Medicaid cuts to further pinch ailing providers

Local hospitals are bracing for a round of Medicaid spending cuts that executives say could be the worst in decades and lead to more cutbacks in their organizations.

Rising health care costs and a surge in the number of Medicaid patients have increased the state's obligation to the government health insurance program for the poor and disabled by $777.7 million over two years.

The state also must find $1.2 billion to replace stimulus money that the federal government provided last year to help Virginia cope with rising health care demands and declining state revenue. That funding stops at the end of this year.

Former Gov. Timothy M. Kaine's state budget proposal calls for freezing the rates Medicaid pays hospitals for inpatient services a second consecutive year and other cuts to the program.

But hospital officials say Medicaid reimbursement rates already are well below what it costs to provide services and that further reductions would strain their facilities.

Now, the General Assembly is trying to write a budget that probably will need to absorb a $1.9 billion shortfall in addition to Kaine's proposed reductions, and hospital executives worry that the cuts could go deeper.

Their representatives are making their case to legislators. Both houses are scheduled to reveal their budget plans later this month.

"Last year was bad, and this year is a far more Draconian suggestion," said Michael Corcoran, chief financial officer of Chesapeake Regional Medical Center. "It's kind of a slow death, and eventually you'll hit the breaking point."

Medicaid provides insurance for low-income families and the disabled with funding from the state budget and an equal federal match. Beyond federal minimums, states can dictate eligibility requirements, services that are covered and reimbursement rates.

At about $2.6 billion, Medicaid accounts for more than 15 percent of Virginia's annual general fund budget.

Spending on the program grew more than usual last year, as the number of people receiving Medicaid swelled by about 5 percent. Local hospitals also have seen an uptick in the percentage of Medicaid patients, as well as a rise in the number of uninsured patients.

The state's policy is to set Medicaid hospital reimbursement rates at 78 percent at least every three years and then adjust annually for inflation, according to Craig Markva, a spokesman for the Virginia Department of Medical Assistance Services, which administers the program. But the General Assembly can change that.

To control costs, Virginia and 38 other states have withheld increases or reduced reimbursement rates in recent years, according to the Kaiser Family Foundation.

Last year, the state's hospitals received about 72 percent of their cost on Medicaid patients. That's because reimbursement rates were frozen last year and weren't fully adjusted for inflation the previous year.

The Virginia Hospital and Healthcare Association estimates that Medicaid reimbursement could drop to 50 percent by 2012 if the General Assembly cuts the budget 15 percent across the board to make up for the shortfall.

"It's the worst treatment, in terms of rates, that we have ever seen," said Laurens Sartoris, the association's president.

Local hospital executives say it could add up to the loss of millions of dollars, noting that any state cuts will be matched dollar-for-dollar by a reduction in federal funding.

Children's Hospital of The King's Daughters probably would suffer most in South Hampton Roads.

About half of the hospital's patients are covered by Medicaid, enough that the program pays CHKD additional "disproportionate share hospital" funds to offset the losses. About 36 percent of the hospital's revenue last year came from Medicaid - approximately $88 million, said Jim Dahling, its president and CEO.

Because Kaine's plan includes freezing the disproportionate share hospital money and eliminating special payments for facilities with high-volume neonatal intensive-care units, CHKD would lose on more than just reimbursement rates. Its estimated loss under that proposal: $9.1 million a year.

After cutting $6.5 million in expenses last year, including 137 jobs, CHKD may have to trim more positions and scale back the availability of some services, Dahling said.

"The fact of the matter is we don't have much to work with, and any cut to us is devastating to what we're trying to accomplish here," he said.

For other local hospitals, Medicaid makes up 6 to 9 percent of their revenue. The Medicaid cuts come as privately insured patients delay procedures or other services to save money, forcing the organizations to make reductions.

Bon Secours Hampton Roads Health System sustained a $12 million loss in the budget year ending last summer and eliminated 200 positions through attrition and layoffs between fall 2008 and last spring.

Bon Secours, which received $35.6 million from Medicaid last year, stands to lose up to $7.2 million a year by 2012 if Kaine's plan is followed, said chief financial officer Greg Simia.

"You can sustain one year of these kinds of unfortunate trends, but doubled-up, back-to-back, I think that makes it more serious," Simia said.

Under Kaine's budget, Chesapeake General Hospital faces losing $7.6 million over two years from potential Medicaid cuts, Corcoran estimated. Sentara Healthcare's seven Hampton Roads hospitals could see a $20 million decrease next year, said Vicky Gray, a company senior vice president.

To absorb losses, providers likely will raise what they charge private insurance companies, said Sartoris, the president of the state hospital association.

"What we're being forced to do, to a greater extent than ever before, is to become a tax collector for the state," he said.

While some local executives said they wanted to be paid "fairly" or "at an appropriate level" by Medicaid, others were more concrete about their hopes.

CHKD's Dahling wants hospitals with a large number of Medicaid patients to be exempt from reductions in disproportionate share hospital funds and from the elimination of payments for high-volume neonatal intensive-care units.

Given the dire economic situation, Gray said most health care providers will have to accept some cuts. She said Kaine's proposal would be palatable.

Amy Jeter, (757) 446-2730, amy.jeter@pilotonline.com