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Understanding Medicaid Hospital Payments and the Impact of Recent Policy Changes

Appendix A:  Measuring Medicaid Payments to Hospitals

No data source consistently collects information on Medicaid costs and payment, and different estimates of Medicaid payment as a share of costs use different definitions of Medicaid costs and payments. Thus, estimates of Medicaid payment as a percent of costs are sensitive to the specific data source and definitions used to make the estimates. For example, when measuring Medicaid hospital payments, some data sources include supplemental payments, while others do not. In some data sources, these payment streams are not identified, making it difficult to understand what is and is not included. Further, in some cases, Medicaid costs may be defined to include only costs for Medicaid-covered services, while in others, the definition may include unpaid costs for services provided to Medicaid patients when Medicaid was not the primary payer—for example, costs for Medicare-funded services provided to people dually eligible for both Medicaid and Medicare.

Three main sources of estimating Medicaid payment relative to costs are the Medicare cost reports, the DSH Audit Reports and the American Hospital Association survey.  These sources vary in the data they collect and the definitions of costs and payments that they enable.  Each of these data sources may underreport other Medicaid supplemental payments, which may understate total Medicaid payments, and the data likely does not net out provider contributions towards the non-federal share, which are necessary to calculate net Medicaid payments and may contribute to overstating total Medicaid payments.

Medicare Cost Reports.  The Medicare Cost Reports (MCR) are annual reports that all Medicare-certified institutional providers are required to submit to Medicare. It is the only publicly available source of detailed financial data for most of the acute care hospitals in the U.S. These reports contain provider information such as facility characteristics, utilization data, cost and charges by cost center (in total and for Medicare), Medicare settlement data, and financial statement data that are used as part of the annual settlement between the federal government and the provider.1  These cost reports are designed to collect data necessary for Medicare reimbursement and thus do not verify or require Medicaid data, leading to questions about how reliable these data are for Medicaid payment analyses. Hospitals are not required to report DSH payments separately, but DSH payments are included as Medicaid revenues in these reports, and the reports only include costs for Medicaid-covered services.

Medicaid DSH Audit Reports.  The Medicaid DSH audit reports are required annual reports that states must submit to the federal government describing DSH payments made to each DSH hospital.2  In these reports, hospitals explicitly report DSH payments. DSH audits also include unpaid costs for services provided to Medicaid patients when Medicaid was not the primary payer. The primary limitation of this data source is that they exclude hospitals that do not receive DSH payments, which are likely to differ substantially from DSH hospitals in the amount of overpayment or underpayment from Medicaid.

American Hospital Association Reports (AHA).  The AHA uses data from their annual hospital survey to provide an estimate of Medicaid (and Medicare) payments relative to costs.  In their survey, AHA obtains information on each hospitals’ net and gross Medicaid payments, DSH, and supplemental payments. They calculate a cost-to-charge ratio and use this to determine the rate of underpayment for all hospitals. In their underpayment calculation, they include all payment adjustments.3  While AHA publishes annual reports on overall hospital uncompensated care costs, as well as Medicare and Medicaid underpayments, the detailed financial data are not available on their public use files.

As a result of these differences, as well as limitations in the underlying data, estimates of Medicaid payment as a share of cost vary (see Table A1). However, most estimates indicate that Medicaid payments cover most (more than 90%) costs, with one estimate indicating that some hospitals (those that receive DSH payments) receive Medicaid reimbursement in excess of costs.

Table A1: Estimates of Medicaid Payments as a Share of Costs
Source Data Year Estimate of Medicaid Payment as a Share of Medicaid Cost Notes
American Hospital Association (AHA)4 AHA annual survey 2013 90%
  • Includes non-federal, acute care hospitals
  • Payments include supplemental payments and DSH
  • Cost data reflect payments for Medicaid beneficiaries for Medicaid-covered services
Medicaid and CHIP Payment and Access Commission (MACPAC)5 DSH Audit Reports 2011 93% excluding DSH and 107% including DSH
  • Includes only hospitals that receive DSH payments
  • Payments include DSH, but these payments are reported separately
  • Cost data includes cost of services for Medicaid patients for which Medicaid is not primary payer
Authors’ analysis Medicare Cost Reports 2014 93%
  • Includes non-federal, acute care hospitals
  • Payments include DSH
  • Cost data reflect payments for Medicaid beneficiaries for Medicaid-covered services
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