More Insured People Could Mean Less Reimbursement for Charity Care

Andrew Kitchenman | September 30, 2014 | Health Care
Advocates argue against drastic funding cuts even if hospitals see drop-off in uncompensated services provided to low-income patients

medicine money
Expanded health coverage through the Affordable Care Act may be helping people who didn’t have insurance, but it also has hospitals facing possible cuts in charity care, a longtime source of funding.

New Jersey’s charity care program reimburses hospitals for a share of the costs they incur to provide services to the uninsured.

Hospital and healthcare policy experts predict the state will feel increased pressure to reduce these payments as the number of uninsured residents drops dramatically.

The U.S. Department of Health and Human Services last week released projections that the states that expanded Medicaid eligibility – including New Jersey – would see a 25 percent reduction in the amount of uncompensated care they provided.

Whether this means that hospitals will receive markedly less next year than the $650 million in reimbursements they are receiving this year remains unclear. But with the ongoing state budget crunch, current charity care levels may become unsustainable, according to experts.

“It’s going to be a big fight if they don’t have the data to support the payment,” said Matthew D’Oria, a healthcare consultant.

An Urban Institute survey released in June estimated that the percentage of New Jersey residents who are uninsured had dropped by nearly half in the previous nine months, from 21.2 percent in September 2013 to 11.5 percent in June.

That estimate was backed up by large gains in the number of residents receiving New Jersey FamilyCare, the state’s Medicaid program. The state added 281,000 adults to FamilyCare this year, which amounted to 83 percent of the eligible population, according to an estimate by the Kaiser Family Foundation.

“If that number is that big, that means that those (charity care) claims are that much lower next year,” said D’Oria, a former deputy commissioner for the state Department of Health. “It’s really remarkable.”

Joel Cantor, director of the Rutgers Center for State Health Policy, agreed that the state will feel pressure to reduce charity care payments. However, Cantor, an NJ Spotlight columnist, cautioned that the full effect of the increase in the number of Medicaid patients is not yet known.

The state splits the cost of charity care with the federal government, with each paying $325 million this year.

The federal share is drawn from a larger pool of federal money — totaling $686.5 million last year — that is paid to New Jersey to support hospitals that serve a disproportionate share of low-income patients. That amount is scheduled to be cut by roughly $105 million annually starting Oct. 1, 2016, with the cuts deepening in later years, under last year’s federal budget deal.

Funding amount uncertain

State Department of Health officials said it’s too early to tell what charity care aid will amount to next year, noting that the funding is part of the annual state budget process. Gov. Chris Christie will propose the next budget in February.

While the overall charity care budget is unknown, individual hospitals are unlikely to see large changes in the shares they receive. That’s because nearly 80 percent of the formula for divvying up the aid is based on how much each hospital receive the year before, with the rest determined by changes in the uncompensated care that they provided.

Charity care is an annual source of concern for New Jersey’s hospitals, according to Betsy Ryan, president and CEO of the New Jersey Hospital Association, state’s largest hospital group. She noted that the hospitals provided $1 billion in uncompensated care in 2012, the last year for which audited records are available.

Ryan said that it’s important that the state base charity care payments on documented, audited data, not projections or estimates. The audited data for this year won’t be available until late 2015.

“We would argue that there shouldn’t be a change unless there is a dramatic decrease in documented, audited charity care,” Ryan said. She said the state should continue to follow the formula that’s been used in previous years.

Ryan said her association’s priority is for charity care payments to be made in a transparent manner, providing certainty and stability to hospitals throughout the budget process. She noted that state charity care payments are pegged to Medicaid reimbursements, which already amount to less than average patient costs and are also less than the rates paid for privately insured residents or Medicare recipients.

Organizations representing specific subgroups of hospitals want to make sure their members are protected from future changes in charity care funding.

More for ‘safety net’ hospitals?

Suzanne Ianni, president and CEO of the Hospital Alliance of New Jersey, said the state should target a greater share of charity care funding toward the state’s so-called safety-net hospitals, particularly if there is an overall decline in charity care funding. Her organization is comprised of 16 hospitals that serve large low-income populations. She said the federal regulations will lead to larger cuts in federal funding to states that don’t steer charity care payments to hospitals with the most Medicaid and uninsured patients.

“It’s really important to recognize that there is an increased burden on safety-net hospitals from new Medicaid patients,” Ianni said, noting that Medicaid patients are more likely to visit hospitals now that they are insured. While the long-term goal under the federal ACA is to reduce the reliance of uninsured residents on hospital emergency rooms, states such as Massachusetts and Oregon saw increases in ER use after expanding their Medicaid programs, since patients were already familiar with hospitals.

“The need to preserve access is more important than ever to protect the safety net in New Jersey,” said Ianni, who added that hospitals serving largely privately insured residents shouldn’t receive charity care funding.

Richard A. Pitman, executive director of the Fair Share Hospitals Collaborative, said he would like to see state charity care payments hold steady, even if the amount of hospitals’ uncompensated care drops. His organization represents 26 hospitals that serve areas with fewer low-income patients than those in Ianni’s organization.

“Hopefully, they will be in a position to stop grossly underfunding a large number of New Jersey hospitals,” Pitman said of state officials.

He noted that the state hasn’t been following a legislative mandate that hospitals receive at least 43 cents for every dollar of charity care they provide. As it stands, some hospitals are receiving at little as 9 cents per dollar, with most of his member hospitals receiving between 15 and 30 cents per dollar, Pitman said.

Pitman disagreed with Ianni’s prediction that the federal government would cut New Jersey’s hospital funding if it didn’t direct more money to hospitals serving the largest low-income populations, arguing that the state already directs the lion’s share of this aid to such hospitals.

Pitman argued that all hospitals serve as a safety net for their local residents. This includes immigrants with undocumented or illegal status.

“Whatever the state should choose to do with the money it has committed to charity care, it is just vitally important that they keep it in healthcare and not divert it to other demands because we are so under-reimbursed in charity care, so under-reimbursed in Medicaid,” Pitman said. “The state really does need to keep those dollars committed to the care of patients.”

He pointed out another potential problem that could arise from the ACA’s federally operated health insurance marketplace. Since most residents buying insurance on the marketplace are buying plans that require significant out-of-pocket costs, hospitals could see a significant increase in “bad debt” – such as unpaid hospital bills.

“It’s really a time of unparalleled change in how hospitals are reimbursed for what they do,” Pitman said.

Insurance industry experts have questioned whether the increase in bad debt will be as high as hospitals predict, since the ACA also provides residents with household incomes up to 250 percent of the poverty line – currently $59,625 for a family of four – with cost-sharing subsidies to limit their out-of-pocket costs.

Ryan said it’s too soon to discuss how potential future cuts to charity care should affect individual hospitals.

“We really think it’s premature to divvy up the pie,” she said.