The state should establish a replacement for Texas Disproportionate Share Hospital (DSH) Programs I, III and IV.


Background
The Medicaid Disproportionate Share Hospital (DSH) program was established by the federal government to help hospitals that carry a large burden of uncompensated and indigent care. The program provides federal funds for such hospitals at a matching rate of about 64 percent. Each state designs its own program, and Texas has four components, commonly known as Dispro I, II, III and IV.

Under new federal law, after June 1993, the DSH program in Texas will lose approxima tely $500 million annually in federal matching funds unless the state takes action to replace the Dispro III and IV components of the program that will cease at that time. These components must be replaced because the use of voluntary donations as match fo r federal funds in the Medicaid program a feature of Texas current Dispro III and IV will be prohibited by federal law. This means that private, nonprofit hospitals cannot contribute to these programs to receive money as they have in the past.

Texas DSH programs also will become permanently capped this year at the fiscal 1993 level of $1.5 billion in state and federal funds.

Additionally, the state legislation authorizing the Dispro I program, which remains legal under federal law, will also expire on August 31, 1993.

Under Dispro III, the state currently assesses 24 high-volume public and non-profit Medicaid providers and dedicates 95 percent of this assessment and its federal funds to the same hospitals. Assessments on the non-profit hospitals are cons idered voluntary donations.

Texas dedicates the remaining five percent of the assessment and its federal funds to the state s rural hospitals under Dispro IV. Three rural Mental Health and Mental Retardation (TxMHMR) hospitals also are included under the program.

Dispro I and II will not be affected by the new rules. Dispro I uses intergovernmental transfers from state hospitals and 19 local hospitals. The transfers from the 19 hospitals and a supplemental appropriation fund payments to 110-120 hospitals annually. Dispro II is using intergovernmental transfers from three University of Texas teaching hospitals as state match for $271 million in federal funds in fiscal 1993. Because Dispro I state legislation will expire at the end of the fiscal year, the st ate can reconsider this program in conjunction with Dispro III and IV.

Altogether, local hospitals in Dispro I, III and IV will receive an estimated $525 million in federal funds in fiscal 1993.

Texas has several options to respond to the new federal rul es. First, the Legislature could direct the official Medicaid agency, which is in the process of changing from the Department of Human Services (DHS) to the Health and Human Services Commission (HHSC), in conjunction with other appropriate agencies, to dev elop and request approval for a redesigned Dispro program which replaces Dispro I, III and IV programs by no later than September 1, 1993. 1 However, without legislation, revenue from a revamped Dispro program cannot be certified by the Comptroller and therefore, would not be counted toward the state s budget requirements for the next biennium.

A second option could be to replace the current Dispro III program with a similar one that involves mandatory transfers from some of the state s public hospital districts and subsequent payments to these districts and to the non-profit and private hospitals who previously contributed voluntarily. This proposal has been discussed by local proponents.

The problem with this approach is that private, non-profit hospitals who contributed something last year to receive payments would now pay in nothing but would still receive funds, since the federal law has changed regarding their participation. For instance, last year 24 public and non-profit hospitals paid into Dispro III and received payments; under the new rules, only the public hospitals could pay in, but all would receive funds. This would amount to a major shift of funds from local public hospitals to private, non-profit hospitals.

This approach also ignores state i nterests. Texas has an opportunity to maximize funding for the state through the intergovernmental transfer process. Making payments to private, non-profit hospitals, who would no longer be contributing, eliminates the state s opportunity to generate funds.

Another option for funding Dispro programs would be to use a provider tax; however, new federal rules require provider taxes to be broad-based. Under this approach, some hospitals which are taxed may not receive back as much in payments as they remit in taxes. A broad-based provider tax could also be considered a new tax at a time when policy makers are trying to resist pressure to increase taxes.

As a result of these concerns, the Texas Performance Review (TPR) proposes a plan that would maximize the state s financial opportunities, provide assistance to some of the state s largest indigent and Medicaid hospitals and provide rural hospitals with another year of assistance.

TPR proposes that Dispro I be reconstituted to include the Texas Department of M ental Health and Mental Retardation (TxMHMR) state hospitals now in Dispro I and IV, the Tarrant County Psychiatric Center, Harris County Psychiatric Center and the state chest hospitals. Local hospitals now in Dispro I would receive a small payment under this plan. Dispro II hospitals would remain the same.

The plan also proposes a new Dispro III that would be comprised of the largest Title IX hospital provider in each Metropolitan Statistical Area (MSA) with a population greater than 500,000. Payments w ould be made to these hospitals based on Medicaid in-patient days and a per diem amount that escalates to reward higher utilization. The plan assumes that adjustments would be made in Dispro III to accommodate growth under the cap for Dispro II.

Dispro III would generate a net of $441 million for the biennium to these local hospitals and an additional $470 million for the state s general revenue.

Dispro IV would retain the same hospitals that currently qualify (except for the TxMHMR hospitals that are mov ed to Dispro I) and the same payment methodology, but would be a one-year program designed to ease the brunt of declining payments under the cap. It would generate an additional $24 million for these hospitals in fiscal 1993 and would be phased out by fisc al 1995.

