Off the Charts Blog | Center on Budget and Policy Priorities

Health reform cuts supplemental Medicaid payments for hospitals that serve many low-income and uninsured patients because the need for such payments should shrink as more low-income people gain coverage through the law’s Medicaid expansion.  The Department of Health and Human Services (HHS) has now issued a proposed rule to allocate these cuts among the states — and the rule makes clear that adopting the Medicaid expansion is the right choice for states.

That’s true for two reasons.  First, under health reform the federal government will largely pay for the Medicaid expansion.  Second, the states will face cuts in these hospital payments — the so-called “disproportionate share hospital” (DSH) payments — whether or not they expand Medicaid.

Health reform cuts DSH payments by $18.1 billion through 2020.  The cuts start at $500 million in fiscal year 2014, when the Medicaid expansion first takes effect, but they grow sharply in later years, to $5.6 billion in 2019 and $4 billion in 2020.

Under the proposed rule, which applies to fiscal years 2014 and 2015, the size of each state’s cut will largely reflect the number of uninsured in the state and how well the state targets its DSH payments to hospitals with the most Medicaid and uninsured patients.  (Under health reform, President Obama and Congress directed HHS to take these factors into account in apportioning the cuts.)  A state’s decision whether to expand Medicaid will not be a factor.

To be sure, a state’s decision on the Medicaid expansion will likely affect its number of uninsured in coming years.  If HHS continues to take the number of uninsured people into account in allocating the cuts after 2015, states that don’t expand Medicaid could see somewhat smaller DSH cuts than other states because they will have more uninsured.  But, given the magnitude of the total cut in later years, such states will still face substantial DSH funding cuts.

The bottom line?

Hospitals and low-income people in states that expand Medicaid will be far better off.  Hospitals will gain much more in payments for the care they provide to large numbers of low-income people who will gain insurance through the expansion than they may lose in DSH payments.  And low-income people will be much better off with health coverage than if they remained uninsured.

The New England Journal of Medicine reported encouraging new findings yesterday from the Oregon Health Study, a landmark, ongoing study of the state’s Medicaid program.  Medicaid beneficiaries were more likely than the uninsured to access preventive care, such as mammograms for women, and they had far less financial hardship caused by health care spending.  In fact, Medicaid coverage “almost completely eliminated catastrophic out-of-pocket medical expenditures.”  The researchers also report significant improvements in diagnosing depression and diabetes among the Medicaid recipients they tracked.  This report confirms earlier results from this study, which is often described as the “gold standard” for research.

These findings are receiving praise, and for good reason.  Both diabetes and depression are costly conditions; diagnosing and treating the diseases can improve patients’ health and quality of life.  And eliminating catastrophic out-of-pocket costs means that Medicaid provides financial security for low-income adults in the same way that health insurance protects higher-income people from economic setbacks.

The results come as some states are deciding whether to expand their Medicaid programs under health reform.  Some critics of Medicaid already are citing some of the study’s results, such as the lack of statistically significant changes in diagnoses or treatment of high blood pressure or high cholesterol, as a reason to oppose expansion.

A closer look at the Oregon study shows that its results don’t support that case, however.

In addition to reporting the important positive results, the researchers were careful to explain their findings’ limitations, including small sample sizes that prevented them from concluding that some trends were statistically significant.  For example, the authors did find that some patients’ cholesterol levels fell, but they suggested that they would need larger samples of patients to study before they could be certain of the findings’ validity.  Similarly, they left open the possibility that improvements in high blood pressure among Medicaid recipients could be clinically significant.

These results reflect an average of just 17 months of additional health insurance coverage.  We know that Oregon’s Medicaid recipients used more preventive care — a factor that may take years, or even decades, to show its full effect on their health.  Previous research, also published in the New England Journal of Medicine, pointed to reduced mortality in states five years after they expanded Medicaid to more low-income adults.

President Obama proposed in his 2014 budget to delay for one year a scheduled cut in supplemental Medicaid payments to safety net hospitals that serve large numbers of low-income patients.  Health reform calls for the cut in federal disproportionate share hospital (DSH) payments beginning in fiscal year 2014, assuming that the hospitals’ need will fall as more low-income people become insured through Medicaid and subsidized coverage in the new health insurance exchanges.  (The cuts scheduled for 2016 and 2017 would rise to make up for the delay.)

