Medicaid disproportionate share hospitals (DSH) are hospitals that serve a large number of Medicaid and low-income uninsured patients. Recognizing the importance of DSH hospitals to the Medicaid program, states make additional payments (called DSH payments) to these hospitals “to improve the financial stability of safety-net hospitals and to preserve access to necessary health services for low-income patients.” (MACPAC, March 2014 Report to Congress)
Each state is allotted DSH funding according to a formula that is generally based on historical spending, increased to account for inflation; the states also have discretion in how DSH funding is distributed.
The ACA mandated cuts to Medicaid DSH based on the assumption that the ACA would expand Medicaid coverage to almost all non-elderly adults under the age of 65. This expansion would thereby reduce the number of uninsured individuals, and the cost to hospitals of caring for these individuals.
As originally structured, the ACA called for a total of $18 billion in Medicaid DSH cuts beginning in FY 2014 and continuing through 2020. Subsequent legislation has both delayed the implementation of the cuts and extended the Medicaid DSH cuts (currently through fiscal year 2027) into future years. Current law requires reductions of $8 billion per year for fiscal years 2024 through 2027 (for a total of $32 billion in reductions).
The ACA directed the Secretary of HHS to develop a methodology that predominantly distributes the aggregate DSH cuts among states that:
- Have the lowest percentages of uninsured individuals, or
- Fail to target DSH payments to hospitals with high uncompensated care amounts and Medicaid volume.
The Supreme Court, in June 2012, upheld the constitutionality of ACA’s individual mandate to purchase health insurance, but that same decision, as a practical matter, makes Medicaid expansion optional for states. As a result, the number of uninsured individuals still cared for by hospitals has not declined at the levels anticipated by the ACA.
As such, DSH cuts of the magnitude contemplated in current law pose a significant risk to the Medicaid safety net at a time when demands on the program are growing and the responsibilities of hospitals to care for the uninsured have not abated. The challenges to that safety became painfully apparent as the COVID-19 pandemic began to take its toll on American lives and state Medicaid programs stretching to care for Medicaid patients.
On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that eliminated the fiscal year 2020 Medicaid DSH allotment reductions, delayed fiscal year 2021 allotment reductions from taking effect until December 1, 2020, and lowered that reduction to $4 billion from the prior $8 billion. On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, which eliminated the fiscal years 2021, 2022 and 2023 Medicaid DSH allotment reductions and added $8 billion per year reductions in fiscal years 2026 and 2027.
FAH believes it is important for policymakers to continue to work to eliminate, or at a minimum, continue to delay these harmful cuts.
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