DSH Cuts Delayed
Opportunity for State Reform
In February, after more than two years of inaction, the federal government delayed planned cuts in its Disproportionate Share Hospital (DSH) payments, a part of the Medicaid program. The DSH payments are intended to aid hospitals that suffer financial losses from providing care to relatively large numbers of uninsured and Medicaid patients. New York State distributes $3.6 billion annually in DSH payments, but its distribution fails to target the hospitals with the greatest need. The latest delay of federal DSH reductions should be a stimulus for the State to revise its distribution to direct funding where it is needed most.
The Repeated Delay of Federal Cuts
The Affordable Care Act (ACA) signed by President Barack Obama in 2010 intended to reduce substantially the number of Americans who lacked health insurance. One seemingly reasonable way to help cover the added federal taxpayer cost of the new benefits was to reduce Medicaid DSH payments. This was based on the expectation that a decrease in the number of uninsured patients would be accompanied by lower fiscal losses for hospitals caring for this group; hence, a reduced need for DSH payments. Accordingly the ACA authorized a seven-year schedule of reductions to DSH beginning in federal fiscal year 2014 after the ACA’s insurance expansion provisions were to be implemented. The $12 billion federal program would be reduced by $500 million in federal fiscal year 2014 rising to a reduction of $5.6 billion in federal fiscal year 2019. (See Table 1.)
As the scheduled cuts approached, many hospital leaders and state officials raised objections on grounds that uncompensated and undercompensated care costs were not being reduced by as large an amount as initially anticipated, due in part to a large and growing undocumented population uncovered by ACA provisions and continuing underpayments by the Medicaid program for those it covered.1
In response, in 2013 Congress delayed the reductions for two years. As shown in Table 1, the first cuts were postponed until federal fiscal year 2016; the amounts were altered to begin at $1.2 billion, peak at $5.6 billion, and be reduced to $4.0 billion in federal fiscal year 2020.
As the new deadline approached Congress again responded to arguments against the cuts. The reductions were delayed in 2014 to begin in federal fiscal year 2017, and in 2015 were delayed to begin in in federal fiscal year 2018.2 In each case the delay was accompanied by an increase in the amount of the first year cuts and in the aggregate amount of the cuts.
The federal elections of 2016 brought in a new President and a Congress with a new party composition. These changes altered the pattern of Congressional decision making about a wide range of fiscal issues including the DSH cuts. In 2016 and 2017 no action was taken to delay the cuts taking effect at the start of federal fiscal year 2018 (that is, October 1, 2017), and it seemed the cuts would be implemented. The federal government issued proposed regulations to distribute the $2 billion cut among the states.3 However, the reductions were not realized by the nation’s hospitals because federal legislation adopted in February 2018 delayed the cuts until federal fiscal year 2020. As was the case with previous delays, the magnitude of the cuts increases—to $4.0 billion in the first year and $8.0 billion in years thereafter. Thus, New York has gained some time before cuts take effect, but will suffer larger losses when they do become effective.
The Absence of State Reform
New York has a big stake in the DSH program. Of the $12 billion of federal funding nationwide, New York receives nearly $1.8 billion, the largest amount of any state. The $1.8 billion of federal funding is matched with nonfederal funds–provided by the State or local governments–and $3.6 billion is paid to hospitals across New York State annually.4
Under the latest schedule of DSH cuts, New York’s hospitals would suffer a loss of federal funding of approximately $724 million in federal fiscal year 2020 and $1.4 billion annually thereafter.5 The State and localities might continue their support for the nonfederal share of DSH in some other form, but if the State and localities also dropped their DSH share, future losses would total $2.8 billion annually.
These potential cuts in DSH payments have serious consequences not just due to their scale, but also because New York’s program distributes the funds inequitably. The federal Medicaid legislation allows states to develop their own methods for distributing DSH funds, and New York has devised a complex system that yields widely criticized results.6 In simple form, the New York system reflects this hierarchy:
- The hospitals affiliated with the State University of New York (SUNY) and the State’s inpatient psychiatric hospitals have first priority. SUNY hospitals receive DSH payments up to their full uncompensated and undercompensated care losses, and the State’s psychiatric hospitals receive the maximum payments available under federal law. State revenues supply the nonfederal share for these hospitals.
- Voluntary hospitals (i.e., nonpublic) have second priority, receiving a guaranteed $1.1 billion. New York State also supplies the full nonfederal share for the voluntary hospitals.
- County hospitals have third priority. Like SUNY hospitals, the county-run facilities receive reimbursement for the full value of uncompensated and undercompensated care losses. However, the counties are required to supply the nonfederal share.
