Because of the new health care law, the federal government assumes that more low-income people will be covered by insurance. As a result, it will begin reducing payments next year to hospitals that treat high numbers of poor patients — and that worries local hospital leaders.
They say that even with increased insurance reimbursement from newly covered patients, it’s going to be a tall order to replace those lost “disproportionate share” dollars.
“The hope here is more people will have coverage. Whether that coverage pays me what it costs to deliver the care at the end of the day … it looks pretty scary, actually,” said Tim Cooper, chief financial officer at PMH Medical Center in Prosser, a public hospital district. “We’re going from day to day and month to month, and hopefully it will. You really don’t know.”
In the health care world, disproportionate share (DSH, referred to as “dish”) payments function like levy equalization funds for poor school districts: It’s money from the government to compensate for the cost of treating a disproportionately low-income population, which often has government insurance with low rates of reimbursement.
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To illustrate levy equalization, lawmakers often compare property-poor school districts like Yakima with property-rich (and generally wealthy) districts like Bellevue. A similar comparison can be made with hospitals.
In 2012, only 6 percent of admissions and 6 percent of patient days at nonprofit Overlake Hospital Medical Center in Bellevue were Medicaid patients. At nonprofit Yakima Valley Memorial Hospital, 43 percent of admissions and 39 percent of patient days were paid by Medicaid. Overlake has 287 hospital beds compared with Memorial’s 226.
Medicaid dollars, at significantly lower reimbursement rates than private insurance, made up 20 percent of Memorial’s revenue that year, but only 4.2 percent of Overlake’s, according to state Department of Health year-end financial reports.
To balance that out and help hospitals like Memorial keep their doors open, both Medicaid and Medicare — the state-federal health programs for the poor and older Americans — distribute DSH payments based on the number of Medicaid and Medicare patient days per year. Generally, payments go to hospitals where at least 32 percent of patients are Medicaid.
But with expanded Medicaid under health care reform and access to individual insurance through the new state insurance exchanges, state and federal agencies expect hospitals to be recouping more money in reimbursement for patients who were previously uninsured or underinsured. This, they reason, makes DSH payments less necessary. So the health care law includes a six-year schedule for reducing those payments by $18.1 billion nationwide between 2014 and 2020, eventually phasing out DSH entirely.
“Over time as DSH goes away, part of that is going to force the hospital to look into their operations and do what they can to maintain the delivery of care in a way that’s needed, medically necessary, and at the same time, maintain the value and the cost so they are operationally viable,” said Thuy Hua-Ly, chief financial officer of the Health Care Authority, which manages Medicaid in Washington.
Memorial receives about $8 million annually in Medicare DSH and about $3 million in Medicaid DSH, and expects to lose $2.1 million of its Medicare DSH next year. Medicaid reductions have not been determined.
In 2012, the hospital’s net patient services revenue — money Memorial receives for delivering care — was about $351 million, but it posted a net revenue loss of about $6.6 million. Hospital officials attributed the loss to two unusual, one-time items; taken out, net revenue was back in the plus column at about $5.5 million.
Hospital directors say the lost DSH money will likely be greater than the reimbursement they gain from newly covered patients.
“This has no tie whatsoever to more individuals being brought in under Medicaid,” said Rick Linneweh, Memorial’s CEO. “The irony of that is, your Medicaid days will go up as more people will get on Medicaid, but it doesn’t increase the disproportionate share.”
He doesn’t expect increased insurance coverage to offset the loss.
“You’re going to get 35 cents on the dollar (in typical Medicaid reimbursement), when you were getting DSH payments for more than that,” he said.
At Memorial, Linneweh said, the high volume of Medicaid and Medicare patients — for whom reimbursement changes based on the whims of state and federal politics — is what led the hospital to exit physical and occupational therapy, inpatient mental health and orthopedic surgery. Those services were already provided elsewhere in the community.
Nationwide, hospitals in states that didn’t expand Medicaid under health care reform will be hit much harder: Their DSH payments will go away without the benefit of increased reimbursement from newly covered Medicaid patients.
In Washington, hospitals all have at least one person assigned to help enroll eligible patients in expanded Medicaid.
“Hospitals have a lot of skin in the game,” said Julie Petersen, CEO of PMH in Prosser. “If people don’t come on board with those programs, DSH will be gone and we’ll still have the uninsured showing up in our emergency rooms.”
Cooper says about 37 percent of PMH’s patient days are Medicaid. The hospital has received between $380,000 and $571,000 in Medicaid DSH for the past three years, while providing about $3.25 million in charity care and bad debt every year.
“It’s not a lot, when you’re doing the millions of care and you get a few hundred thousand … but it helps. Every little bit helps,” Cooper said.
PMH has been aggressively seeking greater efficiency in anticipation of reduced revenue. Petersen said last year the board cut operating expenses by 10 percent, bringing the hospital back to about 2009 spending levels.
Designated a “critical access hospital,” meaning it serves a rural population with limited access to care, PMH is reimbursed at a higher rate than “prospective payment” hospitals like Memorial. That funding appears safe for now, but if it were to go away, Petersen said, “it would be devastating for rural hospitals.”
Sunnyside Community Hospital is also a critical access hospital, and also receives Medicaid DSH payments. In the past three years, the hospital has gotten between $890,000 and $1.3 million per year. Its 2012 year-end report showed a net revenue of about $3.2 million, making the DSH payments a substantial portion of the total.
In a brief statement, Sunnyside CEO John Gallagher wrote that while reimbursement levels are changing, “We remain confident that Sunnyside Community Hospital and clinics will be able to continue our mission: to provide comprehensive quality care to the region.”
Yakima Regional Medical and Cardiac Center does not receive Medicaid DSH money, though Toppenish Community Hospital, also owned by Florida-based Health Management Associates, receives around $900,000 a year.
A requirement to receive DSH money is providing labor and delivery services, which Memorial, Toppenish, Sunnyside and PMH all do.
The bright spot for Washington hospitals is the Safety Net Assessment, which was originally passed by the Legislature in 2010 and re-upped this year for another four to six years. Through it, hospitals pay a tax to the state, which is then matched with federal dollars, and the state sends the money back out to the hospitals in the form of increased Medicaid reimbursement.
It was first passed to counteract a 4 percent rate cut in the state’s Medicaid reimbursement to hospitals during the economic downturn. Now, that money will continue to help hospitals absorb the loss in DSH payments over the next few years. In 2014-2015, the state hospital association says, hospitals are expected to receive $220 million in net benefit from the assessment.
While the safety net money will help, there’s still considerable uncertainty around the exact impacts of the DSH cuts. Linneweh says that’s a management challenge that could result in reduced services.
“The only thing that can really change is bringing in new services for revenue, the amount of increases you can get in commercial insurance, or reduction in expenses. That’s how you reach your bottom line,” Linneweh said. “There will be questions as to what services do or do not stay in the Yakima community.”
Date: December 5, 2013