Increased State Directed Payments (SDPs) will cause hundreds of millions in P&L exposure on Hospital DSH audits.
By Cody Smart
June 1, 2024
Phew! Once again, hospital systems sidestepped the annual grim reaper of Medicaid DSH cuts earlier this year—congressional magicians waved their wands and the DSH (Disproportionate Share Hospital) reductions vanished (again) until 2025. But before we break out the bubbly, let's discuss what’s lurking in the shadows: State Directed Payments (SDPs) will soon throw a whole new wrench in DSH funding at hospitals across the country.
What are SDPs?
State Directed Payments (SDPs) are a special provision in the Federal Medicaid Managed Care Law Section 42 CFR § 438.6 that allow states to direct payments to providers through Managed Care Organizations (MCOs). Each state can structure SDP payments to support broader health policy goals and capture CMS matching dollars in the process. Basically...a federal-match adrenaline shot to hospital balance sheets that needs only 1) to be passed through the Medicaid Managed Care plans as a claim add-on and 2) driven by a relatively thought-out methodology that CMS approves in advance.
And CMS has been approving them by the baker’s dozen. Their increase in popularity may have something to do with the fact that state SDP programs aren’t currently subject the same audit requirements as 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 State Directed Payments.
How will SDPs affect my DSH Cap?
As you know, your hospital DSH Cap (that capricious ceiling that limits your total DSH payments) 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 plug right 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 many of our clients even reduce to zero – the DSH Cap. At hospitals where the entire DSH Cap could drop to zero, the facility may face CMS recoupment of the entire federal portion of DSH payments for the calendar year in question. At many hospitals, this could mean tens of millions of dollars in P&L exposure.
In New York city alone there's over $100M per year at risk. The example below presents a hypothetical hospital.
State Directed Payments are a great source of operating revenue for Hospitals, and the cat is now out of the bag. These programs will keep growing nationwide for the foreseeable future. While they are a welcome mechanism for states to increase abysmally low Medicaid Rates up to something that almost resembles cost, these payments have their drawbacks too. Reimbursement Teams need to be aware of the downstream implications of their SDP funding, including how it can reduce a Hospital's DSH Cap, potentially creating material liabilities on future audits.
