Hospital Uncompensated Care: Federal Action Needed to Better Align Payments with Costs
Published: 2016-06-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Hospitals have historically incurred billions of dollars in costs for services provided to uninsured and other low-income individuals. The Patient Protection and Affordable Care Act (PPACA) offered ways for states to increase insurance levels including by expanding their Medicaid programs. In anticipation of the expected decline in the uninsured and uncompensated hospital costs, PPACA also reduced federal support for hospitals serving a disproportionate share of low-income and uninsured individuals and redirected some support to Medicare UC payments for hospital uncompensated care costs.
GAO was asked to examine federal support for hospital uncompensated care. GAO examined (1) the key sources and amounts of federal support for hospital uncompensated care costs; (2) the basis for determining hospital uncompensated care payments made under Medicaid and Medicare; and (3) the extent to which Medicare UC payments align with hospital uncompensated care costs. GAO analyzed federal payment data for fiscal years 2013 and 2014, the most recent available, reviewed relevant laws and regulations, and interviewed CMS officials.
section_title: What GAO Found
paragraphs: Key sources of federal support for hospitals incurring costs for services provided to uninsured and other low-income individuals (uncompensated care costs) include multiple types of Medicaid and Medicare payments totaling about $50 billion annually. GAO's analysis shows that through Medicaid, a joint federal-state program for low-income individuals, states made three types of payments that helped offset uncompensated care in fiscal years 2013 and 2014 totaling over $35 billion annually. Medicare, a federal program for aged and certain disabled individuals, made two types of payments in 2013 and three in 2014—including a new type called Medicare Uncompensated Care (UC) payments—totaling over $14 billion annually. Federal tax law also provides tax benefits—estimated by researchers to be billions of dollars annually—to tax-exempt nonprofit hospitals that incur uncompensated care costs.
The basis for determining these different types of Medicaid and Medicare payments varies somewhat by type of payment. As shown in the table, however, the payment types are based on similar factors—generally hospitals' costs or workloads related to providing services to Medicaid, uninsured, or low-income Medicare patients, or some combination of these.
Medicare's UC payments are not well aligned with hospital uncompensated care costs for two reasons. First, payments are largely based on hospitals' Medicaid workload rather than actual hospital uncompensated care costs. Centers for Medicare & Medicaid Services (CMS) officials acknowledge this could result in payments not aligned with uncompensated costs, particularly in states that have expanded Medicaid resulting in fewer uninsured individuals and lower uncompensated costs. In an April 2016 proposed rule, the agency announced that it is considering using hospitals' actual uncompensated care costs as the basis for making Medicare UC payments. Second, CMS does not account for hospitals' Medicaid payments that offset uncompensated care costs when making Medicare UC payments, even though the bulk of Medicare's payments—about 85 percent or $7.7 billion in 2014—were made on the basis of hospitals' Medicaid workloads, for which hospitals may have also received Medicaid payments. CMS officials said that the Medicaid and Medicare programs are operated separately. Medicare UC payments that are not aligned with uncompensated care costs or adjusted to reflect Medicaid payments undermine CMS's efforts to efficiently pay for health care services.
section_title: What GAO Recommends
paragraphs: GAO recommends that CMS take two actions: (1) improve alignment of Medicare UC payments with hospital uncompensated care costs; and (2) account for Medicaid payments made when making Medicare UC payments to individual hospitals. In commenting on a draft of this report, HHS concurred with both recommendations.

section_title: Letter
paragraphs: Hospitals historically have incurred billions of dollars in costs for services  they provided to uninsured and low-income patients for which they are not  fully compensated. These costs are referred to as uncompensated care  costs, and longstanding, federally supported programs provide funds to  help offset these uncompensated costs. These programs include  Medicaid, the joint federal-state partnership health coverage program for  low-income and medically needy individuals, and Medicare, the federal  health coverage program for the elderly and certain disabled individuals.  At the federal level, the Centers for Medicare & Medicaid Services (CMS)  within the Department of Health and Human Services (HHS), oversees  state Medicaid programs and administers the Medicare program. For  Medicaid, CMS provides guidance to states on federal requirements for  Medicaid hospital uncompensated care payments and oversees  compliance with these requirements. States are responsible for day to  day administration of the program, including determining payment  amounts to individual hospitals consistent with any applicable federal  limits. For Medicare, CMS administers Medicare payment policies,  including making Medicare payments to hospitals for uncompensated  care.
