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Fee-For-Service Hospital Care

California has tried to maintain inpatient hospital services for Medi-Cal beneficiaries and the uninsured while reducing pressure on the general fund through a number of different programs, including:

The Selective Provider Contracting Program (1982), operated by the California Medical Assistance Commission (CMAC), created a negotiated inpatient hospital service payment system.

The SB 1255 hospital supplemental payment program (1989), an enhanced payment program that enhanced rates paid for inpatient hospital services.

The Medicaid disproportionate share hospital (DSH) program, a program that subsidizes uncompensated hospital care provided to Medicaid beneficiaries and the uninsured.

These programs have resulted in a number of adverse consequences for the Medi-Cal program and California’s health care safety net.  

Both private and public hospitals have received low Medi-Cal payment rates for more than 25 years.

There has been a substantial increase in the fiscal obligations of county taxpayers and the University of California (UC).

The reimbursement system (i.e., negotiated inpatient hospital rates and supplemental payments for inpatient hospital services) encouraged the delivery of inpatient hospital care in hospitals.  

Hospitals have a way to seek increases to inpatient hospital payment rates, but not outpatient hospital payment rates.  For example, hospitals needing funding increases can CMAC for inpatient hospital rate increases.  Outpatient hospital rates in most years are frozen or reduced and CMAC does not view its role as making up for losses in outpatient hospital care.  Hence any hospital that becomes efficient by shifting care from an inpatient hospital setting to an outpatient hospital setting, receives an even lower amount of its cost reimbursed by Medi-Cal.  

Disproportionate Share Hospital (DSH) Program

The federal DSH program, which only pays for hospital costs, also creates an incentive for uninsured care to be provided in hospitals.  As previously discussed, DSH only compensates hospitals for the uncompensated costs of providing inpatient and outpatient hospital services to Medicaid beneficiaries and the uninsured.  Hospitals are still left with significant uncompensated non-hospital costs (e.g., physician care to the uninsured).  

California was granted authority under federal law to spend up to 175 percent of the hospital-specific DSH limit for public hospitals, which means that the federal match rate for payments for the uninsured can be up to 87.5 percent.  While California would normally receive $50 from the federal government for every $100 in matchable uncompensated care costs under the DSH program, the ability to claim more in federal reimbursement than 100 percent of the actual costs effectively raises the federal matching rate by 37.5 percent (i.e., 50 percent federal match of $175 equals $87.50).  The DSH payment authority works very well in public hospitals, but

Health Management Associates/Harbage ConsultingPage 44

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