Understanding Medicaid Hospital Payments and the Impact of Recent Policy Changes

Executive Summary

Medicaid payments to hospitals and other providers play an important role in these providers’ finances, which can affect beneficiaries’ access to care. Medicaid hospital payments include base payments set by states or health plans and supplemental payments. Estimates of overall Medicaid payment to hospitals as a share of costs vary but range from 90% to 107%. While base Medicaid payments are typically below cost, the use of supplemental payments can increase payments above costs.  Changes related to expanded coverage under the Affordable Care Act (ACA) as well as other changes related to Medicaid supplemental payments could have important implications for Medicaid payments to hospitals.  This brief provides an overview of Medicaid payments for hospitals and explores the implications of the ACA Medicaid expansion as well as payment policy changes on hospital finances.  Key findings include the following:

• Overall, hospitals have benefitted financially from the ACA coverage expansions and the increase in Medicaid payments, especially in states that expanded Medicaid coverage. Analysis of the Medicare Cost Report data for 2013 and 2014 shows overall declines in uncompensated care from $34.9 billion to $28.9 billion in 2014 nationwide. Nearly all of this decline occurred in expansion states, where uncompensated care costs were $10.8 billion in 2014, $5.7 billion or 35% less than in 2013.
• While hospitals expect to benefit financially from the Medicaid expansion, they expect some gains from the reduction in uncompensated care to be offset by volume-generated increases in Medicaid payments that may be lower than cost. The data is not reliable enough to support nationwide analysis of the extent to which this has occurred, and the effect would vary across hospitals.
• Despite the decrease in uncompensated care, other changes to Medicaid payment policy (such as required reductions to disproportionate share hospital (DSH) payments and policy changes to limit the use of other supplemental payments) are likely to have a more substantial effect on Medicaid hospital payment and overall hospital financial performance in the future. Ultimately the impact of reductions in supplemental payments will depend on decisions by state governments to offset reductions with increases to Medicaid base rates paid to hospitals.