About the Author(s)
Recent Developments
Maigan K. Wright

Abstract: The Affordable Care Act reduced Medicaid and Medicare Disproportionate Share Payments to hospitals and forced quality improvement initiatives on them as well. Examples of the quality improvement initiatives are: the Hospital Readmission Reduction Program, Reduced Cost of Living and Productivity Adjustments, Hospital-Acquired Conditions Reduction Program, and the Value-Based Purchasing Program. In other states that have expanded their Medicaid programs, these costs will likely be offset by the increase in Medicaid patients. Non-expansion state hospitals will not have the additional Medicaid patients and thus these hospitals will have a significant loss of revenue.

Keywords: ACA, DSH, health policy, hospitals, Medicaid

Published: August 6, 2014
Cite as:
The ACA’s Unintended Consequences of Hospital Funding Cuts and Newly Implemented Programs in Non-Expansion States, Bulletin Health Pol’y & L. 2014; 3(1).

The drafting of the Affordable Care Act (“ACA”) encompassed the idea that all states will be required to expand their Medicaid programs. However, the Supreme Court struck down this portion of the legislation. The ACA passed without taking into account the states that did not expand their Medicaid programs and it is widely acknowledged that as a consequence these hospitals stand to lose substantial funds. In addition, the majority of uninsured people in these non-expansion states will remain uninsured while many people will gain Medicaid coverage in expansion states. The question is, ‘how will hospitals sustain their operations through financial penalties, payment and reimbursement cuts, and quality of care increase requirements?’ This question cannot be answered because many of these reductions have yet to take place and the impact of all reductions together, especially on hospitals in non-expansion states, can only be estimated.


Reduction of Medicaid and Medicare DSH Payments

Pursuant to the ACA, the Secretary of Health and Human Services is tasked with reducing Medicaid Disproportionate Share Hospital Payments (“DSH”) by $14.1 billion from 2014-2020.1 In states that expand Medicaid, many uninsured persons will now qualify for Medicaid health coverage. This reduction in uninsured patients should save hospitals money because the hospitals will no longer have to pay to treat these patients through charity care. In other words, hospitals will less frequently write off bills for indigent populations.

It is important to compare the effects of monetary reductions the ACA requires for both expansion and non-expansion states. As mentioned above, expansion state hospitals will see more insured patients and less uninsured patients. However, in non-expansion states, hospitals will not see a large reduction in uninsured patients nor an increase in insured patients. This lack of savings for non-expansion state hospitals, coupled with the required ACA reductions and penalties will negatively affect non-expansion state hospitals. If the ACA were implemented as originally drafted, with all states required to expand, this would not be an issue.

In 2011, the Medicaid DSH payments in California amounted to $1,097,417,551. In Texas the DSH payments equaled $957,268,445.2 California expanded its Medicaid program while Texas decided against it.3 By not expanding its Medicaid program hospitals in Texas will lose money from reductions that cannot take part in, might not be able to operate, and may be forced to close their doors.4 This is especially troublesome for rural hospitals because they have high operating costs in comparison to the money they receive. The extra reductions could leave rural hospitals without enough money to operate.5 Overall, DSH payments to hospitals and physicians will fall substantially regardless of the number of uninsured individuals in a state, as required by the ACA.6

Moreover, as a result of the ACA all hospitals will receive a twenty-five percent (25%) Medicare DSH payment cut.7 The remaining seventy-five percent (75%), of what would have been paid as Medicare DSH, is paid as an uncompensated care payment after being reduced for changes in the percentage of uninsured individuals.8 These additional payments will be on a per hospital basis and will take into consideration: 1) the difference in that particular hospital’s DSH payments, 2) the nationwide change in uninsured persons under sixty-five years of age, and 3) how much uncompensated care that particular hospital provides in comparison to all other acute care hospitals.9 The estimated amount Medicare DSH payments will be reduced by from 2014-2019 is over $22.1 billion.10

Furthermore, the ACA calls for major reductions in both Medicaid and Medicare DSH payments, and because of these reductions hospitals will be receiving less money than they require to operate. This may put a strain on hospital budgets, especially if the hospital is located in a state that has not expanded Medicaid. Thus the percentage of uninsured patients using hospitals in non-expansion states will decrease substantially less than Medicaid expansion anticipated.11

