Written by Stephanie Limb

With news at the end of 2017 that the Centers for Medicare & Medicaid Services and the Texas Health and Human Services Commission had come to an agreement to extend the state’s Medicaid 1115 Waiver for five additional years through 2022, Texas hospitals breathed a collective sigh of relief. The agreement came just days before the existing waiver – and its essential $6.2 billion per year in hospital supplemental payments – would expire.

The agreement will keep $3.2 billion per year in uncompensated care payments and $3.2 billion per year in delivery system a reform incentive payments in place for at least two years. For 2020 and beyond, however, the outlook is less clear as CMS will require substantive changes to uncompensated care cost calculations and a new approach to DSRIP.

What Took So Long?

As negotiations went down to the wire, Texas hospitals understandably were getting nervous. With budget planning for 2018 - 2019 underway and key decisions about staffing and services needing to be made, the Texas hospital community fervently hoped that negotiations would end and end favorably.


“THHSC staff and the governor knew that Texas hospitals needed resolution, but they were balancing that against the need to have the very best deal possible,” said John Hawkins, senior vice president, advocacy and public policy at the Texas Hospital Association. “The last thing they wanted was to exchange certainty for a less-than-ideal financing arrangement for Texas hospitals.”

The new administration also presented challenges. While many had originally thought that the changing of the guard from the Obama administration, which had balked at continuing the waiver because of the state’s unwillingness to expand its Medicaid program, would yield expedient and favorable waiver renewal, the Trump administration actually presented a different set of challenges.

“With leadership turnover at the U.S. Department of Health and Human Services and staff time and focus centered on Congress’ multiple efforts to repeal and replace the Affordable Care Act, our waiver had to fight for priority status," said Hawkins.

THA brought in additional resources to get that priority status, retaining a DC-based lobbying firm to secure access to key decision makers and increased engagement with the Texas Congressional delegation, particularly with Sen. John Cornyn and Reps. Eddie Bernice Johnson (D-Dallas) and Michael Burgess (R-Lewisville), to prioritize their personal outreach to CMS staff.


“The final waiver agreement is a testament to the advocacy of the entire Texas hospital community working in partnership with THHSC, the governor’s office and the Texas Congressional delegation,” said Ted Shaw, THA president/CEO. “We had numerous visits in DC with members of Congress and repeatedly hearing from hospitals, small and large, was integral to their support.”

Uncompensated Care Payments

At its core, the Medicaid 1115 Waiver is about hospital financing. Originally implemented in 2011 as the state began mandating managed care enrollment for almost all Medicaid beneficiaries, the waiver converts hospitals’ Upper Payment Limit funding, not allowed under managed care, into two pools of earned funding: uncompensated care and DSRIP.

Under the new waiver, level funding for hospitals’ uncompensated care costs will continue for 2018 and 2019. For 2020 and beyond, however, the amount of uncompensated care funding and hospitals’ individual uncompensated care payments will be resized (more on key waiver dates is available on page 34). Key to this resizing is requiring hospitals to use a modified “Worksheet S-10” instead of the currently used UC Tool to document uncompensated care costs. Using a modified S-10 will mean that hospitals no longer can count their Medicaid shortfall or bad debt as uncompensated care costs. The UC pool size and payments will be based on hospitals’ charity care costs incurred for uninsured patients only, but THHSC expects that a cost will not be considered incurred for an insured patient if his or her insurance does not cover the specific service.

“We knew going into negotiations that CMS would draw a hard line on continuing to include the Medicaid shortfall in uncompensated care cost calculations,” said THA’s Hawkins. “The agency consistently has said that Medicaid rates are the state’s responsibility. That’s what makes having two years of level UC funding and time to adapt to the new reporting tool such a victory.”

Having two years to transition to the S-10 is particularly important so that all hospitals’ uncompensated care cost data are captured. CMS originally developed the S-10 to gather hospitals’ uncompensated care costs as part of their Medicare cost reports and required it of critical access hospitals and those paid under the inpatient prospective payment system. Children’s hospitals and specialty hospitals have no experience with cost reporting via the S-10, but having their costs represented in the waiver’s UC pool is critical.

At the same time, no longer allowing costs associated with the Medicaid shortfall will create differences among hospitals in the amount of UC payments they receive. Some of these differences could be mitigated through changes to the disproportionate-share hospital program, and THA will be modeling these differences and investigating the possibility of changes to DSH.

Delivery System Reform Incentive Payments

Authorized under a section of the Social Security Act – Section 1115 – the waiver was required to have a research and demonstration component. By law, section 1115 Waivers must demonstrate and evaluate state-specific policy approaches to better serving the Medicaid population. As demonstrations, however, these approaches are, by definition, temporary.

With nearly 1,500 DSRIP projects, health care providers across Texas have used waiver funds to increase access to community-based behavioral health care services, reduce unnecessary hospital admissions and readmissions, increase medication adherence, improve primary care access and enhance chronic disease management. Only by achieving certain metrics and demonstrating outcomes did providers qualify for funds.

With the new waiver, the state has agreed to wind down these DSRIP projects. DSRIP funding will decrease in years 3 and 4 and be zeroed out in year 5. The hospital industry’s challenge will be to find a means to preserve these supplemental payments and sustain the most effective DSRIP projects, even in the absence of dedicated funding, so that access gains and outcomes improvements are not lost. THA will work closely with THHSC on the required DSRIP transition plan due to CMS by Oct. 1, 2019, that must describe “how it will further develop its delivery system reforms without DSRIP funding and/or phase out DSRIP funded activities and meet mutually agreeable milestones to demonstrate its ongoing progress.”

