California Hospitals Wonder if Feds Will Kick in for Health Reform

California will need a pot full of cash from the federal government to make Gov. Schwarzenegger’s health reform plan a reality. State officials are confident the plan they devised will make that happen smoothly, without any need for budgetary or legislative drama.

“We’ve spent a lot of time working on the federal funding to make sure it is very solid, and it is,” said Stan Rosenstein, deputy director of medical care services in the California Department of Health Services. He and other state officials visited Washington last week for a series of high-level meetings, including a special briefing for the state’s Congressional delegation. By his reckoning, only $250 million of the $3.7 billion in new federal funds will require a waiver from current rules. The rest will come automatically from Washington.

But the state’s hospital industry, which consumes the biggest single share of health spending, fears the plan could fall victim to the crisis surrounding the huge federal budget deficit. A proposed change in federal regulations covering the way hospitals calculate their costs to receive Medi-Cal funds could “cut the legs out from under” the governor’s program, warned Anne O’Rourke, who represents the California Hospital Association in Washington, D.C.

Health Care Costs Keep Growing

The cost of health care consumes about 16% of the vast economic output of the nation and is growing rapidly, outpacing the growth in the general economy and in workers’ wages. At the same time, the states have become the laboratories for reform, and California is among a growing list of states in line to demand more funds to care for the uninsured.

However, federal officials have just issued a regulation that will make it tougher for hospitals to get reimbursed by the federal government for their spending to treat poor people who don’t have health insurance, according to O’Rourke.

It’s all about funding for Medi-Cal, California’s version of the national Medicaid program. Medi-Cal is a matching program. For every dollar spent by the state, the federal government contributes a dollar. California has been notoriously tight-fisted when it comes to the rates Medi-Cal pays doctors, hospitals and nursing homes, at least compared with the rates in other states. New York, for example, spends more than twice as much per Medicaid beneficiary as California spends.

Gov. Schwarzenegger plans to increase Medi-Cal reimbursement rates. Under the Schwarzenegger plan, the state would put up $1.6 billion for higher payments and the federal government would match it. This would be automatic under current law, Rosenstein said.

Rates of payment have been very low in California for physicians and hospitals for the last 20 years. Rosenstein said, “The governor has wanted to address that as part of the ‘hidden tax.'”

The theory is that many uninsured people get their care — routine care as well as urgent services — from hospital emergency departments, a situation that creates losses for hospitals. To offset those losses, hospitals increase their charges to their patients who do have health insurance. So the cost of health insurance rises, making it a hidden tax.

California Will Ease Eligibility

California also plans to increase the income eligibility levels for families, permitting more poor parents to qualify for Medi-Cal. The state already has broad powers to do this, Rosenstein said. This would result in $1.7 billion more in outlays by California, matched by an identical amount from the federal Treasury in Washington.

In both cases — the higher payment rates for hospitals and doctors, and the boost in eligibility levels — current formulas make it an automatic process for the state to get the money without any need for administrative or legislative action in Washington, according to Rosenstein.

But what state officials see as a smooth glide path is strewn with massive boulders, as viewed by California hospitals. “We are hopeful but very skeptical,” said O’Rourke of the hospital association, referring to a new rule that she says will change the way costs are calculated by hospitals under Medi-Cal and will cut into their reimbursement.

If the Bush Administration goes forward with this rule, announced in January and scheduled to begin in September, it is hard to believe the governor can be successful in getting the cash he needs, according to O’Rourke. “We are doing everything we can legislatively” to block the rule, she said, “but “we do not know how things are going to end up.” The hospital group gives the governor credit for “trying to reach out and include us in this process,” she said. “We’re encouraged about the chance to have a dialogue, but we need to acknowledge” that the new rule could doom the state’s chances of getting the new funds, she said.

Officials Offering Assurances

High-ranking officials at HHS apparently are telling California that the new rule that worries O’Rourke will not hurt the state. She remains dubious.

Without cash from Washington, the governor’s plan would be stymied. The overall package of $12 billion depends on more than $3 billion in the new cash to Medi-Cal as described above. Hospital administrators already are nervous about the new 4% tax proposed by the governor.

The bottom line is that California and other states want more money from Washington to help expand health care coverage to the uninsured. Faced with a huge and growing budget deficit, Washington wants to figure out ways to curb health care spending, rather than expand it. One of these hopes has to give way.

Related Topics

Health Care Costs Health Industry Insight Insurance Medi-Cal The Health Law