Policy & Regulation News

GAO: Medicare Uncompensated Care Aid Not Based on Actual Costs

CMS should align Medicare uncompensated care payments with actual healthcare costs and account for Medicaid reimbursements.

By Jacqueline LaPointe

- Medicare’s uncompensated care payments to hospitals do not account for the actual healthcare costs associated with treating large proportions of Medicaid and uninsured patients, according to a recent Government Accountability Office (GAO) report.

GAO found Medicare uncompensated care payments do not reflect actual costs

GAO found that CMS could reduce unnecessary Medicare spending and better appropriate reimbursements by calculating uncompensated care payments based on actual healthcare costs rather than Medicaid workload.

“Medicare UC [uncompensated care] payments are not aligned with hospitals’ uncompensated care costs because CMS bases these payments mainly on hospitals’ historical Medicaid patient days rather than actual costs hospitals incurred treating uninsured patients,” the GAO stated.

According to an annual survey from the American Hospital Association, hospitals spent over $46 billion in 2013 on uncompensated care costs, including costs for uninsured patients, bad debt, and public payer reimbursement shortfalls.

To help hospitals offset expenses, Medicare and Medicaid paid hospitals nearly $50 billion in both 2013 and 2014. Medicare alone provided over $14 billion annually to hospitals in the same time period using Disproportionate Share Hospital, bad debt, and uncompensated care payments.

CMS determines Disproportionate Share Hospital and uncompensated care payments based on a hospital’s workload. The federal agency uses the number of days a hospital spends treating Medicaid and low-income Medicare patients.

Through the study, GAO revealed that a workload methodology results in disproportionate payments for hospitals, especially as more individuals enroll in health insurance coverage under the Affordable Care Act.

Following the 2010 act, many states implemented Medicaid expansion programs and insurance marketplaces, resulting in significant reductions of uninsured individuals. With more insured patients, hospitals generally experienced less uncompensated care costs, confirmed a 2015 report from the Office of Health and Human Services.

However, since CMS determines uncompensated care payments based on workload, hospitals in Medicaid expansion states received higher payments because more Medicaid patients were treated after gaining eligibility for federal coverage. The hospitals also saw more decreases in uncompensated care due to the Medicaid expansion.

GAO explained that hospitals in Medicaid expansion states received more unnecessary Medicare uncompensated care reimbursements, while hospitals in states that did not expand Medicaid eligibility did not receive the right proportion.

“Conversely, hospitals in states that have not expanded Medicaid will continue to have relatively higher levels of uninsured individuals and thus higher uncompensated care costs, but these hospitals will likely have fewer Medicaid patient days and will thus receive a smaller share of Medicare UC payments under CMS’s current calculation,” stated the GAO.

Additionally, GAO advised CMS to account for the Medicaid uncompensated care payments a hospital receives when calculating Medicare reimbursements for the same purpose.

State Medicaid programs spent over $35 billion annually in 2013 and 2014 to help hospitals manage uncompensated care costs. The programs use several reimbursement types, including Medicaid Disproportionate Share Hospital, Upper Payment Limit, and uncompensated care under Section 1115 payments.

Each state determines the hospitals that receive payments and the amounts, but each reimbursement type is generally found based on actual costs for providing services to Medicaid and uninsured patients. Although, Upper Payment Limit reimbursements are the difference between what the state Medicaid program pays and what Medicare pays for the same service.

While states provide hospitals with some financial means to alleviate uncompensated costs, CMS does not adjust Medicare uncompensated cost payments to reflect Medicaid reimbursements. Since CMS runs Medicare and only oversees state Medicaid programs, the federal agency does not compare the payments. Even though, CMS explained that it possesses the authority to do so.

“As a result, in determining Medicare UC payments, it is important that CMS, in fulfilling its role as an efficient payer of healthcare services, take into account the Medicaid payments eligible hospitals have received for these costs to ensure that Medicare UC payments are most effectively aligned with hospitals’ actual uncompensated care costs,” GAO recommended.

In response, CMS concurred with GAO’s recommendations and explained that it has included provisions in a recently proposed rule to modify the methodology used to determine Medicare uncompensated care payments.

Under the FY 2017 Hospital Inpatient Prospective Payment Systems proposed rule, CMS stated that it would use financial worksheets that detail uncompensated care costs to calculate the reimbursements starting in the 2018 fiscal year.

The proposed rule would also define uncompensated care costs as the “costs of charity care and non-Medicare bad debt.” Standardizing the definition would help CMS “identify different payment streams intended to compensate hospitals for providing uncompensated care.”

“These changes, if finalized, will help to better align Medicare payments to each hospital based on its share of national aggregate uncompensated care costs,” CMS stated.

CMS released the finalized rule on August 2. The federal agency chose not to continue plans to use financial worksheets to determine uncompensated care payment amounts until the worksheet undergoes quality control and data improvement.

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