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Medicaid DSH Payment Cuts Could Add to Financial Woes of Safety-Net Hospitals

By Nellie Bristol, CQ HealthBeat Associate Editor

June 4, 2012 -- Cuts to Medicaid disproportionate share hospital payments required by the health care law could leave safety-net facilities unable to pay for necessary modernizations in health care delivery, experts recently said.

No matter how the Supreme Court rules on the law, according to Arthur Gianelli, president and CEO of NuHealth System in New York, payment changes in the health care system have already begun and will not stop. In response, hospitals, including safety net facilities, are reducing admissions, forging partnerships with other providers, expanding primary care and care management and entering into quality-based shared savings arrangements with payers. However, he said, lower DSH payments required by the health overhaul will leave already undercapitalized public hospitals with even less money to develop such alternatives. Gianelli spoke at an event sponsored by the Alliance for Health Reform and The Commonwealth Fund.

Medicaid disproportionate share payments (DSH), which provide funds to hospitals that treat large numbers of Medicaid and uninsured patients, will be reduced by a total of $18 billion, between 2014 and 2020 under the health law (PL 111-148, PL 111-152). Medicaid DSH payments currently total about $11.5 billion today. The overhaul assumes that decreases in the number of uninsured will make up for the lost revenues.

In addition to losing DSH funds, hospitals will be more limited in their ability to use commercial insurers to cross subsidize care since the health overhaul provides for a review of premium increases for private insurance, Gianelli added. "You're going to see a true tightening of the resources that are available to hospitals and certainly a tightening of the resources that are available to public hospitals and safety net facilities," he said.

Gianelli says public hospitals already are struggling as they straddle between service delivery systems based on fee for service payments and new arrangements focused on value. The first system rewards volume of care while the second rewards continuity and quality. Hospitals are being encouraged to reduce unnecessary admissions, but the payment system still does not yet adequately reward facilitating other types of care. "Hospitals are being asked to ... destroy their own demand," he said. "You almost can't find another example in any sector in the economy where a major economic player is asked to do less of what they do, but that's precisely what's going on in health care. It's critically important by the way that hospitals succeed in doing that for the health care system to be sustainable in the long run."

Policymakers can mitigate the squeeze by focusing Medicaid and disproportionate share dollars better, providing organizational flexibility to the facilities and clearing up anti trust issues at the state level to allow better integration of health facilities, Gianelli said.

Deborah Bachrach, special counsel for Manatt Health Solutions, also expressed concern about declining DSH payments. "The DSH cut is premised on the success of the [health overhaul]," she said. If the law is completely successful, there will be 20 million to 26 million uninsured remaining, she added. Policymakers need to ensure that DSH funding is adequate to cover the cost of services to the remaining uninsured. She recommended allocating the funds along a sliding scale based on actual services provided to patients.

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