Increased State Directed Payments (SDPs) could mean hundreds of millions in P&L exposure on Hospital DSH audits.
By Cody Smart
Phew! Once again, hospitals have just about sidestepped the grim reaper of Medicaid DSH cuts—congressional magicians waved their wands, and voila, the DSH (Disproportionate Share Hospital) reductions look like they will vanish into 2025[1]. But before we break out the bubbly, let's get real about what’s lurking in the shadows: State Directed Payments (SDPs) will soon throw a whole different wrench in DSH funding at hospitals across the country.
State Directed Payments (SDPs) are a special provision within the Federal Medicaid Managed Care Law Section 42 CFR § 438.6 that allow states to direct payments to healthcare providers through Managed Care Organizations (MCOs). Each state can structure SDP payments to support broader health policy goals and capture a federal match in the process. Basically, they're a federal-match adrenaline shot to hospital balance sheets, and CMS has been approving them by the baker’s dozen. Further, state SDP programs aren’t subject those pesky audit requirements imposed on DSH and other supplemental payments. However, the full impact of these payments on hospital finances may still be hiding in the shadows.
The catch? DSH audits lag, trailing several years, and by the time hospitals prepare their current year DSH audit information, they may find there’s a ticking time bomb in their P&L: DSH recoupments as a result of SDP payments.
As you know, your hospital DSH Cap (aka DSH Limit), that capricious ceiling that decides how much DSH each hospital can keep[2], is determined by a simple formula— Medicaid and uninsured costs less Medicaid and uninsured payments.
The SDP payments your hospital currently receives from managed care organizations are Medicaid payments that will enter into your DSH Cap calculation. When SDPs increase, DSH Caps will decrease, and it’s not just a drop in the bucket. SDP payments are now so significant in magnitude that they will materially reduce – at some providers even obliterate – the DSH Cap. For some hospitals, the entire DSH Cap could drop to zero, meaning the facility may face CMS recoupment of the entire federal matching component of DSH payments received in the calendar year in question. At many hospitals, this could mean tens of millions of dollars in P&L exposure.
Start tracking your DSH stats now for all past calendar years not yet audited (as of this writing, that’s 2021, 2022 and 2023). The era of simply ensuring your DSH cap is high enough to support your DSH payments is now over in states making large SDP payments. Hospitals must arm themselves with proactive, comprehensive financial analyses and be prepared for possible DSH Recoupments as a result of SDPs.
[1] https://docs.house.gov/billsthisweek/20240304/HMS31169.PDF
[2] https://www.ssa.gov/OP_Home/ssact/title19/1923.htm
Smart Reimbursement Inc develops technology to assist hospitals in accurate reporting of large and complex data.