Legislative changes made under the Patient Protection and Affordable  Care Act (PPACA), enacted on March 23, 2010, have implications for the  amount of uncompensated care hospitals provide, as well as for the  amount and allocation of federal support for hospital uncompensated care  costs. Under PPACA, states have the option to expand their Medicaid  programs to cover nearly all adults with incomes at or below 133 percent  of the federal poverty level. PPACA also required the establishment of  health insurance exchanges by January 1, 2014—marketplaces offering  private health insurance coverage—and provided for federal subsidies to  qualified individuals and families who purchase health insurance through  the exchanges. As a result of these changes, the number of people with  health insurance has increased. For example, the Congressional Budget  Office and the Joint Committee on Taxation (JCT) have estimated that the  number of uninsured individuals would decline by 12 million in 2014.  Given that increases in the number of people with health insurance could  significantly lower the amount of uncompensated care hospitals provide,  PPACA also made changes intended to more closely align certain  Medicare and Medicaid funds with hospital uncompensated care costs.  For example, PPACA redirected some existing Medicare funds paid to  hospitals serving a disproportionate share of the nation’s low-income  individuals in order to establish a Medicare Uncompensated Care (UC)  payment specifically to offset hospitals’ uncompensated care costs,  including the cost of treating uninsured patients. Researchers have noted  that the reduction in the number of uninsured individuals varies by state;  for example, states expanding Medicaid to cover the newly eligible adults  have had greater reductions in the number of uninsured individuals than  others.
In light of the multiple changes that have affected, and will continue to  affect, the amount and costs of hospital uncompensated care and the  financial support hospitals receive from federal programs, you asked us to  examine the various federal efforts to help hospitals with uncompensated  care costs and the basis for determining federal payment amounts for  hospital uncompensated care costs. This report examines  (1)  the key sources and amounts of federal support for hospitals’  uncompensated costs of care in 2013 and 2014;  (2)  the basis for determining hospital uncompensated care payments  made under Medicaid and Medicare; and  (3)  the extent to which Medicare UC payments align with hospital  uncompensated care costs.
To examine the key sources and aggregate amounts of federal  government support for hospital uncompensated care, we gathered data  on reported aggregate payment amounts for hospital uncompensated  care for each type of payment available under the Medicaid and Medicare  programs in fiscal years 2013 and 2014—the most recent available. We  also obtained information on the value of tax-exemptions for nonprofit  hospitals available in 2006 under federal tax laws. For Medicaid  payments, we analyzed data from the quarterly Medicaid Expenditure  Reports—referred to as the CMS-64—that states use to report Medicaid  expenditures to CMS for the purpose of receiving federal matching funds.  For Medicare payments, we obtained reported data on projected  spending in fiscal years 2013 and 2014 from CMS. We also reviewed  available information from the Internal Revenue Service (IRS) on tax  exemptions provided to nonprofit hospitals, including relevant laws and  IRS regulations, and interviewed IRS officials to clarify our understanding  of these materials. In addition, we obtained available estimates on the  financial value of tax-exemptions for hospitals that qualified for these  exemptions under federal tax laws.
To assess the basis for determining hospital uncompensated care  payments made under Medicaid and Medicare, we reviewed federal laws,  regulations, and CMS policy and guidance documents that detailed the  formulas—including the methodologies, definitions, and data sources— used for determining payments that help offset hospital uncompensated  care. For Medicaid payment types we reviewed the formulas for the  federal payment limits that apply to payments made by the states. Under  Medicaid, states have discretion to make payments in amounts up to  hospital-specific payment limits and state-wide DSH allotments. We did  not review the actual Medicaid payments that states made to individual  hospitals or the basis for payments they made. For Medicare payments  we reviewed federal formulas used to determine hospital payments that  help offset uncompensated care costs. We did not analyze actual  Medicare payments made to individual hospitals. In addition, we  interviewed Medicaid and Medicare officials at CMS to understand each  program’s policies for determining hospital uncompensated care. We also  interviewed experts, including officials from the Medicaid and CHIP  Payment and Access Commission (MACPAC), the Medicare Payment  Advisory Commission (MedPAC), and industry stakeholders including the  American Hospital Association and Healthcare Financial Management  Association, to obtain their views on CMS’s policies to determine hospital  uncompensated care payments under Medicaid and Medicare.
To determine the extent to which Medicare UC payments align with  hospital uncompensated care costs, we examined CMS’s Impact File for  the 2014 Final Rule that implements Medicare payment policies for fiscal  year 2014—the first year Medicare UC payments were made. We  reviewed studies on the relationship between the factors on which  Medicare UC payments were based and hospital uncompensated care  costs, including a CMS contractor study and MedPAC studies. We also  interviewed CMS officials regarding implementation of the Medicare UC  payments, and MedPAC officials and the contractor hired by CMS to  provide technical assistance about the implementation of the Medicare  UC payment. We did not compare actual Medicare UC payments made to  individual hospitals with those hospitals’ uncompensated care costs.
We determined that the data we obtained from CMS on Medicaid and  Medicare payment amounts and from the CMS Impact file were reliable  for purposes of our review by checking the data for discrepancies,  comparing the data to other publicly available data, and communicating  with officials to resolve any identified discrepancies. We conducted this  performance audit from April 2015 to June 2016 in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.
subsections: section_title: Background
paragraphs: Hospitals are an important and significant provider of health care services  to our nation. Nearly one-third of the total $3 trillion in health care  spending in 2014 was attributed to hospital services. Three major  payers comprise the bulk of our nation’s hospital spending: Medicare,  Medicaid, and private health insurance companies:
Medicare is a federal health program administered by CMS that  provides health insurance coverage for seniors aged 65 and over,  individuals with end-stage renal disease, and certain disabled  persons.