Method of Finance

While changes to UC and DSRIP are known, a significant unknown variable is the method of finance for generating the non-federal share of waiver payments. While CMS still requires non-federal funds to draw down federal waiver funds, the waiver’s terms and conditions are silent on how those non-federal funds should be generated. At issue is whether the state’s current practice of hospitals’ providing the non-federal share through intergovernmental transfers and burden alleviation agreements will be allowed to continue.

The uncertainty over the method of finance is the result of the ongoing, unresolved issue of the disallowance of federal uncompensated care payments for private hospitals in North Texas, currently before the Departmental Appeals Board at HHS. In September 2016, CMS notified the state it was disallowing $27 million in federal UC payments under the waiver because they constituted “impermissible provider donations.” The state appealed the decision and is awaiting a final verdict from the DAB. If the disallowance is upheld because the DAB agrees with CMS that the funding mechanism is impermissible, the state will need to identify another means of generating the non-federal share of waiver payments.

Hospitals in some areas of the state already have abandoned burden alleviation agreements and instead implemented alternative means, specifically local provider participation fees, to generate the non-federal share of waiver payments. But the uncertainty around the method of finance that undergirds the entire waiver lingers over the future of hospital financing and is an issue that THA will be heavily involved in during the course of the year and into the next legislative session.

During 2018, Texas Hospitals magazine will explore different aspects of the new waiver and how hospitals in Texas are responding. Current information on the waiver and rulemaking is available from www.tha.org/waiver.


Barclay E. Berdan, FACHE
Barclay E. Berdan, FACHE

"Texas Health Resources is appreciative and supportive of the continuation the Texas 1115 Medicaid Waiver. Its renewal is essential to stabilize the safety net for the most vulnerable populations of Medicaid recipients and other low income and uninsured patients. A large percentage of Texas residents cannot receive quality health care without a safety net of committed health care providers, and the safety net is not possible without the 1115 Waiver.

As we celebrate the success of the continuation of the waiver, we also must focus on the realities of a Medicaid program in which basic Medicaid payment rates fall woefully short of the cost of providing hospital care. The new Waiver provides the ability to build upon existing supplemental payment programs and begin new ones such as the Uniform Hospital Rate Increase Program.

Texas Health will continue to work with THA and our regulatory and elected officials in Austin and Washington D.C to implement the new Waiver as well as resolve the outstanding disallowance [of federal uncompensated care payments for hospitals in North Texas]. Relief in this area, coupled with securing the 1115 Waiver, will help continue our steadfast mission of improving the health of all people in the communities we serve."

Adam Willmann, FACHE
Adam Willmann, FACHE

“I am pleased that we were able to get the UC and DSRIP programs extended. These supplemental payment programs are vital to my hospital and to all rural hospitals. Given the political circumstances, the state negotiated the best deal possible for Texas hospitals. Our challenge going forward, however, will be to deal with the substantial drop in payments in years three through five. This could spell financial trouble for smaller rural hospitals. The state must work with rural hospitals to find replacement funding between now and 2020. Areas of focus should be to fix Medicaid underpayment and develop new payment programs in which the state and federal governments would share the financial responsibility. Otherwise, we will see more rural hospital closures or further reduction in key services such as obstetrics and deliveries. If these scenarios come to pass, it would completely undermine the intent of the original waiver to sustain and improve access to these much-needed services.”

Ernie Sadau
Ernie Sadau

"Despite encountering a year full of administrative uncertainty and political challenges, health care remains deeply personal for CHRISTUS Health. Keeping Medicaid support for Texans doesn’t just extend the life of a few line items on a government spreadsheet—it keeps extremely valuable programs and stories of hope and healing alive in the many communities CHRISTUS serves. The Medicaid 1115 Waiver gives hospitals and clinics the ability to operate as a safety net for the Medicaid and uninsured populations.

It allows CHRISTUS to continue to be part of exceptional stories like the ones we see at the new Dr. Hector P. Garcia Memorial Family Health Center in South Texas, where a CHRISTUS Spohn pharmacist helped a mom facing financial hardships and serious medical challenges get her complex list of medications in order. There’s the story of the North Texas man, who could be classified as working poor, struggling with diabetes. He came to us and also got a screening and help for depression, a condition that many patients with chronic diseases develop. There are the many stories of children like the 7-year old girl who isn’t scared to play during recess anymore because she now knows how to use her rescue inhaler, a skill she learned in the Mobile Pediatric Asthma clinic.

The mobile program, out of CHRISTUS St. Michael in Texarkana, is much like our various telehealth programs. And they all work to remove barriers that prevent people from getting the care they need. These are just some of the programs that successfully address the needs of our communities, but the Waiver also helps CHRISTUS offer programs to build up our caregivers. A young CHRISTUS nurse who has always been drawn to help patients in crisis is now training and undergoing advanced certification to become a Psychiatric Mental Health Nurse Practitioner. Her job is helping to alleviate the backlog of patients who need this specialized care in South Texas.

We couldn’t be more pleased that these valuable programs can continue thanks to the extension. We’re particularly proud of these stories because it showcases what we work to do every day at CHRISTUS, which is to transform the health and the life of every patient we are privileged to serve."