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Texas Submits Uncompensated Care Evaluation to CMS

This week, we reviewed the independent evaluation of Texas’ Uncompensated Care Pool submitted to the Centers for Medicare and Medicaid Services (CMS) by the Texas Health and Human Services Commission (HHSC). The evaluation, which was required under the Special Terms and Conditions (STCs) of the State’s Section 1115 waiver, was completed by Health Management Associates (HMA).


In December 2011, the HHSC received federal approval of the Texas Healthcare Transformation and Quality Improvement Program Waiver. The plan extended managed care, addressed concerns related to preservation of Texas’ hospital safety net, and facilitated a critical transformation of the health care safety net from one driven by volume to one driven by value. A focal point within the waiver was funding for both a Delivery System Reform Incentive Payment (DSRIP) program and an Uncompensated Care program (UC Pool). Five-year funding authorized for the two statewide pools includes $17.6 billion allocated for the UC Pool and $11.4 billion for DSRIP. The waiver expires in September 2016, but has been authorized for a 15-month extension.

Consistent with the approach it has taken in other states that operate uncompensated care pools, CMS required Texas to commission a detailed analysis of the state’s uncompensated care costs, payments and the impact of environmental factors and potential policy changes. Pursuant to the waiver Special Terms and Conditions (STCs), the report includes the following:

  1. A detailed description of the composition of current Medicaid hospital payments.
  2. Analysis of Medicaid financing and how the non-federal match is funded.
  3. Estimated cost incurred by hospitals to provide services to Medicaid beneficiaries compared to the cost to the corresponding payments received.
  4. Estimated cost of uncompensated care provided by hospitals and the portion of uncompensated care attributed to charity care.
  5. Analysis of the adequacy of Medicaid payments in relation to cost incurred by hospitals.
  6. Analysis of Texas Medicaid payment adequacy relative to other states.1
  7. Assessment of recent economic and environmental trends within Texas that may impact future reimbursement levels and the cost of caring for low-income populations.
  8. Estimated financial impact of: 1) implementing a Medicaid expansion for low-income adults; 2) Medicaid DSH reductions required by the Affordable Care Act (ACA); 3) reestablishing supplemental upper payment limit (UPL) payments; and 4) fully funding Medicaid hospital costs through payment rates.

1Note that this portion of the analysis and report were completed by Deloitte Consulting.

Key Findings

Texas hospitals face a large and growing uncompensated care burden. In FY 2015, the net costs of uninsured care for all hospitals participating in the UC Pool, prior to supplemental pool payments, were estimated at $5.2 billion. When Medicaid shortfall is included, unreimbursed costs grow to $8.7 billion in FY 2015. Before supplemental payments are considered, the payment to cost percentage across all hospitals is 48.4 percent. After the application of Graduate Medical Education (GME) and Disproportionate Share Hospital (DSH) payments as offsets to cost, the payment to cost percentage across the participating hospitals increases to 58.8.

Unreimbursed Hospital Costs, FY 2015

Amounts in billionsFY 2015
Total uninsured care$5.2
Total Medicaid shortfall$3.5
Total uncompensated care before supplemental payments$8.7
Percentage of cost paid before supplemental payments48.4%
GME and DSH payments$1.8
UC Pool payments$2.9
Total unreimbursed Medicaid and uninsured after supplemental payments$4.0
Percentage of cost paid after supplemental payments76.3%

Applying UC Pool payments as an additional offset to costs increases the payment to cost percentage to 76.3 percent. While this represents a significant improvement in the coverage ratio relative to base payments only, it is important to note that even after applying UC Pool payments, Texas hospitals still face approximately $4 billion in remaining unreimbursed cost, including $1.8 billion in Medicaid shortfall and $2.2 billion in net uninsured cost.

Source of data The analysis relied primarily on data collected from 356 hospitals participating in the Texas Medicaid DSH/UC Pool program using the State’s audited reporting tool. The Medicare cost report S-10 worksheet was evaluated but ultimately discarded for the purpose of determining uninsured cost. While the S-10 has been the best publicly available source of hospital financial information for decades, it has shortcomings, gaps and variances that are described in detail in the report and that were noted in CMS’ recent decision to delay the use of the S-10 for Medicare reimbursement policy.

