margin or are in the red. The DSH cuts would put further pressure on hospitals struggling to survive, he said.

“We have one of lowest Federal Medical Assistance Percentage rates at around 50%, using every dollar that comes in to serve patients,” Chun said.

The 21 hospitals that the California Association of Public Hospitals represents would lose $330 million if Medicaid DSH cuts were implemented this year, Murray said. 

“We would lose primary-care services and erode many of the gains we’ve made,” she said. 

Another confounding factor is the massive migration to managed care. Nearly 70% of Medicaid beneficiaries were covered by a managed-care plan as of 2017, according to MACPAC data. 

“States moved in that direction to give them more predictability about costs,” said Stanford’s Duggan, adding that hospitals are paid on a per member, per month basis. “That’s challenging for hospitals because those insurers try to keep reimbursement rates down.” 

Policymakers will keep looking for ways to ratchet down Medicaid and Medicare payments through lower reimbursement rates. Reductions in Medicare reimbursement rate growth, coined the market basket, is expected to trim federal spending by $196 billion over 10 years. 

Meanwhile, efforts to undermine the ACA and potentially eliminate the law loom. As hospitals navigate a myriad of issues, nothing would compare to starting from scratch, Murray said. 

“It’s hard to overstate the dire consequences at a local level,” she said. “It would have a cascading effect, forcing closures, reduction of services and access. It would return us to poorer outcomes. It would be a dramatic step backwards.”

Editor’s note: The Medicaid DSH allotment reduction information has been updated to reflect the most recent MACPAC data, which was issued after publication.

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