Punishing Conservative States: Payment Cuts to Hospitals Where Federal Spending is Already Low

A report by Paragon Health Institute

Key Takeaways

  • Through Medicaid’s disproportionate share hospital (DSH) program, states are supposed to use federal funds to make payments to hospitals that provide uncompensated care to a high percentage of uninsured and low-income patients.
  • The DSH program fails to equitably target public resources to safety net hospitals, ultimately failing low-income individuals and the uninsured.
  • In 1992, Congress locked in a formula for calculating DSH funding to states which has—for three decades—rewarded states that had used gimmicky financing schemes to maximize DSH payments, thereby disadvantaging states that had not employed such schemes.
  • States that expanded Medicaid under the Affordable Care Act have been much more likely to benefit from DSH’s perverse funding structure. In 2021, Medicaid expansion states received 171 percent more federal DSH funding per uninsured person and 66 percent more federal DSH funding per low-income individual. Federal DSH funds cover 48 percent of the uncompensated care provided by hospitals in Medicaid expansion states compared to just 17 percent in non-expansion states.
  • Irrationally, the Build Back Better Act would cut federal DSH funds only to non-Medicaid expansion states. These are typically states with already low DSH payments that also collectively saved the federal government hundreds of billions of dollars from 2014 to 2021 by not expanding Medicaid.
  • Medicaid financing reform is necessary to equitably distribute federal aid to where it is most needed and to incentivize states to focus on providing value instead of maximizing the federal funds they can receive. Reforming DSH, as well as other Medicaid supplemental payment programs, to better target federal funds to safety net hospitals would be a good place to begin.

Full Report:

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Paragon Health Institute (PHI) is a non-partisan, not-for-profit policy research institute. Any views, beliefs, or opinions expressed by PHI’s Public Advisors are those of its Advisors and do not necessarily reflect the official policies or positions of PHI or its employees. Any views, beliefs, or opinions expressed by PHI or its employees belong solely to PHI and do not necessarily reflect those of PHI’s Public Advisors.