Defining and estimating uncompensated care Federal and state policies have consistently used all unreimbursed uninsured cost (including both uninsured charity care and uninsured bad debt) for quantifying uncompensated care. Using this definition, there was an estimated $5.2 billion of uninsured cost incurred in FY 2015 by Texas hospitals. The waiver STCs call for a more limited calculation of uncompensated care, however, focused on charity care and excluding bad debt. Due to significant variations in how hospitals classify charity care versus bad debt, many hospitals routinely under-report the portion of uninsured care that should be classified as charity care. Therefore, the report replicates a methodology utilized in California’s recent uncompensated care analysis to impute the value of charity care based on the definition adopted by the Healthcare Financial Management Association (HFMA). After applying this “imputed charity care” factor to uninsured bad debt, an estimated $4.2 billion of the $5.2 billion of uninsured cost is attributed to charity care and the remainder is bad debt. Consistent with the principles applied across the Medicare and Medicaid programs, the entire estimate of uninsured cost less payments should be utilized for the purpose of defining uncompensated care.

Treatment of Medicaid shortfall The STCs also specifically exclude all costs related to Medicaid shortfall from the calculation of uncompensated care cost. This provision stands in contrast to the original purpose of the UC Pool, as articulated in the STCs, to “defray the actual uncompensated costs of medical services that meet the definition of “medical assistance” contained in Section 1905(a) of the Act that are provided to Medicaid eligible or uninsured individuals incurred by hospitals, clinics, or by other provider types …” The analysis includes calculations both with and without estimated Medicaid shortfall to be consistent with the original STCs as well as the reporting requirements articulated by CMS.

Medicaid Expansion and DSH Reduction impact As of July 2016, Texas is one of 19 states that have opted not to expand their Medicaid program to low-income adults, as allowed under the ACA. The impact of a Medicaid expansion would be an estimated $1.6 billion decrease in net uninsured cost and a $1.2 billion offsetting increase in the Medicaid shortfall. However, as of the writing of this report, Medicaid expansion in Texas does not appear to be likely in the near future.

Pursuant to the Affordable Care Act, DSH allotments are scheduled to undergo significant reductions beginning in FY 2018 based on the rationale that increased rates of coverage through Medicaid expansion and subsidized private insurance should significantly reduce the uncompensated care burden on providers. In FY 2015, DSH payments to Texas hospitals totaled $1.72 billion, which offset approximately 10 percent of uncompensated care in that year. Under the most favorable assumptions, the reductions will range from $134 million in FY 2018 to $537 million in FY 2025. Under the most unfavorable assumptions, the cuts will range from $386 million in FY 2018 to $1,543 million in FY 2025.

Importance of UC Funding Under the current funding and reimbursement structure, Texas hospitals incur significant amounts of unreimbursed costs serving Medicaid and uninsured patients. Texas’s uncompensated care burden is almost certain to grow, based on demographics, underlying market factors, and projected DSH cuts. While the implementation of a Medicaid expansion would blunt the impact to a certain degree, it would not come close to eliminating the uncompensated care burden in the state and it is unlikely to be implemented in the near future.

Summary of Hospital Unreimbursed Costs, FY 2017 Pro Forma

In MillionsMedicaidUninsuredTotal
Unreimbursed cost, participating hospitals (1)($3,804)($5,517)($9,321)
Non-participating hospitals (1)($63)($221)($284)
Unreimbursed cost, before supplemental payments($3,867)($5,737)($9,605)
GME pool (2)$31$0$31
DSH pool (2)$560$1,162$1,722
Unreimbursed cost, after supplemental payments($3,277)($4,575)($7,852)
Pro forma effect, Medicaid expansion($1,257)$1,615$358
Pro forma effect, DSH reductions (3)$0($749)($749)
Unreimbursed cost, after pro forma adjustments (4)($4,534)($3,709)($8,243)

(1) FY 2013 base payments and costs trended to FY 2017

(2) FY 2015 amounts, not expected to be materially different in FY 2017

(3) Represents FY 2021 estimate, assuming Texas’ share of the ACA DSH reduction is the same as its current share of the federal DSH allotment

(4) Hospitals only

This pro forma analysis estimates that without payments from the 1115 waiver, Texas hospitals could incur $8.2 billion in unreimbursed Medicaid and uninsured care even after a Medicaid expansion. Including unreimbursed costs from the physician groups, ambulance providers and dental providers that currently receive a portion of the UC Pool payments adds $420 million to this amount, yielding a combined total in excess of $8.6 billion.

In the current environment, reimbursement from the 1115 waiver program helps ensure that adequate resources are available to millions of low-income Texas residents and the UC Pool provides an equitable, accountable and sustainable funding mechanism to help ensure access to care for the state’s most vulnerable residents.

The report was submitted to CMS on August 31st. After reviewing, CMS will work directly with HHSC regarding any decisions or outcomes based on the report.

Key Findings

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