The Current State of Medicaid – And How Changes May Impact CDI

As many of you already know, the One Big Beautiful Bill Act (OBBBA) will introduce new restrictions that may decrease the volume of Medicaid patients. My focus today is how a perfect storm of legislative changes may negatively impact hospital finances at a time when operating margins remain tight, putting additional pressure on clinical documentation integrity (CDI) departments to find revenue. According to a 2024 American Hospital Association (AHA) fact sheet, 96 percent of hospitals have 50 percent of their inpatient days paid by Medicare and Medicaid, and more than 82 percent of hospitals have 67 percent Medicare and Medicaid inpatient days.

Not all CDI departments include Medicaid patients within their CDI review populations, mainly because those primarily covered by Medicaid are pregnant women and children. Medicaid is a joint federal and state program. The federal government has general rules that apply to all state Medicaid programs, but each state has its own program. Consequently, eligibility requirements and benefits can vary from state to state.

The Patient Protection and Affordable Care Act (PPACA) expanded Medicaid coverage, allowing more low-income adults to enroll. These Medicaid adult beneficiaries may be included within the CDI population, even if pregnant women or pediatrics are excluded. Depending on the conversion rate for self-pay, this group of patients may also be reviewed by CDI staff. It is likely that the volume of uninsured patients will rise when long-term reforms are implemented in 2027:

• Medicaid eligibility coverage will be redetermined every six months. Confirming eligibility every six months is likely to be cumbersome for beneficiaries,, as well as increasing the administrative burden associated with Medicaid enrollment. This is referred to as administrative churn.

• The period of retroactive Medicaid coverage will be reduced from the current three months to two months, except for those enrolled as part of the Medicaid coverage expansion; these beneficiaries will only be granted one month of retroactive coverage.

This is likely to translate into a lower volume of CDI reviews, unless Medicaid beneficiaries and the uninsured are already included within the CDI review population. If Medicaid beneficiaries are included, there could be issues verifying enrollment, causing CDI staff to review patients who are no longer eligible for Medicaid and who later shift from Medicaid to self-pay.

It is inefficient to review patients who later fall out of the CDI review population. If Medicaid and the uninsured are not included in the review population, depending on CDI staffing and review rates, it could lead to staffing cuts.

Looking at the larger picture of hospital finances, it is well-known that Medicaid has the lowest reimbursement rates of all payers. An Issue Brief from Medicaid and CHIP Payment and Access Commission (April 2024) reports that Medicaid fee-for-service payments, on average, “are below hospitals’ costs of providing services to Medicaid enrollees and are below Medicare payment rates for comparable services.”

Although there are ways to supplement the fee-for-service Medicaid payment, when all is said and done, net Medicaid payments are below Medicaid costs. This results in a shortfall created by the difference between the cost of treating Medicaid beneficiaries and what Medicaid reimburses for healthcare.

A supplemental payment developed to offset some of the losses associated with treating Medicaid beneficiaries involves Disproportional Share Hospitals (DSHs). Medicaid DSH payments are statutorily required payments designed to offset these losses for hospitals that serve a high proportion of Medicaid beneficiaries.

The payments also include costs associated with the uninsured. Hospital expenses associated with uncompensated care dropped with implementation of the PPACA, but legislation within the OBBBA is expected to increase the volume of the uninsured population. Unfortunately, this is occurring at the same time DSH allotment payments, which are established under federal law, are set to decrease by $8 billion in fiscal years 2026, 2027, and 2028.

This cut is in addition to other changes in DSH payments within the OBBBA, like reductions in managed care supplemental payments and shifting the cost of Medicaid from the federal government to the states.

Changes in uncompensated care affect hospital margins. DSH hospitals report already high levels of uncompensated care and lower operating margins, compared to other hospitals. The AHA states that “the need for Medicaid DSH supplemental funding remains essential, as hospitals cope with the impacts of financial instability while supporting their mission to treat all patients, regardless of ability to pay.”

The expected increase in the volume of uninsured, in conjunction with planned decreased DSH payments, will exert additional financial pressure on hospitals serving a low-income population. This financial pressure is likely to trickle down to CDI departments, as hospitals seek to offset potential financial losses through incremental revenue.

Unfortunately, case mix index (CMI) remains flat across most health systems, due to a variety of reasons, but perhaps the most impactful is the shift of surgical values from the inpatient to the outpatient setting. The benefit of improved documentation and coding accuracy has already been realized at many organizations, while payer audits have become increasingly aggressive, leading to higher denial rates.

Even if CMI increases or remains stable, financial pressures are expected to continue to grow due to tariffs increasing the cost of goods, increased labor costs, and higher volumes of uninsured patients. A recent Advisory Board Daily Briefing reported that “data from the Center for Healthcare Quality & Payment Reform shows that more than 700 rural hospitals are facing the risk of closure, including more than 300 hospitals at risk of closing within the next three years.”

CDI professionals need to be aware of this looming financial crisis, as hospital leadership will likely look to the clinical revenue cycle to offset as much of these losses as possible with incremental revenue opportunities.

Programming note: Listen live today to Talk Ten Tuesday 10 Eastern for the CDI report with Cheryl Ericson.