Medicaid Supplemental Payments Are Inefficient, Demand Change

Medicaid supplemental payments are not need-based and often leave certain states with excess funds, demonstrating that the processes involved in these payments need to change, according to an issue brief published by the Robert Wood Johnson Foundation (RWJF) and the Urban Institute.

The researchers chose not to include certain supplemental payments. Graduate medical education payments were excluded from the brief’s content as well as Medicare payments to rural healthcare facilities.

Overall, the two major public payer programs spent around $82.4 billion on supplemental payments for acute care providers in 2020. Medicare spent approximately $10.7 billion of this amount. Medicaid spent over $71 billion in supplemental payments.

Almost 44 percent of Medicaid’s spending on acute care supplemental payments occurred through the fee-for-service reimbursement system, equaling $31.4 billion. These primarily consisted of disproportionate share hospital payments (DSH) and upper payment limit (UPL) payments. Nearly 36 percent of Medicaid’s supplemental payment spending came from managed care plans.

DSH payments are mandatory for Medicaid programs. The federal allotments for DSH are tied to what the federal government paid Medicaid programs in 1992, not on current state spending. As a result, some states receive less than $40 for state healthcare spending for low-income patients and under $100 for uninsured patients, while other states receive more than $400 or above for each low-income individual’s care and more than $1,500 for each uninsured person.

Moreover, states have limits on their DSH allotments. There are facility-level caps and annual state caps. And the federal government pays each state its DSH payments based on the state’s federal medical assistance percentage (FMAP).

These policies leave some states with a surplus in federal dollars that they cannot spend, not even within the two-year timeframe that they are permitted to spend it. In 2021, $1.4 billion remained from the 2019 fiscal year allotment.

The researchers demonstrated how states have used taxpayer dollars and federal matching dollars to completely cover DSH payments without dipping into state funds.

“Though legal, states’ use of provider taxes and transfers from local government to finance their share of DSH payments has important and broad implications for the federal government, states, and hospitals. For one, use of these financing arrangements reduces state general fund contributions to Medicaid while inflating the federal share,” the researchers noted.

“These financing arrangements also affect net provider payment: Because hospitals finance all or part of the state share of DSH payments, the net payment providers receive is considerably less than what is reported.”

UPL payments, another form of Medicaid spending, operate similarly to DSH allotments and likewise increase Medicaid spending. The key differences are that UPLs are not required like DSH payments are and there are no caps on spending, though there is a federal matching ceiling.

One of the key problems is that hospitals may receive more than they spend on Medicaid beneficiaries. They receive both the Medicaid base payment and the UPL payment, which is tied to how much the provider pays in local transfers or taxes toward the state share. And UPL payments for physicians are even higher, typically equal with commercial rates.

Medicaid waivers, like Section 1115 demonstration waivers, also allow Medicaid programs to receive additional funds as they transition into managed care. These funds can come from Medicaid uncompensated care pools or delivery system reform incentive payments.

Lastly, Medicaid programs might receive extra payments through their managed care organizations. The data on these payments is inconclusive, perhaps not surprising given that the payment delivery process was established in 2017 making it the youngest payment process the researchers covered.

“As with physician UPL payments, states can make directed payments that exceed Medicare rates,” the researchers pointed out.

Given the complications of these payment methods, the researchers suggested repurposing some of the federal dollars, particularly funds used for DSH payments, UPL payments, waiver supplemental payments, and uncompensated care pool payments.

Identifying the hospitals with the greatest need may seem like the most obvious solution, but the researchers noted that assessing need is very complex and this approach has been unsatisfactory in the past. Instead, they suggested redirecting Medicaid supplemental payments to support coverage expansion.

“Making such a wholesale change to supplemental payments would be challenging, both technically and politically,” the researchers acknowledged.

“A transition period and some state and provider protections would be warranted while the reforms were phased in. But preserving the existing flow of a sizable share of federal funds paid as supplemental payments is not sound policy. There are more equitable and more efficient ways to use these funds.”