Using 1115 Waivers to Fund State Uncompensated Care Pools

What is an Uncompensated Care Pool?

Uncompensated care pools (UC pools, or UCPs) are one strategy used by states in order to fund care for the uninsured and the underinsured. The pools are primarily used to pay providers for a portion of the free care they provide, thereby ensuring access to critical inpatient hospital and other provider services. UC pools, also called “Low Income Pools,” leverage 1115 Medicaid demonstration waiver authority to fund hospitals and health systems that:

1. Care for a large number of uninsured patients,
2. Provide a disproportionate amount of charity care,
3. Have incurred "bad debt" from unpaid bills, and/or
4. Serve a disproportionately large number of Medicaid beneficiaries whose care is reimbursed at a lower rate than privately insured individuals.

This blog provides an overview of the seven states that use Medicaid 1115 demonstration waivers to fund their Uncompensated Care: California, Florida, Kansas, Massachusetts, New Mexico, Tennessee, and Texas. We also include information on two states—Arizona and Hawaii—with recently expired 1115 waivers that formerly were used to fund UC pools.

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The table below provides specifications of the UC pools that have operated in these nine states under 1115 waiver authority. Initial waivers were approved over a period from 2002 (TN) to 2014 (NM). For context, the Patient Protection and Affordable Care Act (ACA), enacted in 2014, changed the role of 1115 waivers by allowing states to cover childless adults without applying for an 1115 waiver.[i] The intent of this change, as well as the additional coverage provisions under the ACA, was to increase the number of people with health insurance, which would reduce uncompensated care delivered in hospitals.[ii] Based on data from 2017, uninsured rates for nonelderly adults in these states range from an estimated 3.8% (MA) to 23.5% (TX).[iii] In order to reduce uninsurance, some states have expanded Medicaid eligibility to 138% of the Federal Poverty Level for childless adults, while others have leveraged alternative strategies through 1115 waiver authority. Half of the states with UC pools (listed above) are Medicaid expansion states while the other half are not.

Uncompensated Care pools are often one component of a broader reform strategy funded through a more comprehensive 1115 demonstration waiver. Some state waivers use both UC pools and Delivery System Reform Incentive Payment (DSRIP) Programs to reform their health care delivery system and offset the cost of uncompensated care (e.g., CA, KS, MA, and TX). Other states set aside UC pool funding as part of their transition to a Medicaid managed care model (e.g., KS and TX). Some UC pools have even been in place since before the ACA was implemented in 2014 (e.g., CA, MA, and TN), though most were approved after full implementation.

How are Uncompensated Care Pools funded? Where does this money go?

States differ in how their UC pools are funded and how the funds are distributed. A common funding strategy is the reallocation of Medicaid Disproportionate Share Hospital (DSH) funds. In some states, UC pool dollars may be combined with other funding sources to create larger “safety net” pools. For example, in its most recent waiver renewal (2015-2020), California, under its “Global Payment Program,” combined the uncompensated care funding sources in a previous version of its 1115 waiver with reallocated DSH funds to compensate designated public hospitals providing a high volume of care to uninsured patients.

While some states’ UC pools reimburse providers for a range of uncompensated care, others cover just a small subset of a provider’s uncompensated care costs or divert funding to other non-provider entities. In Arizona, the UC pool covered a portion of the UC costs of just one children’s hospital in Phoenix. New Mexico’s UC pool reimburses the uncompensated care for a state teaching hospital and designated sole community provider hospitals.[1] Massachusetts uses UC pool funds to cover uncompensated care in its critical access hospitals, but it also diverts funding to public health entities like the Department of Public Health and the Department of Mental Health.

Funding for UC pools varies widely, both in total dollars allocated (referenced above) and dollars per uninsured individual in the state. The range of annual funding per uninsured, nonelderly adult begins at $192 per person in California up to $1,312 per person in Tennessee. This wide variation in funding is linked to states’ historical approaches to uncompensated care and generally fluctuates year-to-year based on changes in the cost of furnishing uncompensated care, annual inflation rates, and changing state priorities.

How has the use of Uncompensated Care Pools changed over time? How might the 2020 election influence future approval and use of Uncompensated Care Pools?

As with all 1115 demonstration waivers, renewal of provisions such as UC pools is based on evaluation of the program’s outcomes, as well as current priorities of CMS, which may change with Presidents and their administrations.[iv] For example, under the Obama administration, an assessment of the trends in waiver approvals indicated a reduction in funding and expiration of uncompensated care pools. Specifically, CMS rejected both Hawaii and Arizona’s requests to extend their respective waivers in 2016 and 2017.[v],[vi] Under the Trump administration, CMS has either approved or extended funding for the seven-state 1115 waivers that currently fund UC pools. With waiver renewal durations averaging about five years, all existing UC pools have been approved until after the 2020 election cycle. Because waiver approval criteria can change based on administration policy priorities, results of the 2020 election may determine the future availability and acceptable uses for these pools.

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