Could Postponing Medicaid Hospital Cuts Become the Next 'Doc Fix'?

Obama's budget proposes delaying certain Medicaid cuts another year, complicating the politics of the Medicaid expansion and possibly setting the administration up for an annual headache.
by | April 11, 2013 AT 1:00 PM

Did the Obama administration set itself up for an annual headache over Medicaid hospital cuts?

In his fiscal year 2014 budget for the U.S. Department of Health and Human Services (HHS), President Barack Obama proposed delaying cuts until 2015 to Medicaid disproportionate share hospital (DSH) payments, which go to hospitals that serve a large number of uninsured patients. The Affordable Care Act (ACA) reduced DSH payments because more people would become insured, through the Medicaid expansion and subsidized private coverage, under the law. But then the U.S. Supreme Court ruled last June that states could choose whether or not to expand Medicaid, and more than a dozen governors have already said they do not support expansion.

For full coverage of Obama's budget, click here.

If the Obama administration had kept the DSH cuts in its budget, hospitals in non-expanding states would have received lower reimbursements while still treating a larger number of uninsured patients than federal lawmakers originally expected. Postponing the cuts, though, would allow states to finish making their decisions about the Medicaid expansion, Marilyn Tavenner, acting administrator of the Centers for Medicare and Medicaid Services (CMS), said yesterday. The Medicaid expansion must be approved by each state's legislature.

But the proposal could potentially undercut what was supposed to be one of the major motivators for states to expand Medicaid. Republican leaders (many of whom are against the expansion) don’t have to worry about their hospitals possibly taking a pay cut  if they don’t agree to the expansion -- at least for the first year. And now that the administration has made this concession once, it could lead to greater pressure to make the same one again next year if some states still haven’t agreed to the Medicaid expansion.

Think of it as the new ‘doc fix.’ Congress must annually patch up a proposed cut to Medicare payment rates for doctors, leftover from a 1997 federal deficit-reduction law. The law tied payments to economic growth -- which was fine when the economy was growing but became a problem during the recession of the early 2000’s. Doctors rose up in anger because they were facing a pay cut, and Congress has been forced to cancel the potential cuts every year since. The annual ritual has become known around Washington as the ‘doc fix.’ It’s a political and practical headache, but no alternative solution has garnered enough support to pass.

So, in a similar fashion, could the Obama administration be forced to annually postpone the DSH cuts to ensure that hospitals in states that choose not to expand Medicaid don’t have to endure an untenable pay cut? It’s possible, several health policy experts and advocates say, though some declined to speak on the record.

Opinions vary on how likely it is that the DSH payment postponement will turn into a headache like the doc fix. “Maybe, but my guess is no,” one top policy analyst said. “It’s not far-fetched,” another said.

"This could become a 'doc-fix' situation, though maybe that is too much of a conspiracy theory," says Caroline Pearson, vice president of health reform at Avalere Health, an independent consulting firm. "If most states expand Medicaid, then it will become irrelevant over time ... however, the delay also reduces the strongest political pressure encouraging governors to support expansion, which could mean that fewer states expand in 2014."

Despite the proposal to postpone DSH cuts, states will likely continue to receive pressure from hospitals to expand Medicaid because the restored DSH payments for 2014 do not equal the same amount of money that a state would get for the Medicaid expansion, for which the federal government will cover almost all of the costs.

“The administration very much wants every state to do the expansion, so I don’t think they want to continue to do this,” says Joel Ario, a former HHS official who is now a consultant with Manatt Health Solutions. “They have to keep the pressure on the states to expand.”

Then again, nobody envisioned the doc fix becoming an issue either. The precedent is now set, and Obamacare continues to be a political firestorm, with Republican officials in some very populous states showing no signs of caving on the Medicaid expansion. So it’s not impossible, though it might be unlikely, to imagine that the DSH cuts -- if Congress enacts them into law -- could become a routine nuisance for the White House.