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Let the Payment Reductions Begin

As hospital providers begin to put the pieces of the health care reform puzzle together, one item of common unrest is the imminent reduction in payments in the Medicare and Medicaid programs.  In order to generate its proposed savings to the health care system, the Patient Protection and Affordable Care Act (PPACA) includes substantial reductions to hospital's market basket updates as well as cuts to their Medicare and Medicaid disproportionate share hospital (DSH) payments. 

Of particular note to many hospitals already struggling to survive in today's environment are these $36 billion in cuts to DSH payments, additional payments to providers that were created as a means of offsetting the burden of treating a "disproportionate" number of uninsured patients.  For many of these providers, DSH payments are the difference between remaining operational and being forced to consider other potentially devastating options. 

The reductions to Medicare and Medicaid DSH are as follows:

Medicare DSH

Section 3133 of PPACA includes provisions to initially cut Medicare DSH payments by 75 percent beginning in federal fiscal year 2014.  These reductions are anticipated to total $22.1 billion over 10 years and come as a result of Medicare Payment Advisory Commission (MedPAC)'s findings that only 25 percent of Hospitals' Medicare DSH payments are actually justified by the cost of providing care to indigent patients.  The law also mandates that specified portions of these savings will result in additional payments to providers based on a realigned payment system of better allocated reimbursement of their remaining uncompensated care costs.

Medicaid DSH

Section 2551 of PPACA includes provisions to cut Medicaid DSH payments by $14 billion over 10 years, also beginning in fiscal year 2014.  These Medicaid DSH allotment reductions will not be tied directly to increases in levels of insurance coverage. Rather, they will be based on the state's number of uninsured and how the state treats hospitals with high Medicaid and uncompensated care volumes. 

As with all areas of health care reform legislation, prudent hospitals should be diligent in their attempts to quantify the effects of Medicare and Medicaid DSH payment reductions at their facilities.  However, there are two sides to this equation, making an accurate assessment of the complete ramifications very difficult at best.  The following chart provided by the Congressional Budget Office has been utilized to calculate Medicare and Medicaid DSH payment reduction estimates in reform impact calculators such as the American Hospital Association model.

Theoretically, the reduction of DSH payments is merely a means of equalizing the benefit to providers of the increase in payments resulting from patients with newly issued insurance coverage.  However, the unsettling reality is that these cuts to DSH payments are certain across all providers while the projected decrease in indigent patients may vary drastically from one provider to another, once again creating unintended winners and losers in the realm of healthcare payment systems.

HORNE LLP can assist you with the operational implications of the issues discussed in this article. For more information, please contact HORNE Partner David Williams at david.williams@horne-llp.com or 601.326.1320.