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Can a Medicaid Admission be Profitable?

Medicaid reimbursement has traditionally been something of a bitter pill for healthcare providers, especially acute-care hospitals. Medicaid rates vary across states and locations, but the average figure is usually said to be only about 60 percent of Medicare or private insurer rates, depending on the service. That rarely covers the cost of care, forcing many hospitals to accept Medicaid patients at a loss, though it is preferable to writing off a patient’s treatment as charity care. However, according to one recent study appearing in Health Affairs, it is possible for some hospitals with unfavorable payer mixes to turn a profit on Medicaid reimbursement, thanks to CMS’ Disproportionate Share Hospital (DSH) program.

The DSH program was launched in 1986 to provide additional funds to hospitals that serve large volumes of low-income and Medicaid-eligible patients. Under the program, states receive an annual allotment that is distributed to DSH-qualified facilities in the form of higher diagnosis-related group (DRG) payments. No individual hospital is supposed to receive more supplemental funding than the difference of its uncompensated care and Medicaid-eligible service costs and associated reimbursement. So how can the program help a hospital with a poor payer mix make a profit off of Medicaid admissions?

The explanation lies in how individual hospital payments are calculated. CMS uses two formulas; one that measures a hospital’s DSH percentage as a rate of Medicaid and Medicare Supplemental Security Income patient days, and another that incorporates the percentage to determine a DRG payment increase. According to the study, because the percentage does not adjust for uncompensated care costs, additional Medicaid admissions can increase the DSH percentage and subsequent payments, in some cases leading to a profit. The authors calculated the marginal revenue increase of an additional Medicaid day in FY 2017 to be $320. Roughly a fourth of the sum was due to higher Medicare DRG reimbursements, while the rest was additional payments from Medicare Advantage and CMS, calculated separately, to fund uncompensated care services.

The finding, while surprising, does have some qualifications. Perhaps the most obvious is that it only applies to hospitals with the appropriate payer mixes to qualify for DSH payments. According to Definitive Healthcare data, 2,790, or slightly more than half, of all critical-access and acute-care hospitals were paid under the DSH program. Roughly a fifth of all payments were relatively small, falling below $100,000. Also, the marginal revenue from additional Medicaid admissions is only significant in certain states due to variations in base Medicaid reimbursements. In addition, hospitals can only realize an actual profit if they have a relatively low volume of uncompensated care, which would otherwise absorb any excess reimbursement from the DSH payment. The study indicated that each charity care admission effectively reduced reimbursement by $20. As a result, profitable Medicaid admissions may be more common in states that expanded Medicaid under the ACA and reduced the pool of uninsured patients. Another diminishing factor is the taxes and fees paid by hospitals to finance state Medicaid programs. Depending on the state, the additional costs could outweigh the reimbursement profit and often do, according to another Health Affairs study.

Disproportionate Share Hospitals, 2016, Median Selected Statistics

Disproportionate Share Hospitals All Other Hospitals
DSH Payment $537,141
DSH Percentage  12%
Medicaid Payer Mix  8.8% 3.2%
Medicare Payer Mix  36.9% 57.3%
Private/Other Payer Mix  52.6% 36.1%
Uncompensated Care (M) $8.5 $1.4
Operating Margin  -0.1%  -0.3%
Staffed Beds  149  25

Source: Definitive Healthcare

The DSH program has been adjusted multiple times since its introduction, and CMS has announced plans for changes that address many of the issues above, primarily by switching from a formula that measures Medicaid patient days to one incorporating a hospital’s level of uncompensated and charity care. According to some observers, the change would essentially shift DSH funds towards states that didn’t expand Medicaid, relieving some of the financial pressure hospitals in those states have faced. While the new formula could better address shortfalls from treating uninsured patients, it may also bring about new problems, such as the accuracy of charity care claims, which are not uniformly calculated across hospitals. Even so, while it appears DSH has been successful at reducing the financial impact of reimbursement shortfalls, the payer environment has changed to the extent that the old funding model is no longer sound and could be improved.

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