Medicaid is a joint federal-state health care program that provides  health insurance coverage to low income and medically needy  individuals. Medicaid is administered and operated by each state  Medicaid program under CMS oversight. Within broad federal  requirements, each state establishes provider payment rates, pays  providers for services rendered, and determines the optional  populations and benefits its Medicaid programs will cover beyond the  mandatory populations and benefits states are required to cover. The  federal government matches each state’s Medicaid expenditures for  services according to the state’s federal medical assistance  percentage.
Private health insurance includes employer-sponsored coverage and  coverage purchased by individuals from a private insurance carrier.
Medicare, Medicaid, and private insurance covered over 80 percent of  spending on hospital services in 2014. The remainder of the spending  came from various other sources including other third party payers and  programs and out-of-pocket spending by patients. Patient out-of-pocket  spending includes deductibles, coinsurance, copayments, or payments  for services not covered by insurance or that exceed coverage limits.
Some patients receiving hospital services do not have health insurance  coverage through public programs or private insurance; as a result,  hospitals may provide care to these uninsured individuals for which the  hospital may not receive compensation. Although the federal government  has multiple funding streams to help offset these and other hospital  uncompensated care costs, no standard definition of uncompensated  care costs exists across federal programs. As a result, no standard  federal estimate of total hospital uncompensated care costs is available.  On the basis of its annual survey of hospitals, the American Hospital  Association estimated that hospital uncompensated care costs totaled  over $46 billion in 2013. Any estimate of these costs would vary  depending upon the definition of uncompensated care used for the  estimate. Definitions of uncompensated care costs may include the  following:
Uninsured patient costs. These include the costs of services  provided to patients who do not have health insurance coverage and  are unable to pay for the services they receive; these services are  sometimes referred to as charity care and can include the cost of care  provided to privately insured patients whose insurance did not cover  the services provided.
Bad debt. This includes cost-sharing for which patients are  responsible for paying but have not paid—-for example, deductible  and coinsurance amounts.
Public payer payment shortfalls. These include the differences  between payments from public payers such as Medicaid, and  hospitals’ costs for the services provided to these payers’  beneficiaries.
section_title: Multiple Sources of Federal Support for Hospital Uncompensated Care Totaled Nearly $50 Billion Annually in 2013 and 2014
paragraphs: In fiscal years 2013 and 2014, the federal government made multiple  types of payments to hospitals to help offset uncompensated care costs  mainly through two programs—Medicare and Medicaid—totaling nearly  $50 billion each year. Medicaid payments accounted for almost three- quarters of these payments in each year. Federal tax laws provided other  benefits to qualifying non-profit hospitals through tax exemptions.
subsections: section_title: Three Types of Payments Are Made in the Medicaid Program That Help Offset Hospital Uncompensated Care Costs, with Payments of over $35 Billion Annually in 2013 and 2014
paragraphs: In fiscal years 2013 and 2014, state Medicaid programs spent over $35  billion in each year for payments that helped hospitals offset their  uncompensated care costs. Medicaid spending comprised three types of  payments: disproportionate share hospital (DSH) payments, upper  payment limit (UPL) payments, and uncompensated care payments made  under section 1115 demonstrations. All three payment types are, for  purposes of this report, considered to be supplemental payments, which  are payments generally made separately from, and in addition to, states’  regular, claims-based payments to hospitals for Medicaid services  provided to Medicaid beneficiaries. Supplemental payments are generally  made as lump sum payments on a monthly, quarterly, or annual basis.  Specifically
Medicaid DSH payments. These are Medicaid payments that  Congress established for hospitals serving large numbers of Medicaid  and low-income individuals to help offset their uncompensated costs.  Federal law requires states to make DSH payments to certain eligible  hospitals and also limits DSH payment amounts to each hospital’s  costs of providing uncompensated care, as defined under federal law  and regulations governing Medicaid DSH payments. States have  broad flexibility in deciding how to allocate these payments among  eligible hospitals as long as any payment to an individual hospital  does not exceed that hospital’s uncompensated costs of providing  care to Medicaid beneficiaries and individuals without health  insurance or other sources of third-party coverage for the service  provided. State-specific limits also exist on the amount of federal  funds available for Medicaid DSH payments.
Medicaid UPL payments to hospitals. These are supplemental  payments states make per the Medicaid UPL regulations. The UPL is  a limit or ceiling on the amount of a state’s Medicaid payments for  certain fee-for-service Medicaid services the federal government will  match and is based on an estimate of what Medicare would pay for  comparable services. States’ regular payments to hospitals for  services rendered to Medicaid beneficiaries are often below the UPL.  Consequently, most states make UPL supplemental payments to  some hospitals that are in addition to the hospitals’ regular payments  but do not exceed the UPL. Medicaid payments to individual hospitals  are not limited to the hospitals’ costs of providing services, and UPL  payments that states make have resulted in Medicaid payments that  exceed hospital costs for Medicaid services, making funds available to  the recipient hospitals for uncompensated care purposes.  The UPL  is not a hospital-specific limit but is applied in the aggregate across  certain categories of providers, and states have some flexibility in  deciding which hospitals will receive a UPL payment, and how to  allocate UPL payments among hospitals. While UPL supplemental  payments to providers are associated with particular types of services,  whether the payments are intended to offset uncompensated care  costs related to the provision of those services is generally not  reported.
