Coming Cuts to Safety Net Hospitals Reinforce Importance of Medicaid Expansion

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.