The federal government spends about $50 billion annually reimbursing hospitals for uncompensated care. However, Medicare's uncompensated care payments are not well aligned with the actual costs hospitals incur, according to a Government Accountability Office report.
The GAO noted two flaws in the formula CMS uses to calculate Medicare uncompensated care payments. First, the payments are largely based on hospitals' Medicaid workload rather than actual uncompensated care costs. This could result in hospitals in Medicaid expansion states receiving disproportionately higher payments, according to the GAO. To support its claim, the GAO referenced a 2015 report by HHS' Office of the Assistant Secretary of Planning and Evaluation that found an increase in Medicaid coverage was associated with a reduction in hospital uncompensated care costs.
Second, even though the majority of Medicare uncompensated care payments are made based on a hospital's Medicaid workload, CMS doesn't account for Medicaid payments that offset uncompensated care costs in its calculation. This could cause hospitals to receive payments from both Medicare and Medicaid that help offset uncompensated care costs, according to the GAO.
"Additional steps will be needed to ensure the Medicare UC payments are aligned with hospital uncompensated care costs, including taking into account Medicaid payments that hospitals receive for treating the uninsured," said the GAO. "Neither the current poor alignment of Medicare UC payments with hospital uncompensated care costs nor the lack of accounting for reductions in hospital uncompensated care costs for uninsured patients resulting from Medicaid payments are consistent with Medicare’s role as a prudent payer of healthcare."
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