Section 1115 demonstration uncompensated care payments.
These are payments that some states make to hospitals specifically  for uncompensated care costs in conjunction with demonstration and  pilot projects for which they have received approval from the  Secretary of Health and Human Services. Section 1115 of the Social  Security Act authorizes the Secretary of Health and Human Services  to waive certain federal Medicaid requirements and allow costs that  would not otherwise be eligible for federal matching funds for  experimental, pilot, or demonstration programs that, in the Secretary’s  judgement, are likely to assist in promoting Medicaid objectives.  Certain states have received approval to make supplemental  payments for hospital uncompensated care in their Medicaid  demonstrations. Supplemental payments states make under  demonstrations are made according to the terms and conditions  approved by the Secretary of HHS for each demonstration.
In fiscal years 2013 and 2014, total Medicaid spending—state and federal  funds—through the three types of payments exceeded $35 billion each  year based on state Medicaid expenditure reports submitted to CMS. In  fiscal year 2013, Medicaid DSH payments totaled $16.4 billion and  combined UPL and section 1115 demonstration payments totaled $19  billion. In fiscal year 2014, Medicaid DSH payments totaled $18.1 billion  and combined UPL and section 1115 payments totaled $17.5 billion.  These payments could comprise a large proportion of payments that  hospitals receive. For example, total Medicaid payments for hospital  inpatient and outpatient services totaled over $88 billion in fiscal year  2013 and about $84 billion in fiscal year 2014. All of these Medicaid  payments were eligible for federal matching funds; that is, the federal  government provided funds for half or more of the payments, depending  on the state.
section_title: Two Types of Payments Are Made in the Medicare Program That Help Offset Hospital Uncompensated Care Costs, with Payments of over $14 Billion Annually in 2013 and 2014
paragraphs: Medicare provided two types of payments that helped offset hospital  uncompensated care costs in fiscal year 2013: DSH payments and bad  debt payments. As required by PPACA starting in fiscal year 2014,  Medicare DSH payments were reduced and a third type of payment— the  Medicare UC payment—was established. Specifically
Medicare DSH payments: These Medicare payments are required to  be made to hospitals that serve a significantly disproportionate  number of low-income patients. Congress established these  payments to address concerns that these hospitals would have  unreimbursed costs that would not be recognized under Medicare’s  prospective payment system. Although these payments do not  directly reimburse hospital uncompensated care costs, they are  intended to help offset eligible hospitals’ unreimbursed cost of treating  low-income patients. DSH payments are added on to Medicare’s base  payment to hospitals for each Medicare patient discharge. In general,  there are no national or hospital-specific limits on Medicare DSH  payments. Under PPACA, starting in fiscal year 2014, Medicare  DSH payments were reduced to 25 percent of the amount that would  have been paid under prior law. PPACA requires that the remaining  75 percent of the amount that would have been paid as DSH  payments is used to make a new type of payment, Medicare UC  payments, discussed below.
Bad debt payments: Hospitals are eligible to receive Medicare  reimbursement for a portion of Medicare beneficiaries’ unpaid  copayments and deductibles—known as bad debt—as long as the  hospital makes a reasonable effort to collect the unpaid amounts. In  general, Medicare bad debt payments to individual hospitals are  limited to 65 percent of a hospital’s bad debt costs. The total amount  of payments made by Medicare for bad debt is not capped and  fluctuates as hospital bad debt increases or decreases. Bad debt  payments are made as lump-sum supplemental payments and are not  added on to Medicare base payments.
Medicare UC payments: These payments, which were established under PPACA and required to be made starting in fiscal year 2014, are intended to help offset hospitals’ uncompensated care costs and are added on to Medicare’s base payment for each Medicare patient discharge. Hospitals that are eligible to receive Medicare DSH payments are automatically eligible to receive Medicare UC payments. These payments are made from an amount equal to 75 percent of what otherwise would have been paid as Medicare DSH after reducing this amount for changes in the percentage of individuals that are uninsured.
In fiscal years 2013 and 2014, total Medicare spending through these  payment types was over $14 billion each year. In comparison to  Medicaid, Medicare spending through these payment types is a lower  proportion of payments the program made to hospitals for services.  Medicare payments to hospitals for inpatient and outpatient services  totaled about $179 billion in 2013 and about $183 billion in 2014. As  illustrated in figure 1, of the different types of Medicare payments that  help offset hospital uncompensated care costs, DSH payments were the  largest in fiscal year 2013 (over $12 billion); Medicare UC payments were  the largest in fiscal year 2014 (over $9 billion); and bad debt payments  were the smallest and relatively unchanged from one year to the next.
