Urban Institute: Benefits of closing Medicaid coverage gap outweigh proposed DSH cuts

New legislation to close the Medicaid coverage gap would outweigh cuts to disproportionate share hospital (DSH) payments being proposed in a massive infrastructure package, a new analysis finds.

The analysis, released Thursday by the Urban Institute, comes as hospital groups are howling over a proposal to cut DSH payments by $444 million. But a proposal to expand coverage to eligible residents in states that haven’t expanded Medicaid would outweigh those cuts with more than $6.8 billion in new spending, the analysis finds.

“The financial gains for hospitals from closing the coverage gap are huge and easily offset reductions in DSH payments,” Katherine Hempstead, senior policy adviser for the Robert Wood Johnson Foundation—which commissioned the analysis—said in a statement.

Democrats in the House released legislation last week that would create new federal subsidies available to people in states that have not expanded Medicaid under the Affordable Care Act (ACA). Residents who would be eligible for Medicaid had the state expanded could get the subsidies and buy coverage on the ACA exchanges.

The legislation is part of a larger $1.75 trillion spending package expected to be considered in the coming weeks.

But to offset the costs for closing the Medicaid coverage gap, lawmakers included $444 million in DSH payment cuts to nonexpansion state hospitals, which reimburse them for treating uncompensated care.

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Hospital groups have charged that the cuts would continue even through 2025 when the enhanced subsidies expire. Groups also remember when the ACA cut DSH on the premise that more people would have coverage and therefore payments weren’t needed as much, but safety net hospitals still face razor-thin margins.

America’s Essential Hospitals, which represents safety net facilities, said in a statement that hospitals still need DSH because Medicaid doesn’t fully cover their costs, and there will still be uninsured patients.

But the analysis estimates that while the cuts would total $444 million, the enhanced subsidies would lead to $19.6 billion in new spending on coverage for those in non-expansion states.

“Though only a portion of the total increased federal spending under the reform would flow to hospitals, our estimates conclude that in the years during which additional subsidies would be provided, hospitals overall would be substantially better off than they are under current law, even after a Medicaid DSH cut,” the analysis said.

The American Hospital Association also called the analysis flawed, noting that Urban doesn't include a state share of DSH payments nor does it consider "the fiscal implications of people who may leave employment-based coverage in favor of a marketplace plan."

AHA also added in a statement that DSH payments can help to preserve hospital stability by "filling significant shortfalls in uncompensated care for the uninsured."

The report also considered a boost to subsidies first passed under the American Rescue Plan Act. The subsidies are currently set to expire after the 2022 coverage year, but the legislation would extend them through 2025.

The effect would differ among states based on their population. For example, Florida hospitals would gain $1.7 billion in new spending due to the added coverage but only lose $33 million in DSH payment cuts.

Texas hospitals could also gain $1.6 billion in new spending but lose $157 million in DSH allotments.

However, the analysis conceded the benefits of coverage would not necessarily be extended to the same hospitals that would face DSH cuts.

“Hospitals serving a disproportionately high share of undocumented people would see less benefit from reform than other hospitals and could see substantial DSH cuts,” the analysis said. “At the same time, the overall decline in the number of uninsured people could save spending on uncompensated care for the uninsured.”

But if states save on uncompensated care thanks to expansions in coverage, they could distribute savings to hospitals that face the most DSH cuts.

Urban modeled its DSH cuts based on the fiscal year 2020 federal allotments to 2022 and then applied the 12.5% cut specified in the legislation. The think tank then simulated coverage expansions if the enhanced subsidies took effect in nonexpansion states.

It remains unclear whether the cuts will make it into the final bill. The legislation still needs to pass the House, which returns next week, and could face changes in the Senate.