Quality Improvement Initiatives

1. Hospital Readmissions Reduction Program

The ACA implemented the Hospital Readmissions Reduction Program (“HRRP”), which provides financial incentives to hospitals if they reduce their readmission rates.12 The HRRP also requires hospitals be penalized if they have excess readmissions.13 The Center for Medicaid and Medicare Services (“CMS”) began applying the penalties on October 1, 2012 based on hospital data from previous years and more than 2,200 hospitals were penalized an aggregate of $280 million.14 Notably, the maximum penalty is one percent (1%) of a hospital’s reimbursement.15 One study finds that this program had the greatest effect on hospitals serving the poorest communities. This is because these hospitals are more likely to incur the maximum penalty.16

The way readmission rates are configured is also an issue. The rates do not adjust for patient behavior, post acute-care provider performance, or socioeconomic status of patients, circumstances that are out of a hospital’s control.17 Socioeconomic factors are important because people with low incomes tend to have higher readmission rates because of language and cultural barriers leading to discharge instructions not being followed, a lack of resources to purchase prescribed medications, and fewer options for care after discharge.18 The HRRP will make hospitals responsible for events beyond their control and may have a negative effect on hospitals that provide services for low-income, sick, and vulnerable populations who are more likely to return to the hospital and be readmitted.19

Further, hospitals may have to use their own revenues to implement new policies in reducing readmissions to avoid being penalized. This poses financial difficulties for hospitals that already face other reductions and penalties. Non-expansion state hospitals are hit harder because they get reductions and penalties but do not save money on uncompensated care. With the implementation of the ACA and the influx of newly insured patients in states that expand Medicaid, these types of quality of care penalizations should be aimed towards primary care, not hospitals.

2. Reduced Cost of Living and Productivity Adjustments

Hospital payments change every year based on an index of healthcare costs.20 The cost of living index measures “the increase in prices that each category of provider must pay for the goods and services they purchase to enable them to care for patients.”21 Such inputs include wages and compensation, equipment, and overhead expenses including utilities.22 As a result of the ACA, from 2011-2019 the annual cost of living payment will be reduced by 1.6 %.23

Moreover, Medicare believes hospitals are more efficient in providing certain services than they were before. Thus in 2012 it began imposing productivity adjustments that decrease Medicare payments. These cuts amounted to 0.8% in 2013.24 Hospitals paying cost of living and productivity adjustments will have to become more efficient to make up for funds that are lost.

3. Hospital- Acquired Conditions Reduction Program

For this provision in the ACA, a hospital-acquired condition (“HAC”) is a condition that is acquired at an acute-care facility and is not the condition that the patient is initially receiving treatment for.25 These conditions are called “never events” and hospitals are required by law to report them.26 Common HACs found in hospitals are surgical site infections (SSIs) and hospital acquired infections (HAIs).27 The ACA implemented a payment penalty for HACs in most acute care settings, starting in 2015.28 This is another penalty hospitals must deal with as a result of the ACA and is leading hospitals to lose more money they previously relied on. Again, this is even more significant for non-expansion state hospitals that have less money to lose.

4. Value-Based Purchasing Program

The ACA also establishes the Value-Based Purchasing Program (“VBPP”) for inpatient hospitals. Essentially, this program will pay hospitals based on the quality of care they provide to patients.29 While VBPPs sound positive, hospitals that serve predominately Medicaid patients (“safety-net hospitals”), and hospitals in non-expansion Medicaid states serving a large amount of uninsured patients, may be at a disadvantage.30 This is because non-expansion state hospitals will not have the capital to invest in new technology or even make new policies for higher standards of care.31

Medicaid and Medicare cuts, adjustments, and penalties will cost hospitals more than $1 billion in 2014 alone.32 This is considered a conservative figure and leaves safety-net hospitals absorbing more than thirty-six percent (36%) of the cuts.33 With such a significant loss of revenue it is unfathomable how hospitals will simultaneously meet the expectations of maintaining quality of care, paying employees a decent rate, and keeping up with technological advancements that patients require. This is especially troublesome in states that are treating a large number of uninsured patients and have not expanded Medicaid as to receive the extra federal funding.

Hospitals in states that did not expand Medicaid will receive less government payouts and reimbursements, yet will remain treating uninsured patients with less money available. This is the unintended consequence of the ACA being implemented without requiring all states to expand their Medicaid programs as it was originally drafted. There is a chance that hospitals or individuals may rise up and put pressure on their state governments.34 Or the non-expansion state governments may try to make up for the lost money in other ways such as a waiver, which allows states to expand their Medicaid programs in CMS accepted other ways.35 Only time will tell the fate of the hospitals, taxpayers, and the low-income uninsured population in states that did not expand their Medicaid programs. If the non-expansion states do nothing, the outcome could result in hospitals closing down and a poorer quality of care for everyone in that state’s health system.