section_title: Federal Tax Law Provides Additional Financial Benefits for Tax-Exempt Non-Profit Hospitals Incurring Uncompensated Care Costs with Benefits Estimated in the Billions Annually
paragraphs: In addition to payments from Medicaid and Medicare that offset hospital  uncompensated care costs, federal tax law provides additional financial  benefits to hospitals that qualify for tax-exempt status. Financial benefits  for these qualifying nonprofit hospitals include exemptions from federal  income taxes, eligibility for tax-exempt bond financing of capital projects,  and tax-deductible contributions from donors (both individuals and  corporations). To qualify for federal tax-exempt status, nonprofit  hospitals must be organized and operated exclusively for charitable  purposes. To meet this requirement, IRS requires that nonprofit hospitals  meet its community benefit standard, a measure of which may include  provision of uncompensated care. Hospitals are required to report the  value of the community benefits they provide, including uncompensated  care costs, in Schedule H of IRS Form 990. In tax year 2011, of the  approximately 4,900 total hospitals nationwide, about half qualified for tax  exempt status, and hospital uncompensated care accounted for about 56  percent of their total reported community benefit expenses.
The exact amount of the financial benefits nonprofit hospitals receive from  tax exemptions is not regularly tracked, but reported benefits are in the  billions of dollars. For tax year 2002, the latest data available, the Joint  Committee on Taxation (JCT) estimated that the financial benefits of  federal tax exemption for nonprofit hospitals nationwide totaled about  $6.1 billion. Using JCT’s methodology for estimating nonprofit hospital  tax exemption, researchers estimated that for tax year 2011 the financial  benefits of the federal tax exemption totaled about $13 billion.
section_title: Medicaid and Medicare Payments That Help Offset Hospital Uncompensated Care Costs Are Generally Based on Similar Factors
paragraphs: The basis for determining the different types of Medicaid and Medicare  payments that help offset hospital uncompensated care costs varies  somewhat by type of payment. However, the majority of the different  payment types are based on similar factors—generally hospitals’ costs or  workloads related to providing services to Medicaid, uninsured, or low- income Medicare patients, or some combination of these patients.
subsections: section_title: Medicaid Payments That Help Offset Uncompensated Care Are Generally Based on Services Hospitals Provide to Medicaid and Uninsured Patients
paragraphs: Federal law and policy limit the amounts states may pay under the three  types of payments that help offset hospitals’ uncompensated care costs.  Within these limits, however, states generally may determine the  hospitals that will receive these payments and the payment amounts. For  example, Medicaid DSH payment limits are statutorily based on a  calculation of a hospital’s uncompensated care costs of treating Medicaid  and uninsured patients. Although this statutory formula does not apply to  section 1115 demonstrations, CMS officials stated that they generally use  the Medicaid DSH methodology in determining payment limits for Section  1115 uncompensated care payments. As such, DSH payments and  uncompensated care demonstration payments are based, in part, on the  cost of services provided to Medicaid and uninsured patients. The third  payment type—UPL payments—is based on the difference between what  the state Medicaid program pays for Medicaid services and the federal  upper payment limit for payments for such services. Specifically
Medicaid DSH payments. Federal law requires that states make  Medicaid DSH payments to certain eligible hospitals but limits the  amount of Medicaid DSH payments that states may make to individual  hospitals. These limits are based on a hospital’s uncompensated  care costs, which are defined by federal law and regulation to be the  hospital’s uncompensated costs of providing care to Medicaid patients  and uninsured patients. CMS relies on states and hospitals to  calculate these uncompensated care costs using data from Hospital  Cost Reports, their financial records, and state Medicaid agency data.  In calculating their uncompensated care costs for Medicaid patients  and uninsured patients, hospitals are required to include all payments  received from Medicaid, including supplemental payments that are  related to Medicaid services provided, as revenues that offset the  costs of care. Since 2010, states have been required to submit  independently certified audited reports annually on any hospital  receiving Medicaid DSH payments.
Medicaid section 1115 uncompensated care payments. Limits on  the amount of these payments to individual hospitals are established  based on a hospital’s uncompensated care costs, which are  determined under the approved terms and conditions of a state’s  demonstration. According to CMS officials, the agency requires that  section 1115 hospital uncompensated care payments generally use  similar methods to those used for Medicaid DSH payments to  calculate hospital uncompensated care costs. States may include in  their calculations additional costs typically not allowed for Medicaid  DSH payments, subject to CMS approval. For example, some states  include hospital uncompensated costs of physician services provided  in a hospital.
Medicaid UPL payments. Limits on the amount of these payments  are established in the aggregate based on the difference between  state Medicaid payments to hospitals for services rendered to  Medicaid patients and the amount Medicare would have paid for  similar services. Thus, the total amount of Medicaid UPL payments a  state can make is based on services provided to Medicaid patients.  The UPL is not a hospital-specific limit and states have flexibility in  determining which hospitals to pay and the payment amounts. In fiscal  year 2014, the bulk of state UPL payments were made to hospitals for  inpatient and outpatient services.