- Finally, hospitals of New York City Health + Hospitals (H+H) have lowest priority. These hospitals receive the remainder of funding available from the federal government, which typically is not enough to reimburse fully uncompensated and undercompensated care losses. The local sponsoring district, New York City, must supply the nonfederal share.
In addition to DSH payments the State makes approximately $1.4 billion in other supplemental payments through the Upper Payment Limit (UPL) program, the Vital Access Provider Assurance Program (VAPAP), and the Value-Based Payment Quality Improvement Program (VBP QIP), which direct most of their funding to H+H and the most financially distressed voluntary hospitals for purposes similar to DSH.7 Still, the State’s DSH priorities leave H+H in a disadvantaged position.
H+H facilities suffer in two ways. First, DSH payments cover a smaller share of their losses than is the case for other groups of hospitals. This inequity is primarily due to the DSH payment hierarchy described above. Whereas voluntary hospitals receive a guaranteed amount of funding with the State supporting the nonfederal share and all other public hospitals are guaranteed to receive the full amount of their eligible losses, H+H is given only the remaining funding, and the City must support the nonfederal share.
Second, under current policy, the future cuts will be borne almost entirely by H+H, exacerbating the existing inequity. Because current policy gives lowest priority to H+H and allocates to them only funds remaining after other groups of hospitals get their share, it is possible the full brunt of the future $1.4 billion in federal cuts will fall on H+H hospitals if the State does not take action.
Despite the long-planned imposition of the federal DSH cuts, New York’s state leaders have not made adjustments to the DSH allocations to remedy the current and potentially worsening inequities. This inaction has occurred despite a New York State Department of Health recommendation to reconvene a task force to consider reforms.8 The State should follow through on this recommendation to convene a workgroup to evaluate revisions to the methodologies.9 The possibility of additional future delays in federal cuts should not be taken as an excuse to postpone reform; existing inequities are already serious and state leaders should act based on the assumption that current law provisions for cuts will be implemented.10 Failure to address the current flaws has and will have a significant negative impact on H+H, a crucial safety net system which relies heavily on supplemental payments including DSH.11 Medicaid patients comprise 73 percent of H+H’ inpatients compared to 52 percent in other New York City hospitals and 33 percent in the rest of the State. The 11 hospitals of H+H also reported $759 million in losses from serving the uninsured compared to $860 million by 165 other hospitals across the state.12 H+H leaders are working to improve its finances and operations, but still face deficits which approach $2 billion in coming years.13 Because H+H serves such a large share of Medicaid and uninsured patients, the system should be well protected from DSH reductions, and should not be the first or only hospitals to suffer reductions.
Reforms to the State’s DSH program should be enacted in the current legislative session. First, the distribution formulas–particularly that for the Indigent Care Pool–should be revised to direct DSH payments to the hospitals with the greatest need. Second, State priorities for distributing DSH payments should not leave H+H to suffer DSH cuts alone. Third, the State should make payments promptly; after DSH funds have been earned and cash is available, the State should disburse the funds without delay. While this seems intuitive, prompt payment issues emerged in October 2017 when federal reductions were set to be implemented just as public hospitals complained the State was withholding DSH funding.14
New York’s DSH program distribution is inequitable and especially disadvantages H+H; long-planned federal reductions will exacerbate those faults. The most recent federal delay of DSH cuts increased the magnitude of the reductions when they are implemented, and New York will take the largest cut of any state. New York leaders should act in the current legislative session to fix the inequities in the distribution of DSH funding. Continued inaction will compound the financial risk to the state’s most significant safety net health system.
- Medicaid payment rates to hospitals are typically less than the cost of services, creating a Medicaid shortfall. See: American Hospital Association, “Table 4.4: Aggregate Hospital Payment-to-Cost Ratios for Private Payers, Medicare and Medicaid, 1994-2014” (accessed February 20, 2018), www.aha.org/research/reports/tw/chartbook/2016/table4-4.pdf; and The Kaiser Commission on Medicaid and the Uninsured, Understanding Medicaid Hospital Payments and the Impact of Recent Policy Changes (The Henry J. Kaiser Family Foundation, June 2016), p. 4, http://files.kff.org/attachment/issue-brief-understanding-medicaid-hospital-payments-and-the-impact-of-recent-policy-changes.
- Medicaid and CHIP Payment and Access Commission, “Disproportionate share hospital payments” (accessed February 20, 2018), www.macpac.gov/subtopic/disproportionate-share-hospital-payments/.
- Under the proposed regulation New York was projected to lose $329 million in federal funding in federal fiscal year 2018. See: Medicaid Program: State Disproportionate Share Hospital Allotment Reductions, 82 Fed. Reg. 35155 (June 28, 2017).
