Report Title:

Medicaid Provider Payments

Sets Medicaid payments within limits of appropriations at a level that more fairly compensates providers, brining payments closer to a level that covers the actual costs of quality care offered by providers. (SB654 HD1)

A BILL FOR AN ACT

SECTION 1. The legislature finds that a financial crisis exists in the State's Medicaid payment system to providers of medical care to the poor. The legislature further finds that immediate action is necessary to rescue Medicaid providers from financial ruin.

Medicaid was established in 1965 as a jointly funded federal and state program providing medical assistance to qualified low-income people. At the federal level, Medicaid is administered by the Health Care Financing Administration, an agency that is part of the U.S. Department of Health and Human Services. Within a broad legal framework, each state designs and administers its own Medicaid program under a state plan approved by the Health Care Financing Administration for compliance with current federal law and regulations.

Hawaii’s Medicaid program is administered by the department of human services. Hawaii’s Medicaid plan covers the aged, blind, and disabled population using a fee-for-service payment system. In addition, Hawaii has received a federal waiver for providing medical services through the QUEST program to a separate population that includes families receiving financial assistance through the Temporary Assistance for Needy Families program and others. The federal waiver allows Hawaii to contract with health plans to provide a set of medical services for a specific rate per member per month. This managed care approach enables the State to control its costs by requiring that Hawaii provide services through QUEST at a funding level that is no more than the cost under a fee-for-service system.

Medicaid represents a large proportion of revenues to a typical health care facility.

Hospitals and long-term care facilities often provide free medical services because, whether public or private, they have a public purpose and are committed to maintaining and improving community health. In many cases these facilities provide care to those who do not have the means to pay. A recent study shows that in the year 2000, hospitals and long-term care facilities in Hawaii provided a total of more than $70,000,000 in health care for which they were not compensated. Furthermore, many facilities sponsor health programs benefiting the community for which any revenues that may be generated are far from covering costs. Some facilities sponsor programs to educate doctors and nurses, and they are not fully compensated for sponsoring those programs.

The legislature further finds that long-term care facilities have been particularly impacted by low Medicaid payments because of the typically high proportion of Medicaid patients in these facilities. Nationally, Medicaid pays for about seventy per cent of the residents in long-term care facilities. In Hawaii, Medicaid pays for about seventy-five per cent of the total payments for care in long-term care facilities. Experience on the mainland has shown what can happen if government payments are too low. For example, in Florida nearly one-fifth of the nursing home beds are owned by companies that are in bankruptcy proceedings. In Washington, nearly one-fifth of the nursing homes are either in bankruptcy or have recently shut down. In Texas, more than one-fifth of the nursing homes are in bankruptcy. Medicaid payments that do not cover the actual costs of care, along with low Medicare payments, have been cited as a major reason for bankruptcies of long-term care facilities throughout the nation.

The legislature further finds that the State determines the level of Medicaid payments, within federal limitations. The state Medicaid plan contains a formula for payments to hospitals and long-term care facilities that includes an inflationary factor, known as the DRI McGraw-Hill inflation factor, as estimated in DRI McGraw-Hill Health Care Costs that factor in National Forecast Tables, Health Care Financing Administration's Nursing Home Without Capital Market Basket, as well as a factor for a return on equity. The department of human services recently submitted a proposal to the Health Care Financing Administration to amend the state Medicaid plan to provide only one-half of the DRI McGraw-Hill inflation factor, and none for return on equity. With the passage of time, the proposed amendment would result in payments falling further and further behind equitable levels. The effect of the shortage would be a reduction in payments to all hospitals and nursing homes that provide care to the aged, blind, and disabled population.

The reduction in Medicaid payments occurs at a time when most of Hawaii’s hospitals and long-term care facilities are struggling financially because of the increasing labor and non-labor costs of providing care. In an effort to reduce losses, health care facilities have been laying off workers, freezing vacant positions, and eliminating programs. For example, Queen’s Medical Center has laid off nearly two hundred employees and closed its cardiac rehabilitation unit. It was planning to close its dental clinic, which fortunately will now be kept open because of financial support promised by the State, but only for the next year. These cost-cutting measures have been attributed to lower Medicaid payments. A close examination of health care in Hawaii reveals that its health care infrastructure is at risk, and in turn, so is Hawaii’s reputation as the "Health State."

The financing of health care becomes problematic whenever payments are lower than the actual costs of providing the care. In the past, providers have been able to shift much of the burden of paying for Medicaid patients to other sources of revenue. However, the ability to "cost shift" has become increasingly difficult because of changes in the health care environment. For example, managed care has resulted in significantly reduced payments from private payers. In addition, Medicare payments for older Americans have been reduced significantly as a result of the Balanced Budget Act of 1997, and these payments have been only partially restored as a result of subsequent relief efforts. The legislature further finds that in recognition of the current structure of the health care environment, equity dictates that Medicaid pay its fair share for health care.

Through the QUEST program, the State negotiates with health plans to provide health care for a specified rate per person per month. It has been the practice to hold the per capita rate the same through the several years of a contract with a health plan without inflationary adjustments, even though the inflation for health care is typically higher than the inflation for the economy in general. The legislature further finds that Hawaii’s Medicaid program should acknowledge the reality of inflation and adjust payments accordingly.

The purpose of this Act is to set Medicaid payments within limits of appropriations at a level that more fairly compensates providers, by bringing payments closer to a level that covers the actual costs of quality care offered by providers who must survive financially to continue to treat Medicaid patients.

SECTION 2. The department of human services shall:

SECTION 3. In negotiating future contracts with health plans to provide health care under QUEST, the department of human services shall propose adjustments within limits of appropriations to the per capita payments based on an increasing factor.

SECTION 4. There is appropriated or authorized from the sources of funding indicated below the following sums or so much thereof as may be necessary for fiscal years 2001-2002 and 2002-2003 to be used to bring reimbursements to providers closer to the actual costs of care for aged, blind, and disabled Medicaid recipients:

FY2001-02 FY2002-03

General funds: $3,300,000 $3,400,000

Other federal funds: $4,203,530 $4,387,448

The sums appropriated shall be expended by the department of human services for the purposes of this Act.

SECTION 5. There is appropriated or authorized from the sources of funding indicated below the following sums or so much thereof as may be necessary for fiscal years 2001-2002 and 2002-2003 to be used for an increasing factor for health care payments for the QUEST program:

FY2001-02 FY2002-03

General funds: $3,270,000 $3,636,119

Other federal funds: $4,249,800 $4,725,500

The sums appropriated shall be expended by the department of human services for the purposes of this Act.

SECTION 6. This Act shall take effect upon its approval; provided that sections 4 and 5 shall take effect on July 1, 2001.