Most safety net hospitals receive substantial amounts of revenue from DSH payments in order to at least partially offset the costs of uncompensated care to uninsured people. On average, Medicaid DSH payments accounted for 24 percent of unreimbursed care for members of the National Association of Public Hospitals (Zaman et al. 2012). Revenue from DSH has become critical to most safety net hospitals’ financial viability, as most of these hospitals also serve a high proportion of Medicaid patients, where direct reimbursement for these services is insufficient to cross-subsidize care for the uninsured.
Beginning in 2014, the ACA will reduce both Medicare and Medicaid DSH payments to hospitals. Medicare DSH payments will be cut 75 percent in 2014, although these funds will be redistributed in order to provide additional payment to hospitals that continue to experience high levels of uncompensated care. Medicaid DSH cuts will be reduced somewhat more gradually, to 50 percent by 2019. The rationale for the reductions in Medicare and Medicaid DSH payments is that increases in patient revenue through insurance coverage expansions will dramatically reduce the amount of uncompensated care that hospitals provide and, therefore, the need for supplemental payments.
The 2006 Massachusetts health reform law was similar to the ACA in that insurance coverage expansions were accompanied by reductions in subsidies from the state’s uncompensated care pool. Despite 98 percent of the state’s population being insured, increases in patient revenue were insufficient to offset the loss of state subsidies, and many safety net hospitals—including the two major safety net hospitals in Boston—sustained operating losses as a result (Kane et al. 2012; Tu et al. 2010)
Whether other safety net hospitals experience similar losses as a result of cuts in DSH will depend on a number of factors. Chief among these will be whether the state expands Medicaid coverage to adults up to 138 percent of the federal poverty level. Without additional Medicaid enrollees among those who already make up a large percentage of safety net hospital patients, it could be extremely difficult for these hospitals to offset the loss of DSH revenue through increases in privately insured patients alone. The National Association of Public Hospitals estimates that without Medicaid DSH subsidies, average margins of their member hospitals would decrease from 2.3 percent to –6.1 percent (Zaman et al. 2012). This estimate (which is based on 2010 data) does not account for the potential increases in revenue that safety net hospitals may see in states which opt to expand eligibility for the Medicaid program. On the other hand, the methodologies that states have used to distribute DSH funds in the past have varied, and some have been much less effective in targeting payments to the safety net hospitals most in need (that is, those with the greatest uncompensated care costs) (GAO 2008). In addition, the Medicaid DSH cuts will not be evenly distributed across states. The ACA requires a DSH Health Reform Methodology (DHRM) to target higher reductions in states with the lowest uninsured rates and the lowest levels of care provided to Medicaid and uninsured patients and in states that have not previously targeted DSH payments to hospitals with a high volume of Medicaid patients. Realizing that the DSH reductions could have serious consequences for safety net hospitals in states that are not expanding Medicaid coverage, CMS recently proposed a DHRM methodology only for 2014 and 2015—when the DSH reductions are relatively small—and is postponing decisions about the larger reductions scheduled for subsequent years (CMS 2013).