How Should Hospitals Work Around Medicaid Payment Cuts This Year?

The past few years have been hard for hospitals and their Medicaid reimbursements. A recent Kaiser Family Foundation study found that although most states are on track with their Medicaid budgets for fiscal year 2012, the previous two years were not as easy. In FY 2011, the average Medicaid enrollment across all states was 5.5 percent. In FY 2010, that rate was 7.2 percent. Enrollment went up while funds have stayed neutral or declined, which means more Medicaid enrollees but less money to fund their treatments.

This year, states predicted an increase in Medicaid enrollment of 4.1 percent, lower than the previous few years, but acute-care and pediatric hospitals will still have to find ways to navigate around constricting Medicaid payments. Several states, such as Arizona and Oregon, have imposed Medicaid reimbursement reductions over the past year, so now the challenge is on for hospitals to deal with these further cuts. Here, hospital leaders give some insight how Medicaid cuts are affecting them and some potential short- and long-term solutions to navigate around them.

David Dunlop, president and CEO of Roper St. Francis HealthcareDavid Dunlap, President and CEO, Roper St. Francis Healthcare in Charleston, S.C.:
At a time when the country's economy had stalled and even declined in general healthcare usage, Roper St. Francis Healthcare enjoyed growth. In fact, Roper St. Francis was recently presented with the top award for growth in 2011 by the system's associates at Carolinas HealthCare for an adjusted discharge growth rate of more than 10 percent over the previous year. At the same time, RSFH earned nationally recognized measurements in patient and employee satisfaction with a quality ranking of 99.4 percent. This is the result of years of painstaking planning by a highly synchronized team — and a lot of creativity.

In 2012, the need for more ingenuity intensifies. Like all healthcare systems, RSFH will be optimizing flat or reduced reimbursements from Medicare and Medicaid. That compensation is more vital than ever with privately insured patients at the lowest level in more than a decade. Through efficiency of service, consolidation of services and careful scrutiny of vendor contracts the system is ready to face the reductions and will continue to deliver excellent, patient-centered care. Our efficiency initiatives are unfolding in stages each year and in 2011 resulted in a reduction in supply expense per adjusted discharge of 3.6 percent.

Other strategies that will help mitigate the negative financial impacts of healthcare reform are being expanded. Through improved case management we have reduced the length of stay for our patients. Vertical integration with physicians is most importantly improving the continuum of care for our patients, but it also helped contribute to a 24.8 percent increase in physician utilization of our web portal last year — a result that was enhanced by creative new marketing tactics.

"Value assessment teams" are diligently reviewing processes to ensure we receive the best value for our costs and have already saved the system hundreds of thousands of dollars. And a concerted multi-year strategy that is elevating quality of care is controlling costs by doing what is best for our patients: reducing readmissions, infections and falls. Even increasing our "green" programs is proving to be a positive contributor to our changing financial landscape, while helping us maximize our contributions to the local and global community through the donation of unused or recycled supplies.

We all want and need to excel, despite these new challenges, but to do that we are going to have to not only be early-adopters but also innovators in human resources, finance, technology and treatment. It is our hope that as we venture into 2012's economic, political and regulatory challenges, healthcare providers will unite in new ways for the good of our patients and for the sake of our shared goals as a community.

Stephan Harr, senior vice president of finance and physician services at Orlando HealthStephan Harr, Senior Vice President of Finance and Physician Services at Orlando Health: For fiscal year 2011-2012, Orlando Health had to absorb cuts in Medicaid reimbursement in the range of $45 million, representing a 23 percent cut on an annual basis.

As a $1.7 billion healthcare organization that provides services throughout Central Florida, we have the responsibility to make business decisions to protect the long-term viability of our organization and support the healthcare needs of the communities we serve. As we looked at our options, our primary goal was clear: to make the right business decisions to ensure we are here for the community long term.

