The comprehensive legislation removed the requirement that all Americans purchase health insurance. What impact will it have on disproportionate share hospitals going forward?
Passage of the Republican tax reform bill included a provision to remove the individual mandate penalty, a key aspect of the Affordable Care Act, also known as “Obamacare,” which will have a significant impact on how hospitals care for more uninsured patients.
The bill did not repeal the individual mandate but gutted the penalty for Americans without insurance, which in 2017 was either a $695 fine or 2.5% of their income, whichever amount was greater.
The decision is expected to increase the uninsured population by 4 million in 2019, according to a CBO report released last month. The number of uninsured Americans is expected to rise by 13 million by 2027 as young adults drop out of the market without the mandate penalty.
With a higher uninsured rate, health system leaders must now address how to care for a larger population lacking insurance coverage. The long-planned reduction of federal payments to disproportionate share hospitals (DSHs) poses an additional challenge.
Currently, CMS administers payments to DSHs which predominantly tend to low-income patients including those without insurance. The Urban Institute estimates 35% of uncompensated care costs, the total amount of healthcare provided with no payment received, are covered by the federal government.
Federal DSH spending rises with uninsured rates
The funding formula for both Medicaid and Medicare DSH payments is based in part on a state’s uninsured rate. The Medicaid DSH formula specifically relies on how well the state directs payments to hospitals with high volumes of Medicaid inpatient utilization, and how well the state directs payments to hospitals with high levels of uncompensated care.
Federal DSH spending totaled $12 billion during fiscal year 2016, according to the Kaiser Family Foundation. In its November analysis, the CBO estimated a $44 billion increase in DSH payments would be needed over the next decade due to the individual mandate repeal.
Since automatic increases in DSH spending are based on higher uninsured rates, the burden of uncompensated care will be partially offset by the increase in the amount of money a hospital receives, Matthew Fiedler, PhD, a fellow with the Center for Health Policy in the Brookings Institute’s Economic Studies Program, tells HealthLeaders Media in an interview.
“The uninsured rate will have a direct effect on the amount of uncompensated care and an indirect effect on the amount of DSH payments that are made, in Medicare at least, because the uninsured rate is part of the formula that determines how much DSH payments any given hospital is entitled to,” Fielder said.
DSH funding on eight-year reduction plan
In the original text of the ACA, federal funding reductions were planned for DSH payments to coincide with an expected decrease in the uninsured rate nationwide. The reductions were set to go into effect in fiscal year 2014 and last through fiscal year 2020, but legislation was passed in 2013 to postpone them until fiscal year 2018.
Despite the four-year layoff, nearly two-thirds of states did not sufficiently allocate their FY 2018 budgets for the scheduled reductions, according to the Kaiser Family Foundation. In July, CMS proposed a rule that ordered the beginning of reductions with $2 billion in FY 2018.
The current DSH reductions are projected to run through fiscal year 2025, totaling $43 billion.
The potential impact of changes to the DSH program on hospitals is unclear until Acting Secretary of Health and Human Services Eric Hargan makes cuts or redistributions of DSH allotments, says David Mosley, managing director with Navigant Healthcare in Atlanta, Georgia.
The impact will depend on the cost of people who utilized services without payment compared to the number of people who will be uninsured and eligible for DSH, Mosley tells HealthLeaders Media.
“I would love to have some wonderful prognostication,” Mosley says, “but the answer is there are a few variables out there that, until someone tells us the value of those variables, we don’t know.”
Jack O'Brien is the Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.