How the Current State of Medicaid May Impact CDI Departments

As many of you already know, the One Big Beautiful Bill (OBBBA) will add 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% of hospitals have 50% of their inpatient days paid by Medicare and Medicaid, and more than 82% of hospitals have 67% Medicare and Medicaid inpatient days.”

Not all CDI departments include Medicaid patients within their CDI review population, mainly because the population 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 (ACA) 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 the volume of uninsured patients will rise when long term reforms are implemented in 2027. Consider the following:

• Confirming Medicaid eligibility every six months is likely to be cumbersome for both the beneficiary 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, who will only be granted one month of retroactive coverage.

All of which 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. An Issue Brief from Medicaid and CHIP Payment and Access Commission (April 2024) reports 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.  

When all is said and done, net Medicaid payments are below Medicaid costs. This results in a Medicaid shortfall, 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 is Disproportional Share Hospital Payments (DSH). Medicaid DSH payments are statutorily required payments designed to offset these losses for hospitals that serve a high proportion of Medicaid beneficiaries.

These uncompensated care payments also include costs associated with the uninsured. Hospital expenses associated with uncompensated care dropped with implementation of the ACA, 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 $8.0 billion dollars in FY 2026, FY 2027 and FY 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 hospital uncompensated care affects hospital margins. DSH hospitals report high uncompensated care and lower operating margins compared to other hospitals. The AHA states, “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 payors audits 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 (Feb. 2025) reported, “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.