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As lawmakers argue over the future path of Medicaid, they point to uncertainty over the amount of money spent by hospitals participating in the program.

By Rose Hoban

When talking about how convoluted hospital finances can be, Mark Holmes has an analogy: “In a construction business, you pour 40 yards of concrete and bill the client for 800 bucks,” said the health economist, who teaches at UNC-Chapel Hill.

“But if construction companies got paid the way hospitals do, they’d pour the concrete and send a bill for $1,000. Then four weeks later, they’d find out what they get paid for it, and it’s only $800 – or less.”

According to Holmes, that metaphor gives a slight glimpse into the strange and complicated world of hospital finances and billing.

N.C. Hospital Association lobbyist Cody Hand talks with Sen. Ralph Hise (R-Spruce Pine), co-chair of the Senate Health and Human Services Committee. Photo credit: Jasmin Singh

Last month, as lawmakers in the House and Senate began sparring over the state budget, one of the most vexing questions they faced was how to calculate what hospitals spent on caring for Medicaid patients last year and how much they were still owed for that care.

Lawmakers were having trouble reconciling this year’s Medicaid numbers because of difficulty getting data out of the NCTracks Medicaid billing and claims processing system, which launched a year ago and has struggled since.

Sure enough, when budget time came, there was no way to create a projection for the coming year or reconcile the unpaid bills from last year.

So lawmakers turned to hospitals themselves, asking hospital finance officers what they thought they were owed. And the answer they got back was a collective, “We’re not sure.”

That’s because hospital accounting is different from keeping the books for other kinds of businesses – very, very different. And very difficult.

And the difficulty in calculating hospital costs has only added to the uncertainty at the General Assembly over how much lawmakers should set aside to resolve Medicaid’s debts.

Complicated, confusing

According to Holmes, the rules governing hospital accounting resemble nothing so much as a Rube Goldberg array of guidelines that are created primarily by governmental payers, in particular Medicare, the federally funded program that covers seniors’ health care, and Medicaid, which covers low-income children, some people with disabilities and many elderly who live in nursing homes.

“[Federal authorities] keep adding on different elements, and hospitals need to account for all those differently,” Holmes said.

Southeastern Regional Medical Center’s main campus in Lumberton. Image courtesy SRH

Then there are people who have private insurance – every one of those companies negotiates a different pay rate with hospitals – and then people who have high deductible plans, who often pay the first $5,000 or $7,000 of their medical bills before their insurance kicks in.

“One CFO told me that 10 years ago, he had 15 payers; now he has 20,000 payers,” recounted George Pink, another health economist from UNC-Chapel Hill. Pink’s area of expertise is in health care finance.

Hospitals now have many patients with those high-deductible health plans “and you have to collect money from them. In a sense, they’re their own insurers and they’re more likely to default on their debt,” he explained.

Thomas Johnson is one of those chief financial officers. He manages finances at Southeastern Regional Medical Center in Lumberton, where he has an entire department full of billing employees that deal with all the intricacies of getting a claim out the door.

“If it wasn’t so complicated, we could take a lot of cost out of our systems,” Johnson said. “So much of the overhead in health care today is directly related to the complexity of having to track and monitor what it takes to be able to bill a claim and get it paid.”

He said some studies show that the insurance and billing processes alone add between 20 and 25 percent of the cost of care in order for hospitals to make ends meet.

No pay, some pay, almost never full pay

Johnson explained that his hospital is the safety net hospital for Robeson County, where Southeastern Regional is located, as well as for several surrounding counties.

About two-thirds of Southeastern Regional’s patients are on either Medicare or Medicaid; an additional 10 percent are uninsured.

“We have to take all comers. All hospitals do,” Johnson said. “In our situation, we have more of the uninsured and the Medicaid population because of our geographical location. It’s a very poor region.”

And the hospital’s operating margins show it: Southeastern Regional’s run, at best, between 2 and 3 percent per year.

“We’re cutting costs left and right; there are layoffs across the state and hospitals are eliminating money-losing services,” Johnson said. “Nonetheless, we’re seeing a lot of downsizing of hospital payrolls and expenses.”

Across the state’s 135 hospitals, the average operating margin is 1.8 percent, according to the North Carolina Hospital Association. That’s down from an average of 2.8 percent in the previous fiscal year, said Julie Henry, spokeswoman for the NCHA.

“Often, hospitals are taking care of people they know they’re not going to get paid by,” she said.

“It’s not like other businesses, where you pay when you get the service,” said Hugh Tilson, vice-president for governmental affairs at the NCHA.

“We provide the service first and then figure out how to pay for it,” he said. “Then, most times, someone else is paying; two-thirds of the time it’s the government, 25 percent of the time it’s someone with insurance, and the rates from all the different insurers all differ.”

Tilson explained that often a patient will walk in and get treatment for an acute condition and a financial counselor meets with them, and the patient says, “I’m eligible for Medicaid.” The hospital then applies for Medicaid for them and they might not know for months if the person is covered.

In the hospital’s accounts receivable budget, the amount that person owes might appear as the amount Medicaid would pay. But if the patient isn’t covered by Medicaid, it becomes self-pay and the hospital has to go back to that person and negotiate a payment schedule.

Not to mention the past two years of rate cuts to Medicaid that have eaten away at reimbursement.

“It’s hard from the hospital perspective to track revenues from a particular service to a particular patient in a timely fashion,” Tilson said.

These kinds of uncertainties over payment are part of the reason why hospitals couldn’t tell lawmakers “this is what the state owes us” during the early part of the budget process – because they had no way of knowing.

NC Off-Tracks

But the other big budgeting problem for hospitals – and for lawmakers – came out of problems with NCTracks.

The system was supposed to give providers and hospitals the “real time” ability to track the claims that they’ve submitted to the state Medicaid program.

But it hasn’t turned out that way.

“If NCTracks was fully functional, then not only would hospitals have a more clear picture of what their claims status is with the state, the state would not have to ask us how much they owe our hospitals,” said the NCHA’s Julie Henry.

This year at Southeastern Regional, Johnson said, there have been extra problems, because if the claim submitted to NCTracks is not “clean” – meaning there are no mistakes, no information is left off and there are no ambiguities – then the claim can end up launched into months of delayed payment.

And that’s hurt hospitals like Southeastern Regional, where so many patients are covered by Medicaid, while the payment system has continued to struggle.

“Instead of it getting simpler, it gets more complicated every year,” Johnson said.

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