Over 30 years of reporting on Congress, federal agencies and the White House for corporate America as well as national trade and professional associations.

State Cutbacks to Medicaid Hit Hospitals Hard

P&T Journal...October 2012

     Illinois hospitals swallowed a bitter pill on June 14 when Governor Pat Quinn (D) signed the Save Medicaid Access and Resources Together (SMART) Act. That bill and four other associated pieces of legislation aimed to cure what ails the state Medicaid program, which has been on the financial critical list with a $2 billion a year structural deficit. In order to do so, the bill lasered $1.6 billion a year off state Medicaid costs, some of that in the form of 62 benefit reductions, some in the form of reduced payments to for-profit hospitals (3.5 percent) and safety-net hospitals and critical access rural hospitals (2.7 percent).
     The SMART Act left pharmacies smarting. The pharmacy industry agreed to some reductions back in April 2012, when Governor Quinn first announced his package. Negotiations with medical providers continued on through the spring. Danny Chun, Vice President of Communications for the Illinois Hospital Association, says pharmacies had to then agreed to a second round of reductions, much to the industry's dismay. The final bill restricts Medicaid recipients to four prescriptions a month, it terminates Illinois Cares Rx, and increases co-pays to the federal maximum for pharmaceuticals, among other new restrictions. 

      The cancellation of Illinois Cares Rx underlines the ripple effect of the Medicaid benefit reductions being announced by many states. The Rx program subsidized prescription costs for some seniors receiving medications through Medicare Part D.

     Illinois' Medicaid program may be more financially troubled than programs in many other states. But other states, too, have been whacking away at payments to hospitals and cutting benefits, pharmacy and otherwise. Florida cut Medicaid payments to Florida hospitals by 12 percent in July 2011, and instituted an additional 5.6 percent cut in July 2012. 

       Cuts in state Medicaid payments to Florida hospitals have forced Sarasota Memorial Hospital to squeeze its nickels and dimes, if not its pennies. Sarasota treats 90 percent of the Medicaid recipients in its area, and those individuals constitute about 9.5 percent of the hospital's payor mix. The nearly 20 percent reduction in Florida Medicaid payments over the past two years comes out to about $2 million a year in lost revenue for the hospital, according to Bill Woeltjen, the hospital's Chief Financial Officer. When all direct and indirect costs are thrown into the equation, SMH is losing $9 million a year on its Medicaid patients. "That $2 million is really critical when you think of the fully absorbed costs." says Woeltjen. "So far it has not cut into muscle. But we are continuing to look for ways to do more with less." 

        Maybe the Medicaid payment cuts have not busted the hospital's biceps. But the reductions have led to heavier lifting for fewer people at the hospital's in-patient pharmacy. David Jungst, R.Ph.,  Pharm.D., BCPS, Director - Pharmaceutical Care Services at SMH, says, "We have definitely had to give up salary dollars and not fill open positions. We took those positions off the books. All my positions are critical. That loss won't affect patient care, but I am worried about anything getting through the cracks, especially when  one dose can cost $10,000 or $20,000. We cannot take our eyes off the ball."

        The financial pressures on the hospitals have forced Jungst to make some changes, some minor some major, in the way the pharmacy department handles Medicaid patients. "Particularly with regard to expensive drugs such as chemotherapy, which today account for about 50 percent of our drug budget, up from 25 percent a few years ago, we are trying to provide that drug therapy out-patient if appropriate, where the Medicaid payment is much better," he notes. 
      Not only is there a lot at stake for hospitals, there is a lot at stake, too, for the 60 million individuals and families who currently qualify for Medicaid. The program provides health coverage for low-income families who lack access to other affordable coverage options, for individuals with disabilities for whom private coverage is often not available or adequate and for seniors who need long-term care services and supports or assistance in affording their Medicare coverage. Total spending for Medicaid was about $276 billion in 2011.The federal government pays about 57 percent of program costs and the states paying the remaining 43 percent. While children and their parents account for 75 percent of all enrollees, the elderly and disabled account for two-thirds of total spending on the program.

     The outcome of the 2012 presidential and congressional elections could complicate hospital finances even more if there are significant Republican gains, and if Mitt Romney wins the White House. So far, there have not been deep cuts in federal support for Medicaid; only the states have cut back their support. But Republicans want to convert Medicaid into a block grant program. That would have the effect, based on, for example, Vice Presidential candidate Rep. Paul Ryan's (R-Wisc.) plan, of reducing federal outlays to the states for Medicaid by nearly $800 billion over 10 years, according to ????. Regardless of who wins the election, Medicaid will be on the chopping block because of the need to reduce the federal deficit.