Additionally, a Medicaid payment adjustment outside of Dispro for certain rural hospitals that are sole providers in their communities is recommended in another part of this report.

The TPR plan also includes a $45 million annual appropriation f or public hospitals with over 18,000 Medicaid in-patient days, but less than 35,000 days, to assist public hospitals that serve large numbers of Medicaid patients but do not qualify for the DSH III program. The TPR plan would maximize state returns primari ly by maximizing payments under the DSH program to state mental hospitals and chest hospitals and the state-owned university teaching hospitals.

Moreover, the plan assists the state s largest Medicaid hospital providers. At the same time, however, it also generates funds that could be used to match federal funds and offset the overall Medicaid deficit, which would help all Medicaid providers.


Recommendations
A. The Legislature should establish a Dispro I program comprised of the Texas Department Mental Health and Mental Retardation (TxMHMR) State Hospitals, the Tarrant County Psychiatric Hospital, the Harris County Psychiatric Center and the chest hospitals. T ogether with the three state-owned university teaching hospitals included in Dispro II, these ent ities should transfer $1.6 billion to the General Revenue Fund over the biennium ($750 million in fiscal 1994 and $809 million in fiscal 1995). About $269 million in fiscal 1994 and $297 million in fiscal 1995 of these state appropriations should be transf erred over the biennium to the official Medicaid agency to draw down $994 million ($481 million in fiscal 1994 and $512 million in fiscal 1995) in federal funds. Of this federal gain, $45 million per year would be appropriated to the university teaching ho spitals (the same as under current law). This would leave, along with their original contribution, a gain of $904 million ($436 million in fiscal 1994 and $467 million in fiscal 1995) in general revenue. Local hospitals now in Dispro I should receive a payment under this plan. This report allocates $25 million a year to this purpose. The actual level would be subject to legislative determination. The Legislature should mandate that Dispro II be allowed to grow under the cap. The state should comply with all federal rules and regulations that would affect the transfer of funds.

B. The Legislature should establish a new Dispro III program for the state s largest Medicaid hospital provider in each Metropolitan Statistical Area (MSA) with a population greater than 500,000. The Legislature should mandate intergovernmental transfers o f $1.6 billion ($511 million in fiscal 1994 and $491 million in fiscal 1995) from the hospital districts or cities involved to the General Revenue Fund. The Legislature should further mandate that general revenue amounting to $277 million in fiscal 1994 and $255 million in fiscal 1995 be transferred to the official Medicaid agency to draw down federal matching funds of $936 million for the biennium ($487 million in 1994 and $449 millio n in 1995). Of the federal gain, $252 million in fiscal 1994 and $213 million in fiscal 1995 should be appropriated back to the hospital districts and cities (except for the $16 million to rural hospitals in fiscal 1994 in Dispro IV), along with their orig inal contributions. The remaining $470 million ($235 million per year) would be retained for general revenue.

The total payments should be returned to the hospitals according to a formula based on Medicaid in-patient days times a per-diem amount that escalates to reward higher utilization. The per diem schedule would be $1,500 for hospitals with 35,000 to 45,000 Medicaid in-patient days in 1991; $2,000 for those with 45,000 to 60,000; $2,500 for those with 60,000 to 80,000, and $3,000 for those with 80,000 and over.

Reductions under the cap for Dispro III due to growth under Dispro I and II in fiscal 1995 should be accomplished by pro-rating the reduction according to the percent of Medicaid in-patient days per hospital.

Hospitals which would no longer benefit from the DSH program because of its structure or because of federal law changes could request an appropriation from the Legislature.

C. The Legislature should mandate a one-year Dispro IV program to ease the transition for rural hospitals now rec eiving funds under the current Dispro IV program. The Legislature should mandate that $9 million of general revenue from the Dispro III program be used to draw down federal matching funds of $16 million in fiscal 1994 for these hospitals.

Under this plan, contributions to and payments out of this program would be part of the new Dispro III program in fiscal 1994. The total payment should be transferred to the rural hospitals based on the current payment system for Dispro IV. Currently, the Dispro IV program is dependent upon the Dispro III program, which must be reconstituted to comply with federal law.

A separate recommendation involving a Medicaid payment adjustment outside the DSH program, which would benefit certain rural hospitals, is made in another part of this report.

These hospitals could also receive an appropriation from the Legislature after the one-year continuation period.

D. The Legislature should access the approximately $206 million in unappropriated proceeds from the state s Dispro programs in fiscal 1993.

The proceeds from the program, or $126 million, were appropriated in fiscal 1992, but the fiscal 1993 proceeds will still be available.

E. The Legislature should appropriate $45 million annually to local public hospitals with more than 18,000 Medicaid in-patient days, but with less than 35,000 days.

These funds should be appropriated for the support and maintenance of the districts hospital systems. State contributions would be payable solely from revenue available for those pur poses and would not constitute a charge against or obligation of the state. Such funds may not be used for construction, maintenance or improvement of facilities of these hospital districts, which is prohibited by the state s Constitution.

