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Think Tank

Should State Add New Hospital Fee To Increase Medi-Cal Payments?

As California’s budget taketh away from health care efforts, legislators and health care providers are looking for new ways for somebody to giveth.

The current budget, with several cuts to health care and related social service programs, includes a $1.3 billion reduction in Medi-Cal as well as cutbacks to Healthy Families.

Assembly member Dave Jones (D-Sacramento) introduced a bill, AB 1383, that would establish a new hospital fee to help California secure additional federal funds for Medi-Cal, California’s Medicaid program. Hospitals that serve a large percentage of Medi-Cal beneficiaries say the measure would help boost their bottom lines, while other hospital operators say the new fees would adversely affect their facilities.

The bill calls for hospitals to pay a provider fee for each Medi-Cal admission and could generate more than $2 billion a year, which would be eligible for enhanced federal matching funds at 62% instead of the customary 50%. Some of the money — as much as $320 million — would be earmarked for use by children’s health coverage programs, including Healthy Families.

AB 1383 passed the Senate Appropriations Committee in August.

We asked several legislators and health care providers what impact AB 1383 might have on the health care delivery system in California. We also asked how the legislation would affect California’s budget.

Hospital operators, legislators who oppose the bill and others were invited to contribute, but declined.

Participants in this edition of the Think Tank are:

California Needs Enhanced Federal Payments

Assembly member Dave Jones (D-Sacramento)

California’s hospitals are under serious financial pressures today.  This is especially true for the hospitals that serve our most vulnerable populations such as children and the disabled.  The rates paid by Medi-Cal make our state among the lowest in reimbursement rates.  The current economic downturn has contributed to the negative bottom lines by increasing the numbers of uninsured and underinsured. 

The federal Medicaid program, Medi-Cal in California, authorizes states to levy fees on health care providers as long as the fee meets federal requirements.  Under these funding methods, states collect the fee from providers. It is matched with federal funds to allow increased reimbursement to the providers. The assessment must be “broad based” and uniformly applied to all providers within specified classes of providers (for example, states cannot limit the provider taxes only to Medicaid providers), and states are prohibited from having a provision that would ensure providers are “held harmless”.

Forty-five states have Medicaid provider fees, including 22 states with hospital provider fees.  The state must obtain approval from the federal government in the form of a State Plan Amendment.

Under the American Reinvestment and Recovery Act (ARRA), signed by President Obama in February 2009, the federal match for state Medicaid expenditures was increased from 50% to 61.59% retroactively from Oct. 1, 2008, through Dec. 31, 2010.  

AB 1383 takes advantage of this opportunity for enhanced federal funding by enacting a time-limited fee on hospitals as permitted under federal law. The fee and the allowable enhanced federal match are paid out to hospitals as grants or supplemental payments.  To address the crisis in children’s health care, AB 1383 makes $320 million available for children’s health coverage.  

Providing a rate increase using state general fund dollars is not possible given the state’s dire fiscal situation.  These supplemental payments are also a way of reducing the “hidden tax” where below-market Medi-Cal reimbursement rates shift costs on to insured individuals, families and employers.  The additional money for children’s coverage will help children keep their health care coverage.

AB 1383 is needed immediately to take advantage of the enhanced federal match, to help hospitals serve needy patients, and to stave off disenrollment of children from coverage. 

A Good Idea, but Still Not Enough

Anne McLeod
Vice President of Finance Policy, California Hospital Association

In 2008, hospitals received $4 billion less in payments than the actual cost of providing care to California’s Medi-Cal beneficiaries. 

Federal law allows for federal financial participation to help fill this gap.  In order to draw down the federal funding, the state must provide the non-federal share.  However, in light of the state’s financial crisis, it is unlikely that the state would be able or willing to provide its share of funding.

A fee on hospitals provides an alternative source of the non-federal share of funds, even though the net benefit to hospitals is half of the benefit that would be generated if the state put up the funds.

A fee on hospitals is complex.  Because Medi-Cal is so drastically underfunded, the amount of uncompensated costs is substantial, requiring a significant amount of non-federal funds to be raised.  The fee dollars and the matching federal funds are essentially redistributed among the providers in the form of increased Medi-Cal payments.

With more than 400 hospitals in the state, the size and scope of a hospital fee is complicated further by a broad range of business models and the state’s geography, which creates micro-economies that do not evenly distribute Medi-Cal patients across all hospitals. 

The redistributive effects of a fee prohibit many hospitals and health systems from benefiting from this concept.  Strict federal laws forbid the structure of the fee or the method of the increased payments from ensuring that all hospitals benefit from the proposal. 

AB 1383 puts forward a proposal developed by California’s hospitals.  The proposed legislation imposes a fee on hospitals to raise more than $2 billion annually to be used to obtain the federal matching funds through December 2010.  The funds, together with federal matching dollars, generate supplemental Medi-Cal payments to hospitals to ensure access to care for the state’s low-income population. 

Several critical factors change after Dec. 31, 2010, and the hospitals are considering whether long-term programs can be constructed in a way to stabilize Medi-Cal hospital rates while protecting hospitals from the risks associated with a hospital fee. 

In addition, the hospital fee provides the state with $320 million annually for children’s coverage, which can be used to draw down additional federal matching funds.  This generous commitment will ensure that hundreds of thousands of kids have health care coverage.

The Department of Health Care Services must negotiate a deal with CMS to implement AB 1383. The bill includes limited protections for hospitals and defined flexibility to the state. This delicate balance is necessary to preserve the integrity of the model and its impact on hospitals, without adversely affecting the new Medi-Cal waiver that will begin on Sept. 1, 2010.

While the net benefit to the hospital industry is favorable, it falls short of closing the gap on uncompensated Medi-Cal costs.  Hospitals will still be left with more than $2 billion in uncompensated costs for providing care to Medi-Cal beneficiaries.