- Medicaid and CHIP Payment and Access Commission, Analyzing Disproportionate Share Hospital Allotments to States (March 2017), Table 2A-1, www.macpac.gov/wp-content/uploads/2017/03/Analyzing-Disproportionate-Share-Hospital-Allotments-to-States.pdf.
- These amounts are estimates for federal fiscal year 2020 by the Medicaid and CHIP Policy and Access Commission. See: Medicaid and CHIP Payment and Access Commission, Report to Congress on Medicaid and CHIP (March 2018), www.macpac.gov/wp-content/uploads/2018/03/Report-to-Congress-on-Medicaid-and-CHIP-March-2018.pdf.
- New York’s DSH allocation is one of the least directly targeted in terms of the number of hospitals that receive DSH funding. It is one of just three states (along with Oregon and Rhode Island) that make payments to 90 percent or more of the hospitals within the state. See: Medicaid and CHIP Payment and Access Commission, Report to Congress on Medicaid and CHIP (March 2018), www.macpac.gov/wp-content/uploads/2018/03/Report-to-Congress-on-Medicaid-and-CHIP-March-2018.pdf. Multiple recent analyses have proven the distribution of Indigent Care Pool Funding is demonstrably inefficient. See: Bill Hammond, Hooked on HCRA: New York’s 20-Year Health Tax Habit (Empire Center for Public Policy, January 2017), www.empirecenter.org/wp-content/uploads/2017/01/HookedOnHCRA-1.pdf; Roosa Tikkanen, Funding Charity Care in New York: An Examination of Indigent Care Pool Allocations (New York State Health Foundation, March 2017), http://nyshealthfoundation.org/uploads/resources/examination-of-indigent-care-pool-allocation-march-2017.pdf; and Carrie Tracy, Elisabeth Benjamin, and Amanda Dunker, Unintended Consequences: How New York State Patients and Safety-net Hospitals are Shortchanged (Community Service Society, January 2018), http://lghttp.58547.nexcesscdn.net/803F44A/images/nycss/images/uploads/pubs/hospital_report_-_final_1_22_18_web.pdf.
- See: Patrick Orecki, Medicaid Supplemental Payments: The Alphabet Soup of Programs Sustaining Ailing Hospitals Faces Risks and Needs Reform (Citizens Budget Commission, August 2017), https://cbcny.org/research/medicaid-supplemental-payments.
- New York State Department of Health, 2015 HCRA Modernization Task Force Report (February 2017), p. 5, www.health.ny.gov/regulations/hcra/docs/mod_report.pdf.
- The State's Enacted Budget for fiscal year 2019 extends existing DSH Indigent Care Pool provisions for one year. This is in contrast to the historical practice of extending the provisions in three-year intervals, and presents an opportunity for the State to convene the recommended workgroup.
- New York State Department of Health, Letter to Stanley Brezenoff (October 13, 2017), www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/HHC.pdf.
- H+H leaders recognize this; in a 2016 report H+H projected receipts from supplemental payments will fall 36 percent from $2.2 billion in fiscal year 2016 to just $1.4 billion in fiscal year 2020. See: New York City, One New York – Health Care for our Neighborhoods (April 26, 2016), p. 26, www1.nyc.gov/assets/home/downloads/pdf/reports/2016/Health-and-Hospitals-Report.pdf.
- See most recent audited DSH cap data from 2013: Medicaid.gov, “Medicaid Disproportionate Share Hospital (DSH) Payments” (accessed June 26, 2017), www.medicaid.gov/medicaid/financing-and-reimbursement/dsh/index.html.
- See: Mariana Alexander, Lessons from La La Land: Can the Turnaround of Los Angeles' Public Hospitals Be Replicated in New York? (Citizens Budget Commission, January 2018), https://cbcny.org/research/lessons-la-la-land.
- NYC Health + Hospitals, Letter to Howard Zucker (September 29,2017), www.politico.com/states/f/?id=0000015e-cdf6-ddab-a57f-cff6acde0000; Dan Goldberg, “Outgoing Health + Hospitals chief: Cuomo withholding $380 million from city hospitals,” Politico New York (September 29, 2017), www.politico.com/states/new-york/albany/story/2017/09/29/outgoing-hhc-chief-cuomo-withholding-380-million-from-city-hospitals-114790; and Dan Goldberg and Nick Niedzwiadek, “Cuomo will give Health + Hospitals most of the DSH dollars it requested,” Politico New York (October 13, 2017), www.politico.com/states/new-york/albany/story/2017/10/13/cuomo-will-give-health-hospitals-most-of-the-dsh-dollars-it-requested-115060.