We identified several revenue-generating strategies and cost-cutting efforts to address this budget shortfall. On the revenue-generating side, we focused our efforts on increasing patient volumes by providing more convenient access to some of our services. For example, we introduced oncology services to our community hospitals, making it easier and more convenient for patients living in those communities to access these services.  

On the cost-cutting side, we implemented a number of tactics. We negotiated better rates with our preferred vendors, delayed some capital spending and eliminated most company-sponsored mobile devices. We also restructured some departments to take advantage of efficiencies and delayed or froze staffing in some areas.  

Like most large healthcare providers, Orlando Health recognizes that Medicaid reductions and healthcare reform mandates are changing the way in which healthcare is delivered. Ultimately cuts in Medicaid will continue to shift financial obligations to private insurers and employers in the communities we serve. So, it is essential that we reposition our resources so we can achieve our strategic vision of creating a clinically integrated new model of care that fits into the patient's world.  

We are also reviewing all our services to determine if we are supporting programs that may be better supported through other avenues in the community, always keeping in mind that the broad needs of the community are our top priority. As our president and CEO Sherrie Sitarik often says, "In healthcare, failure is not an option."

Peter Roberts, executive vice president of population health and network development at Children's Medical Center DallasPeter W. Roberts, Executive Vice President of Population Health and Network Development, Children's Medical Center Dallas: Strategic management of Medicaid reimbursements is critically important to Children's Medical Center in Dallas. In 2011, Children's provided more than 20,000 inpatient admissions and a half-million patient encounters. Approximately 70 percent of our patient population is Medicaid or CHIP.

With the inevitable growth and decreasing reimbursement, Children's has begun a process to improve both its care management and cost position for all payors. The recent establishment of an executive-level position in population health represents an important step. Increasingly, Children's — like other major health systems — will need to become accountable for activities outside the realm of inpatient or outpatient care, and in doing so, will develop the capacity to assume risk for a greater proportion of the insurance premium. Major elements of Children's strategy include:

Cost management: Children's has adopted a stretch goal of keeping annual cost increases equal to or less than those in the Consumer Price Index. This approach keeps a continuous and relentless focus on cost improvement by all employees. Children's is completing a significant cost reduction program that was tied specifically to projected Medicaid payment reductions. More than $80 million of reductions are being implemented out of a budget of approximately $900 million — a belt-tightening of 8.8 percent. The next phase will be rolled out later this year.

Continuum of care: Children's is aggressively focused on the decompression of the emergency room through use of an on-site, convenient primary care medical home with extended hours for low-cost urgent care. Our use of promotores — trained, bilingual, culturally aligned lay persons — to provide counseling and health coaching for Medicaid families will be expanded. In addition, a medical home for children with complex chronic illnesses will be developed to provide a lower-cost and better-coordinated resource for this population, who often overutilize the ER, specialty clinics and inpatient beds.  

Care management: Children's and UT Southwestern Medical Center faculty have embarked upon a major initiative to develop and implement clinical practice guidelines for the highest-volume diagnoses. These cover the entire continuum of care across Children's facilities and extend into private-practice pediatricians' offices. Children's also is re-engineering its current decentralized inpatient care coordination to include predictive modeling and risk-adjustment technology.

Community-based health improvement: Children's and UTSW's General Pediatrics Division are working with the Dallas-Fort Worth community to improve the health of all children. The program consists of expanded medical home access, a clinically integrated network of primary physicians supported by a uniform care management and IT system, and a series of sustainable, data-driven quality initiatives designed to improve the health and well-being of children.

Risk-bearing provider contracts with Medicaid HMOs: Improving quality and cost outcomes for its populations is Children's paramount goal. To do so in a financially responsible manner, Children's will renegotiate its fee-for-service contracts. This will help us capture a larger portion of the financial premium in order to fund initiatives that produce the desired goals.

