Safety Net Hospitals Imperiled by High Court Ruling

Safety net hospitals, which serve the vast majority of the nation’s uninsured people, were meant to be major beneficiaries of the federal health care law. With 30 million mostly low-income people newly covered starting in 2014 either by Medicaid or federally subsidized private insurance, the hospitals’ bottom lines seemed certain to improve.

But now that the Supreme Court has made the law’s Medicaid expansion optional for the states, many of those same hospitals are worried about their financial futures.

Hospitals that serve large numbers of the uninsured receive federal “disproportionate share” payments (DSH) to cover the extra costs that this imposes on them. DSH subsidies are the single largest source of funding for these hospitals. The federal health law assumed the Medicaid expansion would be mandatory, and called for a reduction in DSH payments. The theory was that fewer people would be uninsured when the law takes effect, and safety net hospitals would no longer need as much help to cover the expenses of uncompensated care.

The current federal DSH subsidy amounts to about $11 billion annually. Under the health law, federal DSH funding is slated for quarterly reductions starting in 2014, with the estimated total reduction between 2014 and 2020 set at $18 billion. Similar but smaller payments to safety net hospitals under the federal Medicare program for seniors are also slated to decline.

Now the assumption of a substantially smaller uninsured population seems questionable, and safety net hospitals may find themselves with the combination of undiminished costs and less federal help. “That tradeoff is now gone,” says Bruce Siegel, director of the National Association of Public Hospitals and Health Systems, which represents safety net hospitals. “It’s a huge policy issue.”

Already, Republican governors in at least eight states—Florida, Iowa, Kansas, Louisiana, Nebraska, South Carolina, Texas and Wisconsin—have vowed not to expand Medicaid. If they and their state legislatures follow through with those promises, hospitals that serve large numbers of low-income uninsured patients would bear the brunt.

As the accompanying chart illustrates, the percentage of federal Medicaid DSH money allocated to individual states varies widely. As a result, some will be hit harder than others when that revenue stream starts to disappear.

“States are all over the map,” says Matt Salo, director of the National Association of Medicaid Directors. “The differential impact of DSH cuts on individual states is staggering.”

According to the federal health law, the secretary of Health and Human Services has the discretion to impose “the largest percentage reductions on the states that have the lowest percentage of uninsured individuals.” That would mean that a state like Texas, which has the highest uninsured rate in the nation, could see smaller cuts to its DSH payments than states like Massachusetts and Vermont, where uninsured rates are lower than the national average.

Similarly, states that choose not to expand their Medicaid programs could be perversely rewarded with lower reductions to their DSH payments, because their uninsured rates would remain relatively high.

But the federal health agency also has the discretion to make deeper cuts to states that do not adequately target their DSH payments to hospitals that need it most — those with the highest volume of uncompensated care. The result is expected to be not only a reduction in overall federal payments but a redistribution of payments among states.

Rules on how the federal government intends to make the cuts are expected in early 2013. Meanwhile, state policy makers are analyzing the potential fiscal impact on their budgets.

According to health care attorney Deborah Bachrach, states may want to assess the way they allocate DSH money to safety net hospitals.  She encourages states to allocate funds along a sliding scale based on actual uncompensated services provided to patients. States with the most equitable distribution of funds, she says, are likely to receive the most favorable treatment from the federal government.