section_title: Medicare Payments That Help Offset Uncompensated Care Are Generally Based on the Number of Days Hospitals Spend Treating Medicaid and Low-Income Medicare Patients
paragraphs: CMS makes Medicare DSH and Medicare UC payments to hospitals  based on their workload, expressed as the number of days a hospital  spends treating Medicaid and low-income Medicare patients (referred to  as Medicaid patient days and low-income Medicare patient days,  respectively). CMS also makes Medicare bad debt payments based on  a certain percentage of the unpaid copayments and deductibles for  Medicare beneficiaries. Specifically
Medicare DSH payments. As required by statute, CMS determines  Medicare DSH payments based on each hospital’s disproportionate  patient percentage, which is calculated as the sum of two ratios:  (Medicare low-income patient days / total Medicare days) + (Medicaid  days / total hospital days). Hospitals qualify for Medicare DSH  payments if their disproportionate patient percentage is above 15  percent, but actual Medicare DSH payments vary based upon  hospitals’ characteristics, including their size and geographic  location. The resulting payment amount is a percentage of the  Medicare base payment calculated using a statutory formula that is  then added to the base payment the hospital receives for each  Medicare patient discharge. In fiscal year 2014, as required by  PPACA, Medicare DSH payments were reduced to 25 percent of the  amount that would have been paid under prior law. Overall, the  number of Medicaid patient days was the largest factor in determining  Medicare DSH payments in fiscal year 2014. Generally, the ratio that  included Medicaid patient days accounted for about 70 percent of  Medicare DSH payments in fiscal year 2014 while the ratio that  included low-income Medicare beneficiaries treated accounted for the  remaining 30 percent.
Medicare UC payments. PPACA directed CMS to base these  payments on hospital uncompensated care costs, including the costs  of treating uninsured patients. However, CMS has discretion to  choose the methods and data sources it uses to calculate these costs,  and CMS has to date used data related to Medicaid and Medicare  workload as a proxy for uncompensated care costs. For fiscal years  2014, 2015, and 2016, Medicare UC payments made to individual  hospitals are based on a hospital’s days spent treating Medicaid  patients and low-income Medicare beneficiaries rather than on a  hospital’s actual uncompensated care costs. Specifically, an  individual hospital’s Medicare UC payment is based on the hospital’s  relative proportion of days spent treating Medicaid patients and low- income Medicare patients across all hospitals receiving UC payments  nationally. Our analysis indicates that, under this formula, Medicaid  patient days accounted for about 85 percent of Medicare UC  payments, and low-income Medicare patient days accounted for the  remaining 15 percent in fiscal year 2014. In other words, we found  that the amount of a hospital’s Medicare UC payment is largely based  on the hospital’s Medicaid patient workload.
Medicare bad debt payments. CMS pays hospitals a certain  percentage of the actual unpaid copayments and deductibles that  hospitals expected to receive, but were unable to collect, from  Medicare beneficiaries. In general, hospitals must demonstrate that  they have made reasonable attempts to collect the bad debt—that is,  the same type of efforts that they would make for non-Medicare  patients.
section_title: Medicare UC Payments Are Not Well Aligned with Hospitals’ Uncompensated Care Costs
paragraphs: Medicare UC payments are not well aligned with hospital uncompensated  care costs for two key reasons. First, Medicare UC payments are  distributed to hospitals based largely on Medicaid patients treated and not  on hospitals’ actual uncompensated care costs, which include the costs of  treating uninsured patients. Second, CMS does not account for Medicaid  payments made to hospitals that help offset uncompensated care costs,  even though the bulk of Medicare UC payments are based on Medicaid  patients treated.
subsections: section_title: Medicare UC Payments Are Not Well Aligned with Hospitals’ Uncompensated Care Costs As CMS Does Not Base Payments on the Costs of Treating Uninsured Patients
paragraphs: Medicare UC 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. A 2015 report by HHS’s Office of the  Assistant Secretary of Planning and Evaluation (ASPE) found that an  increase in Medicaid coverage (which would result in a corresponding  increase in Medicaid hospital patient days) was associated with a  reduction in hospital uncompensated care costs. Distributing UC  payments on the basis of Medicaid patient days will likely result in larger  shares of Medicare UC payments directed towards hospitals where  uncompensated care costs have likely declined. This is because hospitals  located in states that expanded their Medicaid programs have higher  proportions of Medicaid patient days and would therefore receive a larger  share of Medicare UC payments. At the same time, uncompensated care  costs in these hospitals may be declining due to a reduction in the  number of uninsured individuals in the state. 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.
CMS officials acknowledged that using Medicaid patient days as a basis  for Medicare UC payments could result in hospitals located in Medicaid  expansion states receiving disproportionately higher payments. Officials  stated that the effect of using Medicaid patient days rather than actual  uncompensated care costs was somewhat mitigated because CMS had,  for purposes of fiscal year 2014 Medicare UC payments, used data from  fiscal years 2010 or 2011 to estimate hospitals’ proportions of Medicaid  patient days—a time period before when most states expanded their  Medicaid programs in response to PPACA. However, hospitals in states  that had broader Medicaid eligibility requirements in 2010 or 2011 (and  therefore higher numbers of Medicaid patient days) would receive higher  payments than those in states with more restrictive requirements in those  same years, despite potentially having to provide less uncompensated  care. In addition, the hospitals in seven states that had expanded their  Medicaid programs prior to 2014 may have also received higher Medicare  UC payments through CMS’s use of Medicaid patient days to calculate  Medicare UC payments. Directing a larger portion of the Medicare UC  payments, which are intended to reimburse hospital uncompensated care  costs, to hospitals where hospital uncompensated care is declining is not  consistent with CMS’s role as an efficient payer of health care services.