      Despite more state and imminent federal funding reductions, the Medicaid program will grow in 2014 if the Affordable Care Act (ACA)  is still in place. A study from the Kaiser Family Foundation projects that Medicaid enrollment will climb by 15.9 million more people by 2019 than it otherwise would have, and the number of uninsured will fall by more than 11 million. California and Texas, for example, two states with considerable numbers of uninsured residents, are each projected to see 1.4 million fewer uninsured adults in 2019 due to the Medicaid expansion, with the federal government covering 95 percent of the cost in Texas and 94 percent in California. The cost of the Medicaid expansion between 2014 and 2019 would be jointly financed with the federal government paying $443.5 billion (or 95.4 % of the total cost) and the states contributing $21.2 billion.  (Federal matches start at 100 percent in 2014 and decrease to 93 percent in 2019). That is what the ACA says; whether those federal funds will actually be there, and be appropriated by Congress, well, that is a different story.
      On its face, the expansion is a boon to hospitals, who will get reimbursed 100 percent for uninsured patients whose bills are today being written off as charity care. The ACA allows a state to expand Medicaid coverage to families up to 133 percent of the federal poverty level. The feds now pay about 57 percent (the percentage varies somewhat state-by-state) for current Medicaid recipients. However, hospitals with high Medicaid populations today, called Disproportionate Share Hospitals (DSH), would be hurt badly if their states authorize expansion. That is because that while they will be paid 100 percent for new Medicaid recipients who were previously uninsured, they will at the same time lose federal DSH payments they previously received. DSH payments generally go to large hospitals in urban areas to compensate them for charity care of uninsured patients.
       In 2011, federal DSH payments to hospitals totaled $8.1 billion, which were 26 percent of the total federal Medicaid payments to hospitals. Those DSH payments went to "Safety Net" hospitals in the U.S. hospitals such as Sarasota Memorial. Woeltjen, the SMH Chief Financial Officer, says the Medicaid "enhancement"--that is the infusion of new Medicaid patients whose costs are being paid 100 percent by the federal government--results in a net financial gain for the hospital in 2014, but just slightly. However, five years later as the loss of DSH payments mounts, the Medicaid expansion becomes "significantly negative" financially for SMH.

     The ACA expansion also threatens all hospitals--not just DSHes--from a second angle.  Chun points out that there is a significant population of individuals in any state who already qualify for Medicaid, but who have not signed up. Come 2014, they will have to join Medicaid or pay a penalty for not having health insurance. If they join Medicaid, the federal government will only reimburse Illinois Medicaid 57 percent (not 100 percent) for those previously-eligible individuals, which could complicate the state's Medicaid shortfall even more. 

       Of course many governors have indicated they will opt-out of the Medicaid expansion, if the ACA itself survives political execution at the hands of Republicans, a possibility only if the GOP wins the White House and the Senate in 2012. Even if the Medicaid expansion does survive, Republicans in Congress will attempt to restructure the program to reduce its costs to the federal government. Some Democrats are likely to be sympathetic to structural changes because of the larger political imperative to reduce federal spending imposed by the Budget Control Act of 2011. That law requires Congress to reduce the federal deficit further starting January 1, 2013. If Congress fails to do that, deep automatic budget cuts, including to defense, will go into effect. So there will be strong pressure post-November elections for both Democrats and Republicans to look for substantial cuts in federal spending, and Medicaid is likely to top the targets.

     While Republican Vice Presidential candidate Rep. Paul Ryan's (R-Wisc.) plan to restructure Medicare has received extensive coverage, he also wants to restructure Medicaid. The GOP House budget for fiscal 2013, approved by the House last May, reduces federal spending on all programs by $5.8 trillion over 10 years (while losing some $4 trillion in federal revenues via new tax cuts). Of that $5.8 trillion, Medicaid accounts for $771 billion. The Ryan plan does that by capping federal payments to the states at 2012 levels, plus the rate of inflation. Romney endorses the same approach; his website advocates block grants which would grow at the rate of inflation (not medical inflation) plus one percent a year. Of course the rate of medical inflation would be much higher, meaning states would have to either restrict the number of new participants or cut payments to providers. The Congressional Budget Office estimates that federal payments to the states would be 35 percent lower in 2022 under the Ryan plan than currently projected and 49 percent lower in 2030.

      Democratic opposition has stymied Ryan's proposed Medicaid block grant proposal so far. But should Mitt Romney win the White House and Republicans win control of the Senate, federal spending on Medicaid, one way or another, is certain to fall faster than a zeppelin with a leak.

      Not that Democrats don't have their own Medicaid cost deflation program. They do. President Obama made a number of cost reduction proposals as part of his fiscal 2013 budget proposal. According to Bruce Siegel, MD, MPH, President and Chief Executive Officer of the National Association of Public Hospitals and Health Systems, Obama's proposal to limit state imposition of Medicaid provider taxes "would reduce states’ flexibility in financing their Medicaid programs, leading states to make harmful cuts or pass the cost burden on to providers and beneficiaries." The president's proposal would have combined into a single blended payment what are currently a number of separate Federal Medical Assistance Percentages (FMAP) payments, which cover different populations or provide various services. This proposal would have the effect of cutting the federal match, including the 100 percent for newly-eligible Medicaid recipients in 2014.

     "We oppose the overall idea of combining FMAP payments because it does nothing to reduce the cost of care or make the program more efficient," states Siegel. "It simply shifts Medicaid costs onto states by reducing federal spending, leaving the states to make up the difference."

