Texas Hospitals Face Dramatic Payment Overhaul

The budget that state lawmakers are poised to accept attempts to eliminate wide variations in what hospitals are paid by Medicaid for performing the same procedures on similarly sick patients — a sweeping change in how Texas hospitals are funded.

In a controversial move, the state budget sets the same base payment rate — called a standard dollar amount, or SDA — for most Texas hospitals starting Sept. 1. (Today, all hospitals have their own unique payment rate, determined by a complex formula that weighs a variety of factors.) The budget allows for rate add-ons for hospitals that perform certain high-cost functions, like trauma care and medical education. It also has a provision to account for regional variations in wages and cost of living.

The change follows a Texas Tribune analysis that showed the costs of common medical procedures paid for by Medicaid — the joint state-federal health care program for indigent children, the disabled and the very poor — varies dramatically from hospital to hospital and region to region. A routine delivery at St. Luke’s The Woodlands Hospital costs Texas Medicaid twice as much as at Christus St. Catherine Hospital in Katy, just 50 miles away. The Laredo Medical Center bills Medicaid nearly $5,500 more for a coronary bypass than the Harlingen Medical Center, though both hospitals are along the Texas-Mexico border.

Lawmakers, endorsing the SDA switch as a cost-saving measure in a tight budget cycle, say the change will save Texas tens of millions of dollars over the next two years. But some hospitals, already well into their budgets for the next year, argue it will send their finances into upheaval. They're already facing an 8 percent Medicaid rate reduction as a result of this legislative session's cuts. 

The budget conferees added a provision to the SDA rider that allows the Health and Human Services Commission to use up to $20 million in general revenue over the next year to help hospitals dealing with unexpected losses from the switch to a base SDA. 

"What's important to recognize is, there are legitimate reasons for cost variations in the system," said Amanda Engler, senior director of media relations for the Texas Hospital Association. "The payment system needs to be flexible enough to recognize that."