Increase Federal Medicaid Supplements To Improve Health Care Services


The state should obtain additional federal Medicaid supplements for certain state-owned teaching hospitals and their physicians and certain financially burdened hospitals who treat Medicaid patients.


Background
Texas is one of many states experiencing a decline in medical facilities and personnel willing to treat Medicaid patients. As the decline continues, the financial strain placed on the remaining facilities will increase.

However, state and local governments can help relieve some of that financial pressure and improve services simply by designating some current state and local health care expenditures as the match for federal reimbursements. State and local health care dollars can be placed in the state s General Revenue Fund via intergovernmental transfers and a portion used to bring federal Medicaid matching funds to Texas at about a 64-percent matching rate. These dollars can then be used to supplement the Medicaid payments that designated hospitals receive for treating Medicaid patients, without tapping general revenue. 1

This fund transfer can take advantage of Medicaid rules that allow states to supplement some programs Medicaid reimbursements with additional federal money. The supplements are called adjustments.

To provide the adjustments, the Department of Human Services (DHS) must file a State Medicaid Plan Amendment with the Health Care Financing Administration (HCFA). Once approved, federal funds would become available retroactively from the date the notice of intent to file an amendment was placed in a local newspaper. This means that the state could gain revenue for the current fiscal year. The state s Health and Human Services Commission (HHSC) should contract with an independent expert consultant to conduct a study to verify that Texas planned payment adjustments fulfill Medicare s legal requirements.

The Texas Performance Review has identified several potential state and local payment adjustments that could be funded through intergovernmental transfers of existing state and local funds. The adjustments are designed to help cover the additional costs of providing treatment to Medicaid patients without requiring an increase in general revenue, local expenditures or taxes.

Adjustments could be made to benefit teaching hospitals, one to compensate for the indirect costs of medical education and the other for uncompensated physician fees. Adjustments could also be implemented to pay hospitals that are the sole provider of heal th care in their community, such as in isolated, rural areas of the state.

Altogether, the state payment adjustments would generate a n additional $2.7 million for university teaching hospitals and would add $14.2 million to the General Revenue Fund for the 1994-95 biennium. The hospital payment adjustment for facilities that are sole providers would generate an additional $29 million to those providers and add $26 million to the General Revenue Fund for the biennium.

Proposed state and local payment adjustments are described in more detail below.

Indirect Medical Education Payment Adjustment
One type of Medicaid payment adjustment that the state should pursue is known as an Indirect Medical Education Payment Adjustment. This adjustment assists state-owned university teaching hospitals that have higher costs due to a variety of factors, including the extra demands placed on hospital staff as a result of the teaching activity or additional tests and procedures that may be ordered by residents, higher staff-to-patient ratios and more sophisticated and experimental facili ties. The adjustment would be applied to qualified hospitals, which are state-owned university teaching hospitals that use a specific payment system called the Diagnostic-Related Group payment system, such as the University of Texas Medical Branch at Galveston. Precedent for the Indirect Medical Education Adjustment is set by Medicare, which supplements its payments to medical education institutions for these reasons. Many other states include an Indirect Medical Education Adjustment in their state Medicaid plans.

With an investment in the Indirect Medical Education Payment Adjustment, qualified teaching hospitals would gain about $270,000 per year. The General Revenue Fund would gain about $1.5 million, which could then be used to match $2.6 million in additional federal Medicaid funds and the total used for Medicaid. Alter natively, the $1.5 million could be used as state match for federal funds in other programs or to pay for any other state programs.

Medical School Physician Fee Payment Adjustment
The state also could establish a Medical School Physician Fee Payment Adjus tment to supplement uncompensated physician charges. Medical school physicians provide services to a large number of Medicaid patients. The fee payment adjustment would encourage continued participation by these physicians and also encourage other physicia ns to accept more Medicaid patients.

In fiscal 1992, the state s university medical schools received Medicaid reimbursements for physician fees of $10.7 million.

