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Proposal to Delay DSH Cuts No Reason Not to Expand Medicaid

President Obama proposed in his 2014 budget to delay for one year a scheduled cut in supplemental Medicaid payments to safety net hospitals that serve large numbers of low-income patients.  Health reform calls for the cut in federal disproportionate share hospital (DSH) payments beginning in fiscal year 2014, assuming that the hospitals’ need will fall as more low-income people become insured through Medicaid and subsidized coverage in the new health insurance exchanges.  (The cuts scheduled for 2016 and 2017 would rise to make up for the delay.)

In fiscal year 2012, DSH allocations for all states totaled $11.3 billion.  Under health reform, in 2014 state allocations for DSH would be cut by $500 million, and the cuts are scheduled to grow significantly over several years as low-income people obtain health coverage.  DSH allocations will be cut by $5.6 billion in fiscal year 2019 and $4 billion in fiscal year 2020, relative to what would have happened in the absence of health reform.

Now, the Administration wants to delay reducing the hospitals’ payments until 2015 so that states have enough time to start getting low-income uninsured people enrolled in coverage.  That has prompted some to ask whether the proposal would make it easier for states not to expand Medicaid.

In many states, hospitals have worked to convince their states to adopt the Medicaid expansion; without it, hospitals serving low-income uninsured populations would face DSH cuts without seeing any concurrent gains in coverage among their uninsured patients.  Mississippi’s governor said last week that the proposed delay gives the state more time to decide whether to expand Medicaid.  Similar claims have arisen in Missouri.

The President’s proposal should not affect state decisions whether to expand Medicaid.  First, it is just a budget proposal, and there is a good chance it may never become law.  Second, even if it becomes law, the DSH cuts will occur starting in 2015 and continue in subsequent years.  Congress has already acted twice to extend the cuts beyond the timetable in health reform, and the President’s budget proposes a further one-year extension through 2023.

In states that don’t expand, uninsured people with incomes below the poverty line would remain uninsured, and many would receive care in hospitals that now rely on DSH payments to help pay for the care they receive.  Those payments will shrink whether that begins in 2014 or 2015.  Moreover, in 2014 the federal government will bear the entire cost of the Medicaid expansion, a benefit to states that dwarfs the relatively small cut in DSH payments, whenever it comes.