CMS has for several years considered options for defining and using  hospital uncompensated care costs to make Medicare UC payments, but  has not yet implemented plans to do so. In a May 2013 notice of  proposed rulemaking, CMS stated that the definition of hospital  uncompensated care costs for purposes of making Medicare UC  payments could comprise charity care and bad debt costs (for both  Medicare and non-Medicare patients), since these were commonly  identified as sources of hospital uncompensated care by various  stakeholders, including federal and state programs, and provider  associations. CMS also identified a potential data source for actual  hospital uncompensated care costs—an uncompensated care worksheet  in the Hospital Cost Report—that is the only national data source for  charity care and bad debt costs. CMS did not propose at the time to use  this definition or the data in the uncompensated care worksheet because  of concerns by certain stakeholders about the worksheet’s reliability. In  an April 2016 proposed rule, CMS proposed transitioning away from  using Medicaid days as the basis for UC payments, and instead using  hospital uncompensated care costs from the uncompensated  worksheet. Under the proposed rule, Medicare UC payments made in  fiscal year 2020 would be entirely based on hospital uncompensated care  costs, which CMS proposes to define as charity care and non-Medicare  bad debt. In its proposed rule, CMS requested public comments on its  proposed definition of hospital uncompensated care costs and use of the  uncompensated care worksheet to determine these costs, among other  things.
section_title: In Determining Medicare UC Payments, CMS Does Not Consider Medicaid Payments That Offset Uncompensated Care Costs
paragraphs: Although the majority of Medicare UC payments to individual hospitals  are based on Medicaid patient days, CMS does not adjust these  payments to reflect payments hospitals receive from Medicaid. Hospitals  could potentially receive significant amounts of payments that help offset  uncompensated care costs from both the Medicare and Medicaid  programs. A relatively large portion of the Medicare UC payments are  determined in the Medicare UC formula by hospitals’ Medicaid patient  days; similarly, a large portion of the Medicaid payments that help offset  hospital uncompensated care costs are distributed, in part, on the basis of  payment limits determined by those hospitals’ Medicaid workloads. We  estimate, for example, that in fiscal year 2014 about $7.7 billion of  Medicare UC payments to hospitals were based on Medicaid patient days  and about $14.1 billion of Medicaid payments to hospitals were based on  services provided to Medicaid patients.
CMS officials told us that Medicare and Medicaid are separate programs  administered under different statutory and regulatory rules under which  hospitals can qualify for, and receive, both Medicare UC payments and  Medicaid payments that help offset hospital uncompensated care costs.
When determining hospital uncompensated care costs for purposes of  Medicaid DSH payments, states are required to consider Medicare  payments made on behalf of patients covered by both Medicare and  Medicaid. While the law does not require CMS to take into account  Medicaid payments that offset uninsured costs when calculating Medicare  UC payments, CMS officials confirmed they have authority to consider  such payments but have not taken steps to do so.
Transitioning away from using Medicaid patient days and instead basing  Medicare UC payments on data showing actual hospital uncompensated  care costs, would result in a better alignment of Medicare UC payments  with actual hospital uncompensated care costs. However, this change on  its own would not be sufficient to account for the fact that hospitals  eligible to receive UC payments may also be eligible for Medicaid DSH  payments to offset these same costs. Although the Medicare and  Medicaid programs define uncompensated care costs somewhat  differently, a common and significant cost in their definitions is the  uncompensated care costs for uninsured individuals. As a result, in  determining Medicare UC payments, it is important that CMS, in fulfilling  its role as an efficient payer of health care 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.
section_title: Conclusions
paragraphs: Hospital uncompensated care costs are a longstanding concern that have  the potential to weaken some hospitals’ financial stability and undermine  their ability to provide care and serve their community. Recognizing the  importance of financially stable hospitals, certain Medicare and Medicaid  payments and federal tax laws were established to support hospitals  providing uncompensated care. The amount of uncompensated care  incurred by individual hospitals varies across the thousands of hospitals  in our nation, including private for-profit, private nonprofit, and state and  local government hospitals. The expansion of health insurance coverage  as a result of PPACA has and will continue to alter the amount of  uncompensated care incurred by hospitals. Hospitals in states and  communities where the number of uninsured individuals has declined are  likely to incur lower uncompensated care costs.
