State's hospitals battle back over state's Medicaid funding experiment

Each October, New Hampshire and the state's hospitals engage in an accounting sleight of hand set up in 1991. Hospitals wire the state millions of dollars to pay the "Medicaid Enhancement Tax," and the state then wires the amount back, often within minutes.

The goal of the tax was to create the illusion of raising money so the state could apply for and receive more federal matching funds to cover uncompensated care costs for Medicaid services and indigent patients. Not all the federal funds go back to hospitals and doctors – New Hampshire has the second-lowest Medicaid reimbursement rate in the country – and money is diverted to the general fund. The ploy has been known over the years as "Mediscam."

"We used to joke and say 'What would happen if the state didn't wire this money back?'" said Mark Whitney, vice president for strategic planning at Exeter Health Resources, parent company of Exeter Hospital.

A majority of the state's 26 hospitals are about to find out the answer.

With the new budget that went into effect July 1, Exeter Hospital in October will make an estimated $10.5 million MET payment – based on a 5.5 percent rate on net patient revenues – but this time it will get nothing in return. While Republican leaders hailed the 2011-2013 budget as balanced and without new taxes or "gimmicks," you won't find much agreement over that claim from hospitals. They see a $250 million two-year payout to the state for a tax that, well, really wasn't supposed to be a tax at all.

"It's a tax increase, plain and simple," said Steve Ahnen, president of the New Hampshire Hospital Association. "It was a dramatic overreach." And it threatens, he said, the financial solvency of a majority of hospitals in the state and to unleash a chain reaction of costly consequences for health care in the state.

Already, there have been layoffs at three New Hampshire hospitals — the Elliot in Manchester, Southern New Hampshire Medical Center and St. Joseph Hospital in Nashua. Others, such as Cheshire Medical Center in Keene, have said they're considering making such cuts. And still others have discussed at minimum a decrease in services.

The hospitals also haven't taken the tax sleight of hand lying down. Ten of them have filed a lawsuit against the state alleging the Legislature violated its legal obligation to reimburse them for Medicaid costs. Many have also filed tax rebate requests. They're taking a second look at potential overpayments they made to the state that went beyond federal Medicaid guidelines.

'To the bitter end'

According to Whitney, the $10.5 million MET payment with no refund will essentially wipe out Exeter's operating margin and put Seacoast region community health programs at risk. Frank McDougall, vice president of government relations at Dartmouth-Hitchcock Medical Center in Lebanon, said his hospital paid out and received back from the state some $28 million last year.

"We paid more than $60 million to treat Medicaid patients last year," McDougall said. That number is expected to rise in 2011 and 2012 to more than $100 million as patient volume continues to increase, he said.

"We plan to fight this to the bitter end," McDougall said.

McDougall said hospitals are doing their best to make sure federal regulators are aware of the Legislature's latest bid to maximize federal Medicaid dollars while paying even less for Medicaid services. If this political and economic battle of wills was a movie, it might be titled "Son of Mediscam."

Will the feds approve? That answer may not be known for years. Each state is required to have a plan as part of the Medicaid partnership between the federal government and the states. In reality, the partnership is one part regulatory and one part cat-and-mouse, with states trying to maximize federal money while minimizing payouts. As states adjust requirements, needs and budgets, they file those changes for approval from the Center for Medicaid and Medicare Services.

"It's a real funky animal," said Lisabritt Solsky, deputy Medicaid director for the state, about the state's constantly evolving Medicaid plan.

It reflects, she added, "the past, present and future simultaneously." For example, the CMS is currently in discussions with the state to clear up audits from 2004 to 2006 and the state faces a $35 million overpayment bill.

McDougall said the $35 million amount is based on a familiar theme – the state is over-reliant on the MET to determine payments known as Medicaid disproportionate share hospital payment, or DSH. The MET was established to target DSH funding. McDougall says until last year, in an attempt to comply with Medicaid guidelines, the actual disbursement of DSH funds was not tied to the actual amount of hospital services.

Solsky said the state's Medicaid plan is being modified, but it could be months and more likely years before any CMS determination is made.

Potential consequences

Meanwhile, Solsky said, the biggest change to the state's Medicaid program was Senate Bill 147, which has mandated a transfer of all Medicaid services to a private managed care program on an expedited basis by July 1, 2012.

One national consultant familiar with New Hampshire's Medicaid regulations and practices believes in the end the CMS will shoot down this latest legislative gambit. New Hampshire isn't the only state that plays the Mediscam game but "the feds will take a very dim view of this," said Steve Scheer, a Chicago-based principal with Health Management Associates and adviser to the New Hampshire Hospital Association.

More importantly, he added, the CMS will need to disapprove because many states are already watching closely. If the CMS grants approval, some 33 other states could jump in line and, theoretically, it could lead to a dramatic rise in Medicaid payments to the states — not exactly an ideal scenario, given the immense debt and deficit pressures faced by the federal government.

The 2011 legislatively mandated Medicaid changes – which included a change in the MET formula to increase the tax to hospitals – could be disallowed by the CMS, and that also would put in jeopardy potential matching funds from the feds. But that would happen down the road, when a future Legislature could be left dealing with the financial consequences of a payback and scrambling to fix a budget hole.

The Hospital Association's Ahnen said that hospitals aren't pleading poverty, but are frustrated to be used as an ATM by the state to balance the budget without regard to potential consequences. There's also another level of frustration: "The state now intends to use (MET) revenue, and not general fund revenue, to fund that portion of the budget that pays providers for serving Medicaid patients," he said. "In essence, hospitals will be paying themselves."