Medicaid State Directed Payments Are Critical for Children’s Hospitals

Right now, Congress is considering cuts to Medicaid state directed payments (SDPs) that will reduce health care quality and access for the nearly 37 million children covered by the Medicaid/CHIP program, especially at children’s hospitals.

Far from being a windfall for children’s hospitals, these essential payments do not even make up for the shortfall of Medicaid reimbursements, which pay only 88 cents to the dollar for hospital care, and often less.

Around half of children’s hospitals’ patients are covered by Medicaid; for some, it’s up to three-quarters. That means reducing Medicaid payments will threaten children’s hospitals’ financial viability and the care they provide to all children.

What are state directed payments and why do they matter?

SDPs are supplemental payments to hospitals for the services they provide — including for cancer, behavioral health, maternity, and more.

When Medicaid pays for services, it does not cover the costs of those services. That means children’s hospitals lose money when they treat children covered by Medicaid.

SDPs are meant to make up for that shortfall. For some children’s hospitals, SDPs help to fill payment gaps by an estimated 20%.

The amount states are allowed to pay for a service is limited to what commercial insurance pays for the same services.

State directed payments were created to ensure timely access to care, increase consistency in care, and encourage value-based care as opposed to volume-based care. Hospitals can only receive SDPs for services that advance the quality goals of the state. In short, SDPs support high-quality care and better outcomes for children.

What happens when state directed payments are cut?

Even with SDPs, Medicaid on average still covers less than 80% of children’s hospitals’ costs of providing care.

With around half of children’s hospital revenue coming from Medicaid, supplemental payments allow them to continue providing high-quality, life-saving services to children across the country.

That’s why we are urging Congress to reject policies that would reduce Medicaid state directed payments. That includes altering the ceiling for state directed payments to match Medicare, since many pediatric services are not reimbursed under Medicare and its rates do not always consider children and their needs.

If anything is worth budgeting for, surely it’s our children’s future.