Children’s Hospitals Vulnerable to Uncompensated Care Cuts

September 16, 2016 - Pediatric healthcare providers, especially those practicing in free-standing children’s hospitals, could face serious financial setbacks following upcoming uncompensated care payment reductions as mandated by the Affordable Care Act, a new study published in JAMA Pediatrics suggests.

Using healthcare cost and utilization data from the Kids’ Inpatient Database, researchers found that free-standing children’s hospitals typically faced the largest financial losses compared to other pediatric healthcare providers with more than $10 million in losses per hospital in 2009.

However, Disproportionate Share Hospital (DSH) payments, a type of federal uncompensated care reimbursement given to hospitals that treat large proportions of uninsured and Medicaid individuals, covered nearly half of the financial losses.

Despite the reliance on DSH payments to shoulder some economic burden, the Affordable Care Act requires CMS to decrease certain uncompensated care reimbursements by $2 billion in 2018 and by another $8 billion in 2025.

The study states that free-standing children’s hospitals are especially vulnerable to further financial losses following uncompensated care payment cuts because uninsured rates for children are low and they treat a higher proportion of Medicaid beneficiaries.

Uncompensated care payment reductions are designed to offset the increasing rate of insured individuals under several Affordable Care Act policies, such as health insurance exchanges and Medicaid expansions. However, researchers cited a 2015 US Census Bureau study that found only eight percent of children are uninsured.

“The ACA’s effort to expand health insurance coverage was primarily directed at uninsured adults, not children,” researchers wrote. “Compared with adults, fewer children were uninsured when the ACA was enacted. Therefore, it would be unexpected that hospital financial losses due to the care of uninsured and Medicaid-insured patients would be eliminated through the increased enrollment of uninsured children.”

As a result, increases in the number of insured individuals is not likely to offset decreases in uncompensated care payments for pediatric healthcare providers, the study stated.

Free-standing children’s hospitals also rely on DSH payments to alleviate the gap between actual healthcare costs and lower Medicaid reimbursement rates. Hospitals experienced financial losses totaling $14.1 billion in 2014 because of Medicaid underpayments, according to a July report from the American Hospital Association.

Children’s hospitals are especially affected by lower Medicaid reimbursement rates since more than one-third of children are covered by Medicaid, according to the US Census Bureau report.

Even though children’s hospitals represented less than five percent of hospitals in 2009, the study reported, they maintained the highest healthcare costs for Medicaid-insured patients with an average of $77.2 million. Non-children’s and non-teaching hospitals had costs of less than $500,000.

The gap between actual costs and reimbursements was also significantly more pronounced for children’s hospitals because of Medicaid underpayments. Researchers reported that the median healthcare costs per free-standing children’s hospital for pediatric Medicaid-insured patients was around $143 million, but Medicaid reimbursed the hospitals about $99 million for the services.

The average financial loss for the free-standing children’s hospitals before supplemental healthcare payments was almost $42 million, researchers reported.

By incorporating federal uncompensated care reimbursements, the median financial loss for free-standing children’s hospitals attributable to Medicaid-insured discharges fell to $28 million, or almost half of the loss prior to supplemental payments.

In response to potential decreases in hospital profitability, the study stated that some hospitals may be able to manage the loss of uncompensated care revenue through cross-subsidization, or the practice of charging a higher price for one consumer group in order to subsidize lower prices for another.

“Some hospitals may be able to offset Medicaid losses through the cross-subsidization of positive margins derived from the care of privately insured patients,” said researchers. “However, the ability of each hospital to offset Medicaid losses through cross-subsidization is dependent on their market position, ability to negotiate with private insurers, and case mix.”

While DSH payment cuts are likely to impact pediatric healthcare revenue cycles, the implementation of the reductions has already been delayed several times. Most recently, the MACRA rule enacted in April 2015 pushed back the timeline to 2018.

CMS has not announced any intention to further delay DSH payment decreases, but the JAMA Pediatrics study noted that the bottom line for many pediatric healthcare providers may depend more on how states and lawmakers decide to distribute lower uncompensated care reimbursements and other supplemental healthcare payments.

“Children’s hospitals serve many of the most complex patients,” wrote researchers. “In this era of healthcare system reform, we need to consider how these payment changes may affect the unique patient populations served by children’s hospitals.”

Dig Deeper:

• Preparing the Healthcare Revenue Cycle for Value-Based Care

• Uncompensated Care Drops by $6B after Medicaid Expansion