In view of the changing landscape of hospital uncompensated care,  Congress reduced the amount of federal support to offset hospital  uncompensated care costs and also required federal spending to be  aligned with hospitals’ uncompensated care costs. In particular, a large  amount of existing federal funding was redirected to establish Medicare  UC payments, which will decline as the number of uninsured individuals  declines nationally. CMS was directed to distribute these payments on the  basis of each hospital’s uncompensated care costs. While CMS was  given flexibility to identify appropriate data for determining such costs, the  agency’s use of Medicaid patient days as the basis for distributing  Medicare UC payments to hospitals results in poor alignment of payments  to hospital uncompensated care costs. Poor alignment results because  relatively large shares of Medicare UC payment amounts will be  distributed to hospitals where Medicaid expansion has lowered their  uncompensated care costs. Particularly in view of the changing  landscape of health care coverage, including some but not all states  expanding Medicaid and the impact of such choices on hospital  uncompensated care costs in different states, CMS has the responsibility  to use the best data available to allocate payments based on hospitals’  actual uncompensated costs of providing care. In an April 2016 proposed  rule, the agency announced that it is considering using hospitals’ actual  uncompensated care costs as the sole basis for making Medicare UC  payments by fiscal year 2020  Additional steps will be needed to ensure that Medicare UC payments are  aligned with hospital uncompensated care costs, including taking into  account Medicaid payments that hospitals receive for treating the  uninsured. Neither the current poor alignment of Medicare UC payments  with hospital uncompensated care costs nor the lack of accounting for  reductions in hospital uncompensated care costs for uninsured patients  resulting from Medicaid payments are consistent with Medicare’s role as  a prudent payer of health care.
section_title: Recommendations for Executive Action
paragraphs: To ensure efficient use of federal resources, we recommend that the  Administrator of CMS take the following two actions:  1.
Improve alignment of Medicare UC payments with hospital uncompensated care costs by basing these payments on hospital uncompensated care costs; and 2. Account for Medicaid payments a hospital has received that offset uncompensated care costs when determining hospital uncompensated care costs for the purposes of making Medicare UC payments to individual hospitals.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Secretary of Health and Human  Services and the Commissioner of the Internal Revenue Service.   We  received written comments from HHS, which are reprinted in appendix I.   In addition, HHS and IRS provided technical comments that we  incorporated as appropriate.
In its written comments, HHS concurred with both our recommendations.  HHS concurred with our first recommendation to better align Medicare UC  payments with hospitals’ actual uncompensated care costs, noting the  April 2016 proposed rule that outlines a proposal to do so.  HHS stated it  would consider all stakeholder comments before issuing a final rule later  this year. HHS also concurred with our second recommendation to  account for hospitals’ Medicaid payments that offset uncompensated care  costs when determining these costs for purposes of making Medicare UC  payments. HHS agreed that it is important to align uncompensated care  payments with actual uncompensated care costs and that doing so would  help ensure that HHS is directing the payments to hospitals appropriately.   HHS stated that the Department would continue to review the definition of  uncompensated care as appropriate, particularly in the event it finalizes  the proposal to begin using uncompensated care cost data to determine  the distribution of these payments.  Taking steps to better align these  payments is important to improving the distribution of significant amounts  of federal funds for hospital uncompensated care.
As agreed with your offices, unless you publicly announce the contents of  the report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  Secretary of Health and Human Services and other interested parties. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-7114 or iritanik@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of the report. GAO staff that made key contributions to this report is  listed in appendix II.
section_title: Appendix I: Comments from the Department of Health and Human Services
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Tim Bushfield, Assistant Director;  Leonard Brown; Christine Davis; Iola D’Souza; Carolyn Fitzgerald,  Sandra George; Peter Mann-King; and Laurie Pachter made key  contributions to this report.
section_title: Related GAO Products
paragraphs: Medicaid: Federal Guidance Needed to Address Concerns About  Distribution of Supplemental Payments. GAO-16-108. Washington D.C.:  February 5, 2016.
Medicaid: Improving Transparency and Accountability of Supplemental  Payments and State Financing Methods. GAO-16-195T. Washington  D.C.: November 3, 2015.
Medicaid: Additional Efforts Needed to Ensure that State Spending is  Appropriately Matched with Federal Funds. GAO-16-53. Washington  D.C.: October 16, 2015.
Medicaid: Key Issues Facing the Program. GAO-15-667. Washington,  D.C.: July 30, 2015  Medicare: Legislative Modifications Have Resulted in Payment  Adjustments for Most Hospitals. GAO-13-334. Washington, D.C.: April 17,  2013.
High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February  2013.
Medicaid: States Reported Billions More in Supplemental Payments in  Recent Years. GAO-12-694. Washington, D.C.: July 20, 2012.
High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February  2011.
Medicaid: Ongoing Federal Oversight of Payments to Offset  Uncompensated Hospital Care Costs Is Warranted. GAO-10-69.  Washington, D.C.: November 20, 2009.
Nonprofit Hospitals: Variation in Standards and Guidance Limits  Comparison of How Hospitals Meet Community Benefit Requirements.  GAO-08-880. Washington, D.C.: September 12, 2008.
Medicaid: CMS Needs More Information on the Billions of Dollars Spent  on Supplemental Payments. GAO-08-614. Washington, D.C.: May 30,  2008.
Medicaid: States’ Efforts to Maximize Federal Reimbursements Highlight  Need for Improved Federal Oversight. GAO-05-836T. Washington, D.C.:  June 28, 2005.
Nonprofit, For-Profit and Government Hospitals: Uncompensated Care  and Other Community Benefits. GAO-05-743T. Washington, D.C.: May  26, 2005.