WASHINGTON -- The Bush administration last week proposed tightening what is says are lax regulations that allow state to inflate the number of hospitals within their borders that serve more than their share of poor people and are entitled to extra Medicaid payments.

The proposal, which comes on the heels of other efforts by the Health Care Financing Administration to limit federal Medicaid payments to states, would further harm state finances and could endanger the credit quality of some states and hospitals, according to state and local lobbyists and rating agency officials.

The health agency currently gives states wide latitude in setting standards for classifying so-called disproportionate-share hospitals. But the agency said it wants to set some limits now because at least 17 states are designating too many disproportionate-share hospitals to get more federal Medicaid dollars than they are entitled.

"Some states have used the discretion given them in setting DSH payment policy ... in ways we believe exceed Congress' intent of providing enhanced payments to those hospitals truly providing a disproportionate share of care to Medicaid patients and low-income persons," the agency said in a statement.

Some states have gone so far as to designate every hospital within their borders as disproportionate-share hospitals, the administration said. It did not name those states, but warned that "designating most or all hospitals in a state as Medicaid disproportionate-share hospitals removes any meaning from the statutory term "disproportionate share.'"

The proposed rule would establish uniform federal standards for classifying a facility as a disproportionate-share hospital. It sets up a mathematical formula each state must use to calculate which hospitals treat an inordinate number of Medicaid patients and which do not.

The health agency will accept comment on the proposed rule through mid-December, and then issue a final rule, possibly early next year.

The proposal comes on the heels of attempts by the health agency to rein in other practices by states designed to garner extra federal Medicaid dollars. The agency has already published regulations that will go into effect Jan. 1 under which a state can no longer count donations from hospitals, or certain taxes on hospitals, toward the contributions it makes to Medicaid that are eligible for matching federal funds.

"If this proposal [on disproportionate-share hospitals] were to be enacted in conjunction with the Medicaid provider tax and voluntary contribution interim final regulations, then credit quality for some hospitals would likely suffer," said Elie Radinsky, a rating officer with Standard & Poor's Corp.

"This is one thing to be taken in the greater context of HCFA clamping down on its perception of states abusing the Medicaid match," Mr. Radinsky said. "It's unclear by this proposal how many rated hospitals would actually be affected and what the magnitude of the impact of these regulations is at this time."

Mr. Radinsky said states also could be affected. "Based on the overall context of the federal government reducing its match on Medicaid funds, this, combined with other state budget pressures, may trigger some downgrades of states with borderline ratings who already have limited financial flexibility."

The proposal "is going to exacerbate the situation" states and hospitals are in because of tight budgets and limited methods of raising extra money, said Dennis Farrell, vice president in the health finance department at Moody's Investors Service. "It's going to be a negative, but needless to say we just can't go across the board and lower every rating, though certainly we do view it as a negative issue."

Mr. Farrell said the health agency's efforts to restrict federal Medicaid payments shows the Bush administration is sending "a consistent message of trying to address deficit problems through a very big piece of the pie," namely federal health-care expenditures.

"It's not going to top here, it's going to continue, and probably the times are going to get even tougher" for state budgets and hospital finances, Mr. Farrel said.

Jim Martin, director of the office of state-federal affairs for the National Governors Association, said his membership opposes the agency's proposal and that states are not abusing the authority they were given to decide which hospitals should be given the "disproportionate share" designation.

He noted that many states with large numbers of poor people, particularly in the South, are forced to give the special designation to most of their hospitals.

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