A bipartisan group of 51 senators recently called for Congress to cancel an impending $8 billion cut to federal Medicaid allotments for “uncompensated” hospital care. No limit currently exists on the federal matching funds that states can claim to provide Medicaid benefits to eligible beneficiaries. The $8 billion cut would only trim the degree to which states can steer Medicaid funds away from the program’s covered benefits—often for purposes which Congress has specifically prohibited.
When Congress enacted Medicare in 1965 to provide health care for elderly Americans, it also established Medicaid, which gives states funds to provide health care to low-income Americans. For every $1 that states spent on health care for most eligible beneficiaries, the federal government gave them between $1 and $3—an enormously generous proposition, which all states were eager to exploit.
The federal government initially allowed hospitals to claim repayment for whatever broadly defined costs they incurred treating Medicare and Medicaid beneficiaries. Expenses surged. In the early 1980s, Congress responded by establishing specific Medicare fees for each hospital procedure and allowed states to set their own fees for hospitals to treat Medicaid patients.
Hospitals in low-income neighborhoods serving mostly Medicaid or uninsured patients struggled to cover their overhead costs by using revenues from privately insured patients, so Congress allowed states to claim additional federal matching funds as a lump sum to subsidize such “Disproportionate Share Hospitals” (DSH). In the early 1990s, states realized that the absence of a direct link between the ability to obtain matching funds and the obligation to deliver services gave them an opportunity to claim a windfall in federal funds. States would artificially inflate DSH costs by imposing taxes on hospitals, which would receive kickbacks for participating in the scam. DSH spending surged from $1 billion in 1990 to $17 billion in 1992, before Congress capped the funds that each state could claim. This entrenched an essentially arbitrary distribution of federal aid: in 2023, New Hampshire received $2,123 in DSH grants per poor resident; Wyoming, only $4.
After DSH allotments were capped, a similar supplemental supplemental-payment scheme was soon devised, whereby states that set base Medicaid fees for hospitals below Medicare rates could claim the difference as lump-sum grants. These “upper payment limit” federal funds could then be distributed to select hospitals to use for discretionary purposes, rather than in return for specific Medicaid-covered services. Hospitals then complained that they were underpaid for Medicaid patients—justifying additional subsidies.
Federal law allows states to finance up to 60 percent of their contribution to Medicaid from local government funds. As there is a constant flow of intergovernmental transfers between states, cities, and counties for various purposes, publicly owned hospitals are well suited to exploiting these rules by manipulating funding streams. Hospitals in New York, for example, receive more in Medicaid supplemental payments than those in any other state, and New York City’s municipal Health + Hospitals system has become particularly dependent on them. Medicaid supplemental payments accounted for 31 percent of all H+H revenues in 2016—a big deal for a system operating at an 8 percent loss.
Health + Hospitals runs 11 acute-care hospitals and 70 Community Health Centers, with a mission of delivering care to the city’s underserved and uninsured “regardless of race, immigration status, or ability to pay.” It treats 15 percent of Manhattan’s hospitalized patients but 72 percent of its uninsured. H+H delivers few lucrative surgical procedures to privately insured patients but provides the bulk of treatment for substance-abuse and psychiatric disorders.
H+H also uses its discretionary funds for an array of activities, ranging from “faith based initiatives” and “plant-based medicine” to after-school programs and housing aid, in an attempt to promote wellness and healthy living. Though federal law prohibits states from extending Medicaid benefits to even recent legal immigrants, supplemental payments have allowed H+H to deliver free health-care services to New York City’s half-million illegal immigrants. The city also uses H+H to fund health care for its jail inmates and prison staff—neither of whom are eligible for Medicaid.
Despite its supposed rationale, the bulk of Medicaid supplemental payments do not go to facilities serving low-income communities. Forty-three percent of all hospitals nationwide received DSH funds in 2017. In fact, a 2016 U.S. Government Accountability Office report concluded that “the bulk of supplemental payments to hospitals were made contingent on these hospitals or the relevant local government providing funds to finance the nonfederal share of the payments the hospitals received, rather than Medicaid services they provided.”
The 2010 Affordable Care Act sought to offset part of the cost of its insurance subsidy expansion by slashing DSH allotments. These cuts were to be concentrated on states with relatively high DSH expenditures, few uninsured residents, and weak targeting of funds at institutions providing uncompensated care—conditions that placed New York hospitals in the crosshairs for a $1.4 billion (66 percent) cut.
But Congress has repeatedly postponed the scheduled DSH cuts with broad bipartisan support, under the pretext that the ACA failed to reduce the number of uninsured as intended—with Republican legislators pointing to red states that had opted against expanding Medicaid, and Democrats eager to preserve grants that mostly went to blue states.
The hospital industry, which spent $125 million lobbying last year, has been eager to portray reduced DSH allotments as cuts to services. But in reality, the cuts would simply lead states to reallocate their DSH contributions to Medicaid base payments, which are not capped. Nothing prevents states from continuing to draw federal matching funds in return for state funds currently used for DSH, so long as they are used to pay for covered benefits.
The main consequence of allowing the scheduled cuts to take effect would therefore be to ensure that a larger proportion of Medicaid funds is reserved for eligible low-income beneficiaries, gets distributed to facilities serving such beneficiaries in a traceable manner, and is provided in return for delivering care for which the facilities can be held accountable. Medicaid dollars should be kept for Medicaid benefits, not diverted into a slush fund for states.
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