Unraveling Medicaid hospital payments

The relationship between Connecticut hospitals and the Connecticut Medicaid program can sometimes sound like a bad marriage -- "Can't live with 'em but can't live without 'em either!" The rhetoric can be heated at times, with alleged Medicaid underpayment being blamed for a myriad of problems in the health care system. But this rhetoric can obscure the facts, especially when it comes to Medicaid hospital payments.

The Medicaid program was established by Congress in 1965 to provide health insurance to individuals with low incomes. It's a partnership between states and the federal government, with each kicking in about half of the costs. Congress intended for Medicaid recipients to have the same access to the health care system as that enjoyed by everyone else. To achieve that goal, Medicaid payments to providers should be fair, and states are required to make sure their Medicaid recipients have good access to high quality services. That's why Gov. Ned Lamont partnered with the legislature to order the Medicaid rate study last year, and why DSS is working with the legislature to be sure we have a plan to bring our Medicaid payments to the appropriate level.

But not all Medicaid providers are in the same boat. Some have done better than others over the years. Governor Lamont signed an agreement with hospitals in 2019 which provided them with a guaranteed 2% rate increase each year through 2026. Many other providers have received no increases at all during that time. Since 2016, Connecticut hospitals are receiving $1 billion additional dollars in Medicaid revenue per year.

Despite this steady increase in payments to hospitals, you have often heard Connecticut hospitals say that "Medicaid only pays us 62 cents on the dollar, so we need to charge commercial insurers more to make up the difference." What does this mean, and where does this 62 cents number come from?

Each year, the Office of Health Strategy (OHS) publishes a study that looks at how much the state pays hospitals to cover the cost of care for a patient with Medicaid insurance. In the past that study has said that for every dollar it costs to care for a Medicaid patient, the state pays hospitals 62 cents. This year, we took a close look at how that number was calculated and updated the method to make it more accurate. As a result, OHS arrived at a much different number: 87 cents on the dollar. Here's what changed:

First, OHS required hospitals to report ALL of their Medicaid payments. Some payments had been left out on previous reports. That change meant the more accurate number for Medicaid payments was higher than in previous years. Second, OHS changed the way in which the "user fee" or hospital tax is applied to Medicaid revenue. In the past, hospitals were allowed to subtract the entire fee from just the Medicaid payments. Because the fee is calculated based on the hospitals' total revenue, this year only the Medicaid portion of the fee was subtracted. This change also meant the reported Medicaid revenue was higher. Finally, this year OHS used a standardized federal process to only count Medicaid costs directly related to patient care, and didn't allow hospitals to claim things like lobbying or advertising as patient care costs. That change brought down the reported cost of caring for patients.

The result? After updating the calculation with these three changes, the resulting outcome is that Medicaid actually pays hospitals 87 cents on the dollar. While it may not feel like enough to some, it's in line with what other states pay, and also in line with our estimate for what Medicare pays (81 cents on the dollar). Additionally, nearly all of Connecticut's hospitals are considered tax exempt charities, and as such do not pay local, state or federal property or income taxes.

However, federal regulations require them to provide benefits to their communities, and all hospitals count the difference between Medicaid payments and Medicaid costs as part of their community benefit requirement.

There is still time to talk about reasonable Medicaid rates, and where the state's limited Medicaid dollars are most needed. As we continue to address these challenges collaboratively, we look forward to having a conversation that's based on facts.

Andrea Barton Reeves, JD, is commissioner of the Connecticut Department of Social Services and Deidre S. Gifford, MD, MPH, is commissioner of the state Office of Health Strategy.