In fiscal year 2012, DSH allocations for all states totaled $11.3 billion.  Under health reform, in 2014 state allocations for DSH would be cut by $500 million, and the cuts are scheduled to grow significantly over several years as low-income people obtain health coverage.  DSH allocations will be cut by $5.6 billion in fiscal year 2019 and $4 billion in fiscal year 2020, relative to what would have happened in the absence of health reform.

Now, the Administration wants to delay reducing the hospitals’ payments until 2015 so that states have enough time to start getting low-income uninsured people enrolled in coverage.  That has prompted some to ask whether the proposal would make it easier for states not to expand Medicaid.

In many states, hospitals have worked to convince their states to adopt the Medicaid expansion; without it, hospitals serving low-income uninsured populations would face DSH cuts without seeing any concurrent gains in coverage among their uninsured patients.  Mississippi’s governor said last week that the proposed delay gives the state more time to decide whether to expand Medicaid.  Similar claims have arisen in Missouri.

The President’s proposal should not affect state decisions whether to expand Medicaid.  First, it is just a budget proposal, and there is a good chance it may never become law.  Second, even if it becomes law, the DSH cuts will occur starting in 2015 and continue in subsequent years.  Congress has already acted twice to extend the cuts beyond the timetable in health reform, and the President’s budget proposes a further one-year extension through 2023.

In states that don’t expand, uninsured people with incomes below the poverty line would remain uninsured, and many would receive care in hospitals that now rely on DSH payments to help pay for the care they receive.  Those payments will shrink whether that begins in 2014 or 2015.  Moreover, in 2014 the federal government will bear the entire cost of the Medicaid expansion, a benefit to states that dwarfs the relatively small cut in DSH payments, whenever it comes.

The Kaiser Commission on Medicaid and the Uninsured’s new annual survey of state eligibility policies in Medicaid and CHIP shows that income eligibility levels for working parents have continued to stagnate.  The median income level fell slightly, from 63 to 61 percent of the poverty line — $11,645 for a family of three.  For non-working parents, income eligibility remained at a dismal 37 percent of the poverty line — $7,063 a year for a family of three.

The median income level marks the halfway point in state income eligibility levels — where half the states fall above and half fall below.  As states consider whether to expand Medicaid, it’s important to understand where some of the states rejecting or leaning against expansion stand.  In Louisiana, for example, a parent would have to earn less than $4,582 a year to qualify; in Texas, $4,773; and in Idaho, $7,063.  Alabama, Florida, Georgia, Mississippi, and Utah also fall below the median.  In most of those states, childless adults are not eligible for Medicaid at all or only have limited coverage under waiver programs.

Some governors have balked at the expansion because it would add large numbers of state residents to their Medicaid rolls.  For example, Florida Governor Rick Scott’s office said that the number of people on Medicaid in Florida would nearly double if the state expands (from about 3.3 million today to more than 6 million). But large numbers of parents and childless adults would become eligible in Florida — where over half of poor adults are uninsured — because the state covers so few adults today.  Expanding Medicaid would change that and provide a pathway to health coverage for poor, uninsured working parents and other adults.

The list of possible Medicaid cuts in an agreement to avert the “fiscal cliff” includes rolling back a scheduled payment increase for primary care providers.  That’s a bad idea, and it would undercut efforts to ensure that beneficiaries — including the people who become eligible for Medicaid under health reform’s expansion of the program — have access to health care.

As we’ve explained, health reform allows states to expand Medicaid to cover low-income adults with incomes up to 133 percent of the poverty line, with the federal government paying nearly all of the cost.  A new study by Urban Institute researchers finds that large numbers of people will enroll in Medicaid in 2014 even in states that don’t take up the expansion, because other elements of health reform will simplify enrollment and improve outreach.

To draw new providers into Medicaid and encourage existing Medicaid providers to see more Medicaid patients, health reform raises Medicaid’s payment rates to at least Medicare levels in 2013 and 2014 for primary care physicians providing certain services.  The federal government will pay 100 percent of the cost, which would apply to all states, regardless of whether they expand Medicaid.

This boost will help ensure that there are enough primary care providers to serve current Medicaid beneficiaries as well as the people who newly enroll.

The payment increase will “lead to better quality of care for patients and decreased costs for state governments” by helping beneficiaries get cost-effective coordinated and preventive care services through their primary care physicians, according to a recent letter to congressional leaders from over 100 physician groups — including the American Academy of Pediatrics, a leading advocate for children’s health.

Cancelling the increase, in contrast, would create obstacles both for those seeking health care and for those providing it.