Competing Interests: None reported.

Maigan Wright is a third-year law student who will graduate with Honors in the Health Law Concentration from California Western School of Law (“CWSL”) in December 2014. She is the American Health Lawyer’s Association’s Mentoring Committee Student Delegate, President of the Health Law Society at CWSL, an Editor of The Bulletin of Health Policy and Law, Vice-President of Older, Wiser Law Students at CWSL, founder of the San Diego La Raza Lawyer’s Association Student Committee, a mentor to students interested in law school, a member of Pro Bono Honors Society, and a Student Ambassador at CWSL. Ms. Wright finished her nursing school pre-requisites graduating, magna cum laude, from Portland State University in Portland, Oregon, with her Bachelors of Science in Economics.

References (Bluebook)

1Corey Davis, Disproportionate Share Hospital Payments and the Medicaid Expansion, Nat’l Health L. Program 4 (July 2012), http://www.apha.org/NR/rdonlyres/328D24F3-9C75-4CC5-9494-7F1532EE828A/0/NHELP_DSH_QA_final.pdf.

2Federal Medicaid Disproportionate Share Hospital (DSH) Allotments, Kaiser Fam. Found. (Jan. 2013),http://kff.org/medicaid/state-indicator/federal-dsh-allotments/.

3Where the States Stand on Medicaid Expansion, The Advisory Board Company(Feb. 7, 2014, 12:44 PM), http://www.advisory.com/daily-briefing/resources/primers/medicaidmap.

4Dennis J. Zhang et al., Hospital Readmissions Reduction Program: An Economic and Operational Analysis, 23 (Dec. 10, 2010), https://papers.ssrn.com/sol3/Data_Integrity_Notice.cfm?abid=2366493.


6Davis, supra note 1, at 6.

7Medicare Disproportionate Share Hospital Rural Health Fact Sheet Series, cms.gov 3 (Dec. 2013), http://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/downloads/Disproportionate_Share_Hospital.pdf.




11Roy Grant, The Triumph of Politics Over Public Health: States Opting Out of Medicaid Expansion, 104 Am. J. Pub. Health 203, 204 (Feb. 2014).

12Julia James, Medicare Hospital Readmissions Reduction Program, Health Aff. 1 (Nov. 12, 2013), http://healthaffairs.org/healthpolicybriefs/brief_pdfs/healthpolicybrief_102.pdf.


14James, supra note 12, at 2.



17Id. at 4.



20The Potential Impact of the Affordable Care Act on Urban Safety-Net Hospitals, Nat’l Ass’n Urban Hosp. 5 (Sept. 2012), http://www.nauh.org/research/raw/98.html.

21John D. Shatto & M. Kent Clemens, Projected Medicare Expenditures under Illustrative Scenarios with Alternative Payment Updates to Medicare Providers, cms.gov 3 (May 18, 2012), http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/downloads/2012TRAlternativeScenario.pdf.


23The Potential Impact of the Affordable Care Act on Urban Safety-Net Hospitals, supra note 19.


25Medicare Non-Payment for Hospital Acquired Conditions, Nat’l Conf. State Legis. (Aug. 2008), http://www.ncsl.org/Portals/1/documents/health/MCHAC.pdf.



28Selected Hospital Quality Provisions Under the ACA, Assoc. Am. Med. C., https://www.aamc.org/advocacy/medicare/153882/selected_medicare_hospital_quality_provisions_under_the_aca.html (last visited March 30, 2014).

29Hospital Value-Based Purchasing Program, cms.gov (March 9, 2012), http://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/hospital-value-based-purchasing/Downloads/FY-2013-Program-Frequently-Asked-Questions-about-Hospital-VBP-3-9-12.pdf.

30Teresa Coughlin et al., How Five Leading Safety-Net Hospitals are Preparing for the Challenges and Opportunities of Health Care Reform, 31 Health Aff.1690, 1693 (2012).


32The Potential Impact of the Affordable Care Act on Urban Safety-Net Hospitals, supra note 19.


34Hyun Namkoong, Community Fights Closure of Hospital and Economic Loss, NORTH

35Robin Rudowitz, et al., The ACA and Recent Section 1115 Medicaid Demonstration
Waivers, KAISER FAM. FOUND. 7 (Feb. 2014),

© Institute of Health Law Studies 2014
All rights reserved
e-ISSN: 2168-6513