Disproportionate share hospitals with high rates of uninsured or indigent patients have been worried for some time about major cuts in CMS' compensatory payments beginning this October, and a recent report from Moody's Investors Service validates concerns that these hospitals are in for a challenging financial picture.
The report, "Reduction of Medicaid & Medicare Disproportionate Share Hospital Payments a Looming Challenge for States and Hospitals," says the $36 billion on the chopping block for DSH payments will increase pressure on state governments and budgets as these charity care-heavy hospitals seek to recover lost revenues.
About $14 billion will be cut from Medicaid DSH payments over the next decade, an especially harmful move for safety-net hospitals who rely on DSH payments to offset losses from uninsured and government-insured patients. More red ink can have negative effects on credit ratings for small-margin hospitals that can't absorb the lost DSH revenue.
When the cuts were scheduled, the Patient Protection and Affordable Care Act was expected to increase Medicaid eligibility in all states, creating less need for compensatory DSH payments that make up for uncompensated care. But, the Supreme Court struck down that provision last year, relegating the expansion optional for states that add to their rolls in exchange for more federal money.
Seventeen governors have stated they would not or were unlikely to expand Medicaid. For hospitals with high rates of indigent patients, such as urban safety-net hospitals, that could spell continued charity care without repayment to recoup some of its costs. However, the individual mandate in the PPACA may translate to fewer uninsured patients so there is some question as to the impacts of the lost DSH and Medicaid revenue.
Although DSH cuts make for challenging conditions for safety-net hospitals already struggling to maintain operating margins, the healthcare industry as a whole has gotten pretty good at doing more with less for many years, says Lisa Goldstein, associate managing director for non-profit healthcare at Moody's.
"Hospitals are very used to this [type of funding change]. It's a very cyclical industry," she says. "It's really up to management teams to take a hard look at expenses to show commensurate shrinking in expense rates to fit the revenue rate contraction," she says.
Healthcare spending has risen more slowly for the last three years than ever before, largely driven by major pushes toward greater efficiency of care. But where there is less fat to cut, management may have to explore more painful expense reductions, including larger patient-staff ratios, greater reliance on mid-level practitioners or even layoffs, Ms. Goldstein says.
"Medicare dollars will be declining, that's our thesis, due to penalties and readmissions," not to mention more fraud investigations and audits, she says. "The irony is that the Medicare population is growing…so you've got lower revenues coming into hospitals, but likely more demand."
Moody's has maintained a negative outlook for non-profit health systems, which often act as DSH-eligible safety-net providers, since 2008, the longest continuous negative outlook for the industry in the agency's history. In fact, Moody's has never issued better than a stable outlook for non-profit health systems since it began rating such institutions.
Currently, management is still learning to straddle two different payment worlds, Ms. Goldstein says: the fee-for-service world that incentivizes filling beds, and the value-based purchasing world that incentivizes not filling them. Funding changes for providers under health reform — and the operational and strategic adaptations that follow — will not be an "overnight, flipping of the switch," she says. "It's more like the slow peeling of a Band-Aid."
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The report, "Reduction of Medicaid & Medicare Disproportionate Share Hospital Payments a Looming Challenge for States and Hospitals," says the $36 billion on the chopping block for DSH payments will increase pressure on state governments and budgets as these charity care-heavy hospitals seek to recover lost revenues.
About $14 billion will be cut from Medicaid DSH payments over the next decade, an especially harmful move for safety-net hospitals who rely on DSH payments to offset losses from uninsured and government-insured patients. More red ink can have negative effects on credit ratings for small-margin hospitals that can't absorb the lost DSH revenue.
When the cuts were scheduled, the Patient Protection and Affordable Care Act was expected to increase Medicaid eligibility in all states, creating less need for compensatory DSH payments that make up for uncompensated care. But, the Supreme Court struck down that provision last year, relegating the expansion optional for states that add to their rolls in exchange for more federal money.
Seventeen governors have stated they would not or were unlikely to expand Medicaid. For hospitals with high rates of indigent patients, such as urban safety-net hospitals, that could spell continued charity care without repayment to recoup some of its costs. However, the individual mandate in the PPACA may translate to fewer uninsured patients so there is some question as to the impacts of the lost DSH and Medicaid revenue.
Although DSH cuts make for challenging conditions for safety-net hospitals already struggling to maintain operating margins, the healthcare industry as a whole has gotten pretty good at doing more with less for many years, says Lisa Goldstein, associate managing director for non-profit healthcare at Moody's.
"Hospitals are very used to this [type of funding change]. It's a very cyclical industry," she says. "It's really up to management teams to take a hard look at expenses to show commensurate shrinking in expense rates to fit the revenue rate contraction," she says.
Healthcare spending has risen more slowly for the last three years than ever before, largely driven by major pushes toward greater efficiency of care. But where there is less fat to cut, management may have to explore more painful expense reductions, including larger patient-staff ratios, greater reliance on mid-level practitioners or even layoffs, Ms. Goldstein says.
"Medicare dollars will be declining, that's our thesis, due to penalties and readmissions," not to mention more fraud investigations and audits, she says. "The irony is that the Medicare population is growing…so you've got lower revenues coming into hospitals, but likely more demand."
Moody's has maintained a negative outlook for non-profit health systems, which often act as DSH-eligible safety-net providers, since 2008, the longest continuous negative outlook for the industry in the agency's history. In fact, Moody's has never issued better than a stable outlook for non-profit health systems since it began rating such institutions.
Currently, management is still learning to straddle two different payment worlds, Ms. Goldstein says: the fee-for-service world that incentivizes filling beds, and the value-based purchasing world that incentivizes not filling them. Funding changes for providers under health reform — and the operational and strategic adaptations that follow — will not be an "overnight, flipping of the switch," she says. "It's more like the slow peeling of a Band-Aid."
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