Medicaid is rapidly becoming every state’s largest health insurer, and with that status comes an increasing focus on Medicaid’s payment policies. Yet to date, Medicaid payment reform initiatives have largely neglected to address a significant component of Medicaid payment policies — supplemental payments. Combined, the two most significant forms of supplemental payments — Disproportionate Share Hospital (DSH) Payments and Upper Payment Limit (UPL) payments — represent more than one-third of Medicaid fee-for-service payments to hospitals, and hospital payments constitute 23 percent of all Medicaid spending.

Supplemental payments are a critical source of revenue to hospitals, especially safety-net hospitals. Yet because they are often disconnected from the specific services provided to specific patients, and thereby delinked from the efficiency or quality of the care provided, supplemental payments may in fact run counter to broader value-based purchasing efforts. In this brief from the Center for Health Care Strategies, authors Deborah Bachrach and Melinda Dutton of Manatt Health Solutions examine the need to align supplemental payment arrangements with broader payment reform objectives to ensure that beneficiaries have access to quality, cost-effective care.