Managed Into the Red?

Texas hospital administrators aren’t thrilled by the Medicaid rate cuts they’re facing in the House’s proposed 2012-13 budget. But it’s the state’s plan to expand Medicaid managed care that’s keeping their CFOs up at night.

Proposed cuts in the rates health care providers are paid for treating patients covered by Medicaid would cost Texas hospitals a total of hundreds of millions of dollars a year. But that’s nothing, hospital officials say, compared to the expansion of Medicaid managed care — which could wipe out more than $1 billion in federal funds that sustain them each year. 

“I would hope,” said Charles Barnett, president and CEO of the Seton Family of Hospitals, “that whatever solution we derive at the state Legislature does not reduce the amount of federal funds that comes into the state to help us provide care.”

Medicaid, a joint state-federal program, covers 3.6 million needy Texans. The state’s share of the bill is roughly $22 billion per year — about one quarter of the entire Texas budget. The goal of Medicaid managed care is to provide patients with quality, comprehensive care while cutting costs by eliminating unnecessary tests and procedures. Critics argue it takes a toll on the bottom lines of health providers and forces them to do more with less.

Expanding managed care, in theory, should save the state money. But it could also have the unintended effect of forcing hospitals to forgo an important source of federal funding. Hospitals, and in particular public safety net providers — institutions like Dallas’s Parkland Hospital that provide care to the poorest patients with little or no private insurance — rely on what’s called “upper payment limit,” or UPL, dollars to make ends meet.

Because Medicaid reimbursements are so low that many hospitals lose money when treating these patients, the federal government sends matching dollars — the UPL funds — that provide some budget relief. But the money is contingent on hospitals operating in the fee-for-service model; if they’re in Medicaid managed care, they don’t qualify for the funds.

When Texas first rolled out Medicaid managed care in the mid-1990s, UPL wasn’t a lifeline for hospitals because the state’s Medicaid reimbursement rates were higher. But by 2005, when the Legislature was expanding its managed care program for the elderly and disabled, hospitals were so dependent on these supplemental federal dollars that they convinced lawmakers they should be exempt from it.

Facing a giant fiscal pinch this session, however, lawmakers’ first run at the budget not only expands Medicaid managed care from Texas’ urban regions into the rest of the state. It also eliminates the hospital carve-out, which could take with it half of the roughly $2 billion Texas hospitals get in the supplemental federal funds. 

Today, more Medicaid dollars are spent in hospitals than in any other single health care setting, including nursing facilities and doctor’s offices. In fiscal year 2009, Texas spent $3.3 billion — 14 percent of its Medicaid dollars — on hospital inpatient care.

The Texas Health and Human Services Commission estimates that expanding managed care for the elderly and disabled to hospitals could save the state nearly $30 million in its first two years. Combined with the expansion of Medicaid managed care into the rest of the state, and the premium taxes managed care plans must pay, the commission estimates the state would save roughly $600 million over the next biennium.

The hospitals, meanwhile, have run their own numbers. They can stomach the budget’s 10 percent Medicaid provider rate cut, which they estimate would cost them a combined $410 million a year. But they say they’ll struggle to stay in the black if they lose any of their federal UPL, which was distributed to 281 Texas hospitals, roughly half of them public, in the last fiscal year.

“In essence, the state is solving their budget problem at the expense of local communities,” said John Hawkins, senior vice president with the Texas Hospital Association. “We know we’re going to have to take some rate cuts. We know we’re going to see some level of managed care expansion. It’s the right thing to do. But at the end of the day, we need to hold hospitals harmless on UPL payments.”

Lawmakers say they’re working on ways to preserve these federal dollars, possibly by having local governments pool their own money to secure a federal match — one that would get funneled through managed care providers to hospitals. But whether local governments would buy into such a plan is uncertain, hospitals say. It could also be tough to sustain the same level of funding, added state Rep. John Zerwas, R-Simonton — and there’s already a dearth of trust between hospitals and managed care organizations.

“The UPL funds that come to some of these hospitals, hospitals that are providing a very important safety net, is the difference between being in the black and being in the red,” Zerwas said. “These are legitimate concerns.”

Hospitals were already expecting UPL dollars to drop, because recent federal funding has been augmented by stimulus dollars. With the advent of federal health reform, and the theory that far more Texans will soon be coming onto Medicaid or private health insurance rolls, they’re also expecting to lose out on other federal funding tied to serving indigent patients. 

“We have an obligation to reduce the overall cost of care for really all of the populations we serve,” Seton’s Barnett said. “If we reduce the amount of federal funds available to us to help do the kinds of things we need to do to change, it’s going to be more difficult for us to be successful in redesigning the delivery system.”