Uncompensated Care Faces a Double Hit in Some States

Philip Betbeze, for HealthLeaders Media , May 22, 2013

Hospitals in states that opt not to expand Medicaid are at a severe disadvantage to their counterparts in other states, not only because they will miss out on additional Medicaid-based reimbursement, but also because they will face the same cuts in disproportionate share funding as everyone else.

This article appears in the May issue of HealthLeaders magazine.

Medicaid is widely regarded as a poor payer related to costs, but hospitals, especially the nation’s safety-nets, are eager to get more of their state’s residents on the plan nevertheless. That’s because Medicaid’s reimbursement rate, which varies by state, is much better than nothing at all, which is what many hospitals claim they get, in reimbursement terms, from treating the uninsured.

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But getting more of their patient mix from Medicaid patients rather than the uninsured will be difficult for those in states that have so far refused to expand their Medicaid rolls. Refusing expansion, of course, is their right, according to the Supreme Court’s 2012 decision on the constitutionality of the Patient Protection and Affordable Care Act, in which the Medicaid expansion is enfolded.

But doing so might not only transfer funding to states that do expand, but it also might leave safety-net hospitals with the same costs to treat the uninsured, while other sources of funding, such as disproportionate share dollars, are reduced over time.

As HealthLeaders went to press, 14 states still have refused to participate in the Medicaid expansion, which would take effect in 2014 and make adults with incomes up to 138% of the federal poverty level eligible to enroll.

The problem, say state governors who are resisting, is that although the federal government has agreed to pick up all of the tab for the first three years of expansion and 90% thereafter, there is no way to ensure that future Congresses will keep those promises, meaning states could be on the hook for more than they bargain for under current rules.

The problem for hospital leaders, however, is that if a state does not choose to expand, hospitals in those states will be forthwith at a severe disadvantage to their counterparts in other states not only because they will miss out on additional Medicaid-based reimbursement, but also because they will face the same cuts in disproportionate share funding that their counterparts in other states will see.

“The most vulnerable hospitals will be major safety-nets in urban areas that are currently treating patients who don’t have health insurance and that are dependent on local funding and disproportionate share funding,” says Bruce Siegel, MD, MPH, president and CEO of the National Association of Public Hospitals and Health Systems, a Washington, D.C.–based organization that lobbies on behalf of its members. “We’ll see this funding drop, and will also see continued pressure on the local funding side because of the economy.”

Those dollars lost will be significant, he adds. An NAPH study released late last year found that hospitals could face an increase in uncompensated care costs of $53.3 billion by 2019 if a substantial number of states do forego expansion, coupled with an estimated loss of $14.1 billion in disproportionate share funding.

For most safety-net hospitals, many of which already get by on local tax subsidies, such a drop in revenue could be devastating not only for them but for other hospitals in their states, which would presumably see increased bad debt and funding shortfalls where treating the uninsured is concerned.

Revenue issues apply statewide
Safety-net hospitals will initially bear the brunt of their states’ decisions not to expand, says Siegel.
“If you’re a hospital today that has mostly paying patients and very little charity care, you should be okay, at least in the short term,” says Siegel, who previously served as president and CEO of Tampa General Healthcare and also of New York City Health and Hospitals Corporation. “You’re not counting on coverage expansion and you don’t need disproportionate share and you’re probably not getting much of it right now anyway. But if you’re a safety-net hospital, you have potentially the worst of all
possible worlds.”

For John Haupert, CEO of Atlanta’s 650-staffed-bed Grady Health System, that could mean an annual loss of tens of millions in reimbursement for an already fiscally challenged public hospital system.

By 2016, when disproportionate share funding scales back to 50% of its current levels, “we lose $45 million a year,” he says.

But on a longer-term basis, other hospitals will also be negatively affected.

“All hospitals have skin in this game,” says Siegel. “A lot of hospitals maintain their margin because of the safety-net taking the uninsured, and if that goes away, they will bear the brunt. That’s not a secret to them, but still a threat.”

The haves and have-nots
Though the states that have so far refused still can accept Medicaid expansion, safety-nets in states that refuse expansion are likely to be most at risk.

And though Grady’s Haupert expects much to change in coming years surrounding the Medicaid expansion, he and his board are having to make long-term plans to deal with lots of potential challenges. And it’s frustrating to them that hospitals are in a political fight they didn’t ask for.

“Already we get a disproportionate unfunded mandate. That’s our mission and we have some local tax support, but the bigger issue for us is that the way the law is written, you’re going to give back 50% of your disproportionate share funding even if they don’t expand,” Haupert says.

“The diabolical thing is we have an uncertain insurance expansion and a certain cut in disproportionate share,” echoes Siegel.

If nothing changes, that would mean huge disparities in how much reimbursement similar safety-net hospitals in other states would get versus hospitals in states like Georgia.

“Many say this is too good of a deal to pass up because if the feds don’t deliver on paying for the expansion, you can unwind it,” says Haupert. “Our reality, though, is that I don’t see us expanding immediately.”

For Haupert and his board, that means serious consideration of cuts in services, and with a $45 million annual hole to fill, and it’s not idle talk to discuss eliminating money-losing services, like behavioral health, he says.

“We’ll eliminate or reduce clinical services, period,” Haupert says. “One example I gave to the governor [Republican Nathan Deal] personally is that Grady is the state’s second-largest provider of mental health [care]. If this happens, can we continue to provide it? We could save $25 million to $30 million a year by not doing it, but what does that do to the state? In this case the law of unintended consequences is significant.”

Other hospitals in less populated areas of the state, he predicts, will simply close.

“We have 15 hospitals that will close if the state does not expand its Medicaid program or we don’t get the disproportionate share funding issue resolved, and I don’t see too many governors who want that on their hands,” he says.

Many of the states that are so far rejecting the Medicaid expansion are the same ones that are not planning on setting up insurance exchanges on their own. Though both pieces of the legislation have serious implications for hospital revenue, the delays that are expected to surround states that aren’t setting up exchanges could have a knock-on effect on revenues for hospitals in those states.

Hard lobbying
Like Haupert, Siegel says hospital leaders need to take their issues straight to their governors and paint the picture. He says it can be effective to partner with businesses to push for the expansion.
“Not expanding is an act of fiscal insanity. This is a core economic issue,” he says. “States that do not expand are literally taking their federal tax money and giving it to other states. It’s hurting patients and small businesses in your state.”

But some governors seem steadfast, at least for now. That’s why, in parallel, NAPH and hospitals that will be affected by the disproportionate share funding drop are working on possible modifications to that piece of the law. But as Haupert says, hospitals are caught in the middle of two government entities engaging in high-stakes brinksmanship.

“Someone’s going to have to blink,” he says. “HHS is going to use the disproportionate share issue to the final minute to get the s and years, especially surrounding adjustment of the disproportionate share cuts.

“All of us should be working really hard to educate our governors and congresspeople about the reality of the DSH cuts,” Siegel says. “That will take some time. Right now, the reductions are still a few years out—they don’t start getting big until after 2016, but in an atmosphere of gridlock, it’s hard to get action until a disaster is about to occur.”

Of course, if modifications are made to disproportionate share funding to help alleviate the burden on hospitals in states that won’t expand, some might see it as a reward for political intransigence.

“If they let the number of uninsured drive the calculation, they’ll have to take disproportionate share money away from states like New York and California and give it to states like Texas,” Siegel says, “which would be ironic. There are lots of carrots and sticks in play here.”

Reprint HLR0513-5

This article appears in the May issue of HealthLeaders magazine.