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

Conclusion

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.