Bob Shapiro, CFO of North Shore-Long Island Jewish Health SystemBob Shapiro, CFO of North Shore-Long Island Jewish Health System in Great Neck, N.Y.:
In New York, it's not much different than any other state. Gov. [Andrew] Cuomo has introduced two tactics: Medicaid rates are frozen. We're not getting any cost of living increases year over year. He's also instituted a statewide global cap on Medicaid payments. He's essentially telling the healthcare industry in New York State to manage its expenses, keep it below the global cap, and we'll eliminate significant expenses. He's putting it in our hands, and you know what? That's working right now. We're below our global cap, and that is including a large increase in Medicaid volume. So far, it's working as intended.

In respect to what we're doing, we have a short-term, medium-term and long-term plan. In the short term, it's the usual, 'OK, there goes the government reducing reimbursement, and we have to be more efficient on cutting costs.' That's not new to us. We've been doing this for a while. We're trying to create an environment to make it less difficult to accomplish those hard-to-do things. That's what we're doing in the short-term.

The more mid-term goal we have at North Shore-LIJ is we have to look at the revenue model. Ninety percent of revenues come from services to the patient, either inpatient or outpatient, so it's time to focus on population health and population reimbursement. It's time for us to look at the insurance side of cash flow and to consider insuring the lives of our patients in addition to rendering care to our patients.

There are redundant administrative costs. Insurance companies have an administrative structure, and we have an administrative structure. You don't need both. We're going to start small, take risk on a population, get better at it and expect to have our health plan. The long-term plan is to be successful as an insurance company.

Pete Wertheim, vice president of strategic communications at AzHHAPete Wertheim, Vice President of Strategic Communications, Arizona Hospital and Healthcare Association: Arizona hospitals are struggling under the weight of massive budget cuts to Arizona's Medicaid program, the Arizona Health Care Cost Containment System. Arizona Gov. Jan Brewer and lawmakers cut more than $1.5 billion in state and federal funds from the AHCCCS budget in 2011 by freezing enrollment of childless adults, reducing benefits and slashing reimbursement to hospitals and other healthcare providers.

During the past two years, Arizona policymakers have frozen AHCCCS enrollment for children of the working poor and low-income childless adults to help balance the state budget. As a result, more than 33,000 children and 80,000 adults are no longer enrolled in AHCCCS. Not surprisingly, hospitals across the state have seen dramatic spikes in their uncompensated care costs. Arizona is the only state to have frozen enrollment in its Children's Health Insurance Program.

AHCCCS cut hospital payment rates by 10 percent to generate additional savings for the state budget last year. Following on the heels of a rate freeze in effect since 2007, the 10 percent rate cut costs Arizona hospitals an estimated $200 million per year. AHCCCS payments now cover only 67 percent of the cost of caring for patients.  

As a result of the AHCCCS enrollment freeze and the reimbursement cuts, nearly 50 percent of Arizona hospitals were incurring monthly operating losses at the end of 2011. Hospital uncompensated care has risen by 70 percent in recent months.

Hospitals are offsetting some of the lost revenue through efficiency savings such as consolidation, outsourcing and workplace reforms. But since the 10 percent rate cut took effect, hospitals have begun to eliminate beds, discontinue services and lay off employees.  

The Arizona Hospital and Healthcare Association is urging Gov. Brewer and state lawmakers to provide financial relief to Arizona hospitals through a modest cost-of-living adjustment to AHCCCS payment rates and other creative options to generate federal matching funds. Unless Arizona hospitals' uncompensated care losses are mitigated, more layoffs and service cuts are likely in 2012.  

How does your hospital or health system plan to deal with shrinking Medicare and Medicaid reimbursements this year? Becker's Hospital Review is looking for more hospital executives to share their responses. Please email Bob Herman at

Related Articles on Medicaid:

Healthcare Reform: Two Years Gone, Now What's on the Horizon?

Washington Medicaid Won't Reimburse for "Unnecessary" ER Visits

St. Vincent's HealthCare CFO Mark Doyle: 3 Burning Questions Right Now

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