Medicaid is a joint federal-state health care program that provides  health insurance coverage to low income and medically needy  individuals. Multiple Sources of Federal Support for Hospital Uncompensated Care Totaled Nearly $50 Billion Annually in 2013 and 2014

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. 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

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. 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 Tax Law Provides Additional Financial Benefits for Tax-Exempt Non-Profit Hospitals Incurring Uncompensated Care Costs with Benefits Estimated in the Billions Annually

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. Medicaid and Medicare Payments That Help Offset Hospital Uncompensated Care Costs Are Generally Based on Similar Factors

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. 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. 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

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. 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. 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. 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. Recommendations for Executive Action

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. In its written comments, HHS concurred with both our recommendations.
Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

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.