Will ACA’s Uncompensated Care Payment Reductions be Made Permanent?

Among the proposals that the budget committee is rumored to be considering to replace a small part of the sequester is an extension of a reduction in Medicaid payments to hospitals that serve a high number of low-income patients to help offset uncompensated care costs. First passed as part of the Affordable Care Act (ACA) through fiscal year 2020 (which not coincidentally goes just through the end of the 10-year budget window used by the Congressional Budget Office used to judge the deficit impact of the bill), these reductions have been extended several times, most recently in the fiscal cliff deal, and are now scheduled to expire after 2022. If the conference committee includes this policy, it should extend the reductions permanently instead of repeatedly using short-term extensions to the end of the current CBO budget window to pay for new short-term spending.
Called Disproportionate Share Hospital (DSH) payments, both Medicare and Medicaid make additional payments to hospitals that treat a disproportionate share of low-income patients. Along with other government programs, these payments are intended to help compensate those hospitals for having more uninsured patients who may not pay their medical bills and more patients on Medicaid, which generally pays lower rates than Medicare and private insurance. Without public assistance, hospitals would get stuck with the bill for this uncompensated care, which reached $57.4 billion in 2008, according to the Urban Institute. In 2012, Medicare paid $12 billion through DSH payments and Medicaid paid $11 billion.
Due to the coverage expansions in the Affordable Care Act, however, projections show that the amount of uncompensated care will drop dramatically. For instance, the RAND Corporation estimated that uncompensated care nationally would decrease by $32 billion in 2016 alone due to the effects of the health care law. Therefore, with fewer payments needed to compensate hospitals, the ACA reduced Medicare DSH payments by $22 billion over 10 years and Medicaid DSH payments by $14 billion.
But while the Medicare payment reductions were made permanent, the Medicaid payment reductions were left to expire after 2020. Policymakers have since extended these reductions whenever they want to claim an extra $4 billion in savings to offset new spending, yet it is unlikely that the payments would ever be allowed to increase to their pre-ACA levels.
Moreover, each 1-year extension has been used to pay for an immediate 1-year "doc fix." While there is a benefit right now to reducing near-term fiscal drag through offsets over 10 years, continuing the practice of offsetting immediate spending with savings literally in the last year of CBO's 10-year window feels close to a gimmick and actually increases our debt by over $1 billion each time due to increased interest costs.
If the budget conference committee is going to include a reduction in DSH payments, the fiscally responsible thing would be for policymakers to permanently extend the reductions. While this policy would only save $4 billion this decade, a permanent extension would produce another roughly $60 billion in deficit reduction over the 2nd decade.
Revenue Impact from Reducing DSH Payments
Policy First Decade

Second Decade

Extend reductions in DSH payments for one year $4 billion $0 billion
Permanently extend reductions in DSH payments $4 billion  ~ $60 billion*

*Estimates for the second decade are CRFB staff calculations, and should be seen as an order of magnitude, rather than a precise estimate.