This appropriation would benefit public hospitals that serve large numbers of Medicaid patients, but do not qualify for the DSH III program.

F. The Legislature should direct the official Medicaid agency to place a notice in the local newspaper of the intent to file a M edicaid State Plan Amendment affecting the DSH programs no later than June 30, 1993.

This action would allow the amendment to become retroactive to the date the notice of intent was filed in the local newspaper and would prevent loss of funding for the program if approval is delayed.

G. Savings to the state General Revenue Fund should be achieved from these recommendations by adjusting the method of finance for Medicaid programs in the General Appropriations Act by reducing estimated general revenue appr opriations to the Health and Human Services Commission and the Department of Health, and increasing financing from federal funds by the same amount.


Implications
The key advantage of this plan is that it would provide a solution for most of the paying parties involved: the state and the largest local public hospitals. It would be a relatively simple solution to potentially complex problems involving the dissolution of Dispro III and IV and the financial stress of Medicaid hospital providers.

Currently, Dispro III benefits only local hospitals; under the TPR plan, both the state and local hospitals with the largest indigent caseload would benefit. The plan also would generate more general revenue funds from Dispro I and II.

The largest Medicaid hospitals in the state s largest MSAs also would benefit from additional funds, and the burden of the dissolution of Dispro IV would be lessened for rural hospitals who would receive $24 million in fiscal 1994.

It would also provide a supplemental appropriation to local public hospitals serving large numbers of Medicaid patients, but who do not qualify for the DSH III program. Local hospitals in Dispro I would receive a small payment under this plan.

Because of the constraints of new federal law, this plan would not directly benefit large non-profit hospitals as it has in the past. However, these hospitals could receive a general revenue appropriation.

In another part of this report, TPR recommends a Medicaid payment adjustment outside of the Dispro program for certain rural hospitals that are sole providers in their community.

Finally, under the TPR plan, the state would net $1.4 billion in general revenue for the biennium without increasing spending or state taxes. The additional state funds would mean that state hospitals would receive relief for their indigent caseload and th at overall Medicaid needs of the state could be addressed, which would benefit all Medicaid providers statewide.

Receipt of these funds would be contingent upon approval of the plan by the federal government. While this plan means significant revenue to the state, it also would increase the dependence of the state on the DSH program. Just as changes in federal law are requiring the state to reconstitute its DSH programs this year, future cha nges in federal law could affect this revenue stream.


Fiscal Impact
Under these recommendations, the state would gain $1.4 billion in general revenue for the biennium. Certain teaching hospitals and local hospitals would gain $695 million. These estimate s are based on available revenue budget assumptions. Receipt of these funds is contingent upon approval of the plan by the federal government.

Table 1 - Dispro I and II

Gain to the Gain to
Fiscal General Revenue Local and Teaching Gain in
Year Fund 001 Hospitals Federal Funds

1994 $411,300,000 $70,000,000 $481,300,000
1995 442,400,000 70,000,000 512,400,000
1996 442,400,000 70,000,000 512,400,000
1997 442,400,000 70,000,000 512,400,000
1998 442,400,000 70,000,000 512,400,000


Table 2 - Dispro III and IV

Gain to the Gain to
Fiscal General Revenue Local Gain in
Year Fund 001 Hospitals Federal Funds

1994 $234,777,000 $251,852,000 $486,629,000
1995 235,563,000 213,314,000 448,877,000
1996 235,563,000 213,314,000 448,877,000
1997 235,563,000 213,314,000 448,877,000
1998 235,563,000 213,314,000 448,877,000

Table 3 - Special Appropriation

Cost to the Gain to
Fiscal General Revenue Local Gain in
Year Fund 001 Hospitals Federal Funds

1994 $(45,000,000) $45,000,000 $0
1995 (45,000,000) 45,000,000 0
1996 (45,000,000) 45,000,000 0
1997 (45,000,000) 45,000,000 0
1998 (45,000,000) 45,000,000 0


Table 4 - Dispro Summary

Gain to the Gain to Local
Fiscal General Revenue and Teaching Gain in Change in
Year Fund 001 Hospitals Federal Funds FTEs

1994 $806,744,000 * $366,852,000 $1,173,596,000 0
1995 632,963,000 328,314,000 961,277,000 0
1996 632,963,000 328,314,000 961,277,000 0
1997 632,963,000 328,314,000 961,277,000 0
1998 632,963,000 328,314,000 961,277,000 0

* Includes a gain of $205,667,000 from unappropriated Dispro funds remaining from fiscal 1993.



Endnotes
1 The Department of Human Services is currently the state s official Medicaid agency. Under H.B. 7, 72nd Legislature, Second-called Session, the official Medicaid agency was changed effective January 1, 1993 to the Health and Human Services Commission, pendi ng federal approval. A Medicaid State Plan amendment has been filed to accomplish this transition, but federal approval has not been obtained yet. Also acco rding to H.B. 7, the Department of Health will administer Purchased Health Services programs, which include Medicaid programs previously administered by the Department of Human Services.