With an investment in a Medical School Physician Fee Payment Adjustment, the teaching hospit als would gain an additional $1.1 million per year. The General Revenue Fund would gain $5.7 million, which could be used to match $10 million in new federal Medicaid dollars for a total of $15.7 million for Medicaid expenditures. Alternatively, the $5.7 m illion could be used as state match for federal funds in other programs, or it could simply be used to pay for other state needs.

Sole Community Provider Payment Adjustment
Hospitals that deal with factors such as isolated location, weather conditions, travel conditions or the absence of other hospitals qualify as sole community providers . These hospitals cannot take advantage of the economies of scale that most large urban hospitals experience; consequently, it is more expensive to provide hospital services in these areas. From 1980 to 1992, 66 Texas rural hospitals closed. To attract and retain physicians and other care givers, these hospitals often must provide higher salaries than in urban areas. The marginal costs and the risk of closing for an isolated, rural hospital are much higher than for an urban hospital in Texas.

A Medicaid payment adjustment to hospitals that are the sole providers in their communities would help defray the hospitals extra costs. In Texas, about 120 hospitals would qualify for what is known as a Sole Community Provider Adjustment.

If the state were to invest in a Sole Community Provider Adjustment, qualified hospitals would gain $14.5 million per year. The General Revenue Fund would gain $13.3 million, which could be used to match $23.4 million in new federal Medicaid dollars for a total of $36.7 million for Medicaid expenditures. Alternatively, the $13.3 million could be used as state match for federal funds in other programs, or it could be used to pay for other state needs.


Recommendations
A. The Legislature should 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) to file three State Medicaid Plan Amendments with the Health Care Financing Administration (HCFA) to establish Medicaid Payment Adjustments for three classes of state and local hospitals due to special circumstances.

For the state, two amendments would establish an Indirect Medical Education Payment Adjustment and a Physician Fee Payment Adjustment. For local hospitals, the official Medicaid agency should file an amendment to establish a Sole Community Provider Adjust ment.

B. The Legislature should mandate that the teaching hospitals transfer $2.4 million from their state appropriations or fund balances and $9.6 million from non-Medicaid physician fees to the General Revenue Fund for each year of the biennium.

Of these funds, $4.8 million should be transferred periodically to DHS to be used as state match for $8.5 million in additional federal dollars. The total payment for the Indirect Medical Education Adjustment $2.7 million should then be paid to the teaching hospitals in the form of increased payments per case, and $10.6 million for the Physician Fee Payment Adjustment should be returned through increased reimbursements to hospitals.

The remaining $7.2 million in the General Revenue Fund should be used to draw down an additional $12.6 million in federal funds for a total of $19.8 million for Medicaid.

Alternatively, the remaining $7.2 million could be used as state match for federal funds in other programs, or used for other state purposes.

C. To cover the match for the Sole Community Provider Adjustment, the Legislature should mandate tha t hospital districts, counties and/or cities with qualified hospitals transfer $29.1 million of qualified revenue to the General Revenue Fund for each year of the biennium.

To comply with federal law, these intergovernmental transfers should be mandatory. About $15.8 million of these funds should be transferred to DHS to be matched with $27.8 million in federal funds. The total $43.6 million should be returned to qualifying hospitals as Medicaid payment adjustments.

D. The Legislature should also direct the HHSC to hire an independent consultant to conduct studies to verify:
1. the reimbursements from the Indirect Medical Education Payment Adjustment will not exceed Medicare s upper limit on all state-owned, in-patient hospital facilities;
2. the Sole Community Provider Adjustments will not exceed Medicare s upper limit on all in-patient hospital facilities; and
3. the Physician Fee Payment Adjustment does not exceed a physician customary charges ceiling in Texas.

The Physician Fee Payment Adjustment is not subject to Medicare s upper limit, but is subject to a physician customary charges ceiling. HHSC should periodically update these findings. Since implementing recommendations depend upon factors outside the state s control, any appropriation made with these funds should be made on a contingency basis.