     According to one Washington public hospital lobbyist, the blended FMAP doesn’t seem to have a lot of traction right now, although it still comes up in policy discussions. The provider tax cut has been included in various legislative vehicles, but hasn’t made it to the president’s desk. "We’re hopeful they will not be included in the next budget and are keeping an eye out for future action," he says.

     But budget realities will assuredly stymie that hope. Report after report written by substantial, credible, non-political commissions of one sort or another have buttressed the "Cut Medicaid" political imperative. Former Federal Reserve Chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch co-chaired a task force which wrote the Report of the State Budget Crisis. The Task Force included such leading lights of Republican administrations such as Nicholas Brady and George P. Shultz. The report said Medicaid programs are growing rapidly because of increasing enrollments, escalating health care costs and difficulty in implementing cost reduction proposals. At recent rates of growth, state Medicaid costs will outstrip revenue growth by a wide margin, and the gap will continue to expand. The report points out structural Medicaid deficits are not peculiar to Illinois. They affect most states, and they "can no longer be absorbed without significant cuts to other essential state programs like education or unpopular tax increases or both."
     Matt Salo, Executive Director, National Association of Medicaid Directors, says Medicaid programs have only three alternatives for reducing costs: 1) reducing the number of recipients, 2) reducing services, or 3) reducing payments to providers. "But those three options are not sustainable in long run, especially two of the three, that is cutting services and people," Salo explains. "Medicaid directors are starting to think outside the box." There is a recognition that the system, which depends on fee-for-service, is broke. It rewards volume and is ignorant around quality and outcomes. There are also dysfunctional payment incentives, which is particularly true for hospitals." So states are beginning to experiment with payment reforms such as reducing fees to hospitals based on hospital-acquired infection rates and unnecessary caesarian sections.
    Illinois, for example, has begun to reduce payments to hospitals when their Medicaid patients have higher than necessary hospital-acquired infections such as such as a urinary-tract infection, bed sore or fall-related bone fracture. This change is over-and-above the changes mandated in the SMART Act which Gov. Quinn just signed, and beyond what federal Medicaid requires. The Illinois Hospital Association estimates that state hospitals will lose at least $30 million in Medicaid reimbursements in fiscal 2013, according to an article in the Springfield Journal-Register. Illinois hospitals receive about $2 billion a year for inpatient services to state residents covered by Medicaid. Mike Claffey, spokesman for the Illinois Department of Healthcare and Family Services, told the newspaper the department has tried to negotiate a compromise with the hospital association, but talks broke down. He said the department’s new payment policies are “within the law.”
     "The key to this is doing it in a way that doesn't penalize the hospital" Salo says.  But it is not easy to change the health care model, in the context of Medicaid or in any other application. Health care constitutes 18 percent of gross domestic product (GDP). "There are a lot of people with money invested in the status quo. Another impediment is that dollar savings from long term, structural reforms don't show up on the short term-ledger. That sends a real mix message to hospitals. It is hard for them to believe state directors when they say 'trust us, we are doing the right thing' when they are doing a lot of stuff that looks awful."

     States also face federal rules which result in higher spending. Take the issue of "dual eligibles," for example. They are beneficiaries eligible for both Medicare and Medicaid benefits. These are particularly sick and "costly" individuals. In 2010 they accounted for about 15 percent of Medicaid enrollment and 40 percent of Medicaid spending. About 26 states have begun efforts to move three million dual eligibles into managed care programs in an effort to cut costs, according to The Senior Citizens League (TSCL). More than half of dual eligibles also have annual incomes of less than $10,000, and are more likely to receive nursing home care. “But the time is coming when the states and federal government will be under urgent pressure to cut Medicaid and Medicare costs,” says TSCL Chairman Larry Hyland. “TSCL is concerned that if states and the federal government don’t design and implement the changes the right way, beneficiaries’ may lose access to medically necessary care and quality.”
      In other instances, there may be obvious ways to reduce Medicaid costs. Medication adherence is a good example. A study released in July by the NYU Langone Medical Center looked at 2008 and 2009 data from more than 150,000 Medicaid patients in New York City, aged 20 to 64, and found that only 63 percent of those with the three chronic conditions took their prescribed medications. "The outcome of this study is concerning, as it shows a large number of people with chronic conditions that lead to cardiovascular disease aren't taking prescribed medications, which could prevent a potential stroke or heart attack," lead author Dr. Kelly Kyanko, an instructor in the department of population health at the NYU Langone Medical Center, said in a center news release.
     "We believe that patients and their doctors can work to improve medication adherence through simple measures such as switching to once-a-day or combination pills, keeping a pill box and obtaining 90-day refills instead of 30-day refills for medications they take on a regular basis," Kyanko said.
      So hospital pharmacies which get active in areas like medication reconciliation and medication follow up will have a chance to buffer the effect on their hospitals of the stormy winds blowing up around Medicaid. They will also have an opportunity to reduce the program's costs, $17.4 billion of which are attributed to prescribed drugs. No one expects pharmacists to start pulling rabbits out of their hats. But if they can start making Medicaid drug dollars disappear, that would help.