Legislators are asking for rate cuts and higher assessments from North Carolina’s hospitals, moves that in the past would have been unthinkable.
By Rose Hoban
In many areas of North Carolina, the local hospital is one of the biggest employers in town. And for years, hospitals have leveraged that local power into statewide political clout.
But not this year.
Lawmakers have made a series of moves during this legislative session that will force a trimming of hospital budgets across the state, as the once powerful hospital lobby has found itself increasingly in the crosshairs of budget writers.
The compromise budget presented late Sunday is no different. In the budgets released by both the House and the Senate, and the governor’s as well, hospital reimbursements are being reduced by several different mechanisms and will be under increased scrutiny by state inspectors.
Lawmakers have said the cuts are necessary in order to control growth in Medicaid costs.
“It’s in all of our interest to have a predictable Medicaid budget, and we look forward to working with them to try to figure out how to get that,” said Hugh Tilson, vice-president for governmental affairs for the N.C. Hospital Association.
“We just have to figure out how to do that in a way that builds on what’s unique and special about North Carolina’s delivery system,” he said.
Hospital reimbursement is a big chunk of the $13 billion annual tab for Medicaid, which covers 1.7 million low-income children, their parents, the elderly and people with disabilities.
According to the Kaiser Family Foundation, 25.7 percent of all North Carolina Medicaid spending went to hospital inpatient care and an additional 13 percent paid for hospital outpatient care.
Don Dalton, a spokesman for the Hospital Association, said that statewide about 46 percent of hospitals’ revenue comes from Medicaid. He also pointed out that a third of the state’s hospitals run in the red; about a third have operating margins of less than 5 percent, while the other third do better than that.
That’s because Medicaid doesn’t pay the full cost of care.
“Every time a patient shows up for Medicaid services, we file a claim on their behalf,” Tilson said. “By state law, Medicaid is reimbursing at 80 percent of our costs today for outpatient services.”
But in this year’s budget, that rate drops to 70 percent.
“We have a budget and we have to live within our means,” said Rep. Justin Burr (R-Albemarle). “You know, Medicaid continues to grow. We’re still putting over a billion additional dollars into Medicaid and we’re just trying to put pieces together that will help find efficiencies there and cover the cost and make sure we’re able to do what we need to do.”
But Tilson said he fears the rate cut will compel hospitals to deliver more inpatient care, which continues to be reimbursed at a higher rate, rather than outpatient care.
The state also compels hospitals to give the state back a cut of what they earn in exchange for providing Medicaid and earning back the state and federal dollars that pay for the care. This assessment, which was created in the 2011 legislative session, has been a fixed amount from each hospital.
But in this budget, that assessment formula has been changed; instead, hospitals will have to return to the state 25.9 percent of their state Medicaid dollars. The increased assessment will put about $52 million extra dollars into state coffers annually, up from $43 million last year.
But that’s less than the $95 million assessment that was proposed in the House budget.
“I think, overall, they’re much better off than they potentially could have been had that happened,” Burr said.
Loss of clout
These cuts and others leveled against hospitals come amid tremendous changes in the health care market that are being driven by implementation of the federal Affordable Care Act and changes in the way hospitals are being paid in the larger marketplace.
Hospitals were looking forward to the expansion of Medicaid contained in the ACA, which would have covered many of the uninsured patients hospitals see annually.
But state lawmakers rejected the Medicaid expansion, much to the chagrin of hospital officials. The state Chamber of Commerce did not take a position on Medicaid expansion, and its silence angered many in the hospital community. In recent months, the Hospital Association, Cone Health Systems and Carolinas Healthcare System have all pulled out of the chamber.
“As a membership-based organization, we are always disappointed when any business discontinues its membership,” Gary Salamido, the North Carolina Chamber’s vice president of government affairs, wrote in an email response to a request for comment. “But we understand that such decisions are not made lightly and have been determined best for that individual company.”
“The North Carolina Chamber is fighting every day on issues critical to our diverse member base, including improving educational opportunities, infrastructure needs, and business competitiveness issues such as tax reform,” Salamido wrote.
“The chamber turned their backs on some of their largest members,” said Don Taylor, a health economist from Duke’s Sanford School of Public Policy.
That rendered the hospitals less powerful, he said.
Taylor said some of the hospitals’ loss of clout also came as a result of a series of stories that ran over the past year in the News & Observer that detailed excesses at some of North Carolina’s largest not-for-profit hospitals.
“People said, ‘When I think of nonprofit, I think of the Sisters of Charity,’” Taylor said, “’and here Duke has marble floors in the entryway.'”
And with Medicaid growing as part of the state budget, and lawmakers looking to cut the costs of the program, well-endowed hospitals are a rich target.
Moreover, Taylor said, many members of the legislature are new and don’t have long-standing relationships with hospital leaders.
“These legislators don’t have the same get-along, go-along attitude,” he said. “All those hospital guys – for a long time they were just used to getting their way.”
Shared savings and a future tax
In another hit on hospitals, North Carolina budget writers wrote a provision into the budget that takes an additional 3 percent of Medicaid reimbursement from hospitals for the coming year in a shared savings plan that begins next summer.
Tilson said that for the coming year, hospitals will be paying out before seeing a bonus for saving money.
“It’s a year of you paying extra without getting anything in return,” he said, adding that it feels more like a rate cut than shared savings.
Details of the shared savings plan have yet to be worked out, said Sen. Ralph Hise (R-Spruce Pine), one of the co-chairs of the Senate’s health committee. The state Department of Health and Human Services will be drafting details of the plan in coming months.
Hospitals did win one victory at the legislature this session: Lawmakers raised the cap for a sales-tax refund that not-for-profit hospitals get for the taxes on their purchases of everything from Band-Aids to construction costs to brain-scanning machines.
Lawmakers had considered removing the tax refund, then created a cap of $7.5 million that would have dinged the state’s largest and most well-reimbursed hospitals, including Duke, UNC and Carolinas.
In the end, the legislature raised the cap to $45 million dollars, but Taylor said he didn’t think it would be long before it will be lowered.
“When you create a tax provision that applies to no one, eventually it will apply to someone,” Taylor said.
“There is a cap in the tax plan, which means that these conversations are going to continue,” he said.
Cover photo: UNC Hospital emergency entrance in Chapel Hill. Photo credit: Patrick Mustain.