E. To achieve these savings, the Legislature should reduce the general revenue appropriations of the HHSC and the Department of Health by the total indicated in the fiscal impact table and increase federal funds by the same amount.


Implications
These recommendations provide an incentive for teaching hospitals to identify and increase the number of Medicaid patients they serve. Currently, Texas has difficulty attracting and retaining Medicaid providers. The recommendations would also allow the tea ching hospitals and the state to gain additional revenue without additional spending.

The official Medicaid agency must file State Medicaid Plan Amendments, which must be approved. Other states have filed the Indirect Medical Education Payment Adjustment and had it accepted by HCFA. Precedent for the Physician Fee Payment Adjustment and the Sole Community Provider Adjustment is established under Medicare.

To ensure that these recommendations are pursued in the shortest time possible, they should be tied to the appropriations for HHSC and Department of Health and the medical schools through riders.

Local payment adjustments are specifically designed to strengthen the state s Medicaid program and to increase funds to certain hospitals threatened with closing.

All payment adjustments would benefit the Medicaid program in Texas, increase reimbursements without raising state or local spending and increase general revenue without raising taxes.


Fiscal Impact
Altogether, the Medicaid payment adjustments to the teaching hospitals would generate an additional $1.3 million for the teaching hospitals and $7.2 million in general revenue for fiscal 1994. The Sole Community Provider Adjustment would generate an additi onal $14.5 million for teaching hospitals and an additional $13.3 million for Texas for fiscal 1994.

The recommended independent studies would require some minor administrative costs, but insufficient data exist to develop a cost estimate at this time.

If the notice of intent to file the amendments is placed in fiscal 1993 and the amendments are then approved, the state could gain funds in the current fiscal year.


Table 1 - Indirect Medical Education Payment Adjustment

Fiscal Savings to the Gain to Change in
Year General Revenue Fund 001 Universities Total FTEs

1994 $1,453,000 $270,000 $1,723,000 0
1995 1,425,000 270,000 1,695,000 0
1996 1,425,000 270,000 1,695,000 0
1997 1,425,000 270,000 1,695,000 0
1998 1,425,000 270,000 1,695,000 0


Table 2 - Physician Fee Payment Adjustment

Fiscal Savings to the Gain to Change in
Year General Revenue Fund 001 Universities Total FTEs

1994 $5,732,000 $1,066,000 $6,798,000 0
1995 5,624,000 1,066,000 6,690,000 0
1996 5,624,000 1,066,000 6,690,000 0
1997 5,624,000 1,066,000 6,690,000 0
1998 5,624,000 1,066,000 6,690,000 0


Table 3 - Sole Community Provider Payment Adjustment

Fiscal Savings to the Gain to Sole Change in
Year General Revenue Fund 001 Community Providers Total FTEs

1994 $13,276,000 $14,540,000 $27,816,000 0
1995 12,836,000 14,540,000 27,376,000 0
1996 12,836,000 14,540,000 27,376,000 0
1997 12,836,000 14,540,000 27,376,000 0
1998 12,836,000 14,540,000 27,376,000 0


Table 4 - Summary Table

Fiscal Savings to the Gain to Gain to Sole Change in
Year General Revenue Fund 001 Universities Community Providers Total FTEs

1994 $19,008,000 $1,336,000 $14,540,000 $34,884,000 0
1995 19,885,000 1,336,000 14,540,000 35,761,000 0
1996 19,885,000 1,336,000 14,540,000 35,761,000 0
1997 19,885,000 1,336,000 14,540,000 35,761,000 0
1998 19,885,000 1,336,000 14,540,000 35,761,000 0



Endnotes
1 Currently, the Department of Human Services (DHS) is the official Medicaid agency; however, the state has submitted a State Medicaid Plan Amendment re questing that this designation be moved to the Health and Human Services Commission. Once approved, the commission will be the official Medicaid agency. The Department of Health will administer the purchased Health Services program previously administered by DHS as of September 1, 1993.