Medicaid Expansion: States Face a New Choice

By | Published On: May 4, 2015

States that choose not to expand Medicaid may soon face a severe reduction in federal funds used to support the provision of medical care to low-income populations.

The Medicaid Disproportionate Share Hospital (“DSH”) program was first established in 1981 to fund hospitals that provide uncompensated care to low-income and underserved individuals. The program is designed to address the financial disadvantages faced by hospitals that serve low-income patients, as uninsured patients often cannot pay for services and Medicaid reimbursement rates hover below those received from Medicare and private insurers. Medicaid DSH payments flow to states, leaving each state with some flexibility to determine how the funds are to be distributed to individual hospitals.

The Patient Protection and Affordable Care Act (“ACA”) provided for a reduction in Medicaid DSH payments to hospitals of approximately $18.1 billion between 2014 and 2020. Presumably, in enacting this provision, Congress anticipated that another provision of the ACA – the addition of the “new adult” Medicaid eligibility group (non-elderly adults not otherwise eligible for Medicaid) – would result in fewer uninsured patients and consequently, less need for DSH funds.  The expansion of Medicaid would result in fewer uninsured patients seeking care in hospital emergency departments; instead, the newly insured would receive care from primary care physicians, clinics and health centers.

However, as with so many aspects of ACA implementation, things did not work out precisely as anticipated.  In National Federal of Independent Business (NFIB) v. Sebelius, 567 U.S. ___ , 132 S.Ct 2566 (2012), the Supreme Court held that it would be unconstitutionally coercive for the federal government to require each state to expand its Medicaid program to include the new adult population.  As a result, the new eligibility group introduced under the ACA is effectively an optional group.  As of this month, 30 states (including the District Columbia) have opted to expand the program to include the new adult group.

Many of the states that have not chosen to expand Medicaid hope to retain demonstration programs that they have had in place for many years, which leverage Medicaid DSH payments to finance care of the uninsured.  These demonstrations are carried out under Section 1115(a) of the Social Security Act.  Typically, they create “uncompensated care pools” aimed at supporting public hospitals and other safety net providers. States such as Florida and Texas have indicated, through applications to renew their 1115 demonstrations, that they hope to continue to use the uncompensated care pools to support care to low-income populations, rather than expanding Medicaid.

But if a recent letter from the Centers for Medicare and Medicaid Services (“CMS”) to Florida officials (one such state with a Section 1115 waiver program) is any indication, this option may soon be off the table. The letter indicates CMS’ reticence to renew Florida’s 1115 demonstration and asserts a clear position on the part of CMS: “coverage rather than uncompensated care pools is the best way to secure affordable access to health care for low-income individuals, and uncompensated care pool funding should not pay for costs that would be covered in a Medicaid expansion.” In addition, the letter notes that the state’s “expansion status” is an “important consideration” in whether CMS chooses to extend its waiver program. Florida has filed a lawsuit against CMS alleging that the federal government is attempting to coerce states into expanding their Medicaid programs by threatening to end federal funding for other programs.

Whether this approach causes states that have resisted Medicaid expansion to rethink their decisions remains to be seen. But in most respects, a decision to expand Medicaid to include the new adult group would result in more rational and comprehensive health coverage for now-uninsured individuals and would better support the provision of primary care services where they should be provided – in physician practices, clinics and health centers – rather than on an ad hoc basis in hospital emergency rooms.  We look forward to following this story and providing updates on future developments as they arise.


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