April 02, 2019

MACPAC Report: Funding Cuts Could Affect Safety Net Hospitals

In its March 2019 Report to Congress, the Medicaid and CHIP Payment Commission (MACPAC) expressed concern that impending supplemental federal payment reductions to disproportionate share hospitals (DSH) could affect their financial viability.

The report focuses on hospital payment policy with special attention on DSH allotments and upper payment limit (UPL) supplement payments. Medicaid hospital payment policy is a critical area of interest for federal lawmakers because hospital costs accounted for one-third of total Medicaid spending in fiscal year (FY) 2017.

The commission expressed concern that the planned $4 billion DSH allotment cut in FY 2020 and reductions of $8 billion annually in fiscal years 2021–2025 could lead to service or staff cuts and ultimately affect the financial viability of some safety net hospitals. DSH allotments enable states to make supplemental payments to offset the cost of uncompensated care.

If Congress moves forward with planned DSH cuts, MACPAC recommends the following actions to minimize their impact:

  • Phase-in DSH reductions more gradually over a longer time period by scheduling $2 billion in allotment reductions in FY 2020, a $6 billion cut in FY 2022, and $8 billion decrease in fiscal years 2023–2029
  • Require the U.S. Department of Health Human Services (HHS) to apply the cuts to states with unspent DSH allotments first to reduce their effect on DSH in states where allotments have been exhausted
  • Distribute the reductions to gradually improve the relationship between DSH allotments and the population of non-elderly, low-income individuals in a state after adjusting for differences in hospital costs in different geographic areas

Concerns MACPAC expressed in previous reports about the lack of data for Medicaid upper payment limit (UPL) reimbursement were revisited this year. The commission stressed that incomplete information on hospital financing affects the ability of policymakers to fully understand hospital-based Medicaid spending.

The commission recommended process controls to ensure that UPL demonstration data are accurate and complete. It also asked for actions to make UPL data available to the public in a standard format to permit analysis.

MACPAC’s annual DSH analysis underscored the commission’s previous findings that DSH allotments have little meaningful relationship to measures of uncompensated care at the state level. Much of the variation in state DSH allotments reflects their basis on historic spending patterns. The commission also found that the methodology used by the Centers for Medicare and Medicaid to implement DSH allotment reductions would preserve most of this historic variation.