Avalere Health
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Insights

May 31, 2013

What You Need to Know About DSH Cuts

With DSH cuts looming, hospitals should enroll patients in coverage programs to minimize the burden of uncompensated care.

Hospitals face an estimated $51 billion in cuts to Disproportionate Share Hospital (DSH) payments between 2014 and 2020. The Affordable Care Act (ACA) and two recently released proposed rules from CMS suggest that the impact of these cuts will vary significantly by hospital and by state in 2014.

Medicaid DSH cuts. Under the ACA, hospitals face a $500 million (or ~4.25% aggregate) national reduction in Medicaid DSH payments in 2014. Since not all states intend to expand their Medicaid programs, the negative effects of the pending ACA-mandated DSH cuts have been unclear to hospitals nationwide.  In its proposed regulation released in May, CMS indicated that hospitals in non-expansion states will likely encounter a significant reduction in DSH payments while seeing limited change in uncompensated care.  In determining the DSH payment cuts, CMS will take into account a number of factors, including insurance rates. Since CMS proposed using 2012 data to calculate payment cuts, hospitals in expansion states will receive lower cuts than they would have if 2014 data, reflective of post-expansion insurance rates, were used.  In contrast, hospitals in non-expansion states will face greater DSH payments cuts, but will still have similar levels of uncompensated care patients.  

If the rule is finalized as proposed, states with high uninsured rates that appropriately allocate their DSH payments to hospitals with high Medicaid and uncompensated care levels are likely to see smaller reductions in 2014. For example, Indiana would see a lower DSH cut (roughly 3.3%), Texas would see a higher DSH cut (roughly 5.5%), and most other states would see a cut similar to the 4.25% aggregate reduction.

The proposed rule may continue to place pressure on states to reconsider their non-expansion strategy as hospitals in non-expansion states will have to absorb the payment cuts mandated without seeing significant reductions in their uncompensated care.

CMS will likely re-visit the way it calculates Medicaid DSH in 2016, with more changes accounting for Medicaid coverage expansion expected then.

Medicare DSH cuts. The ACA reduces hospitals’ Medicare DSH payments to 25 percent of their current levels, starting fiscal year 2014. In its proposed FY 2014 Inpatient Prospective Payment System  rule released in April, CMS proposed to distribute the remaining portion of Medicare hospitals’ DSH payments, equal to 75 percent of hospitals’ current DSH payments, into an uncompensated care payment pool from which individual hospitals will receive a payment based on their share of insured low income days.

CMS expects the uncompensated care pool will equal $8.2 billion and estimates that 2,349 hospitals, or 68% of all applicable hospitals, will be eligible for uncompensated care payments in FY 2014.  Each hospital’s overall Medicare DSH payment will vary significantly. Hospitals that provide a greater proportion of uncompensated care relative to the uncompensated care provided by all Medicare DSH hospitals will receive larger uncompensated care payments.

Avalere is the essential voice improving healthcare. We stay ahead of the curve and generate deep content for clients across the entire healthcare industry. We look forward to partnering with you to make better business decisions. For more information, please contact Holly Wittenberg.
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