Straight talk on health care reform: Deficit-reduction plans target provider fees, Medicaid support

The Health Care Affordability Act of 2009 is one of Colorado's most effective reforms, but the program it fostered could be in jeopardy because budget-cutters in Washington are targeting the federal funding that makes the act work.

As talks continue on deficit reduction and increasing the debt ceiling, a number of proposals are zeroing in on the federal matching funds that cover hospital "provider fees" and help support Medicaid funding. Colorado is not alone among states that could lose funds.

The Health Care Affordability Act, with the agreement and support of state legislators and the Colorado Hospital Association, assessed a provider fee on 83 Colorado hospitals. That money is matched by federal funds, which help reimburse hospitals for uncompensated care and over time allow Colorado to expand Medicaid coverage for many uninsured citizens.

By the end of last year, almost 32,000 uninsured adults and children in Colorado had been enrolled in the public Medicaid program. When fully implemented in 2012, the program could provide coverage to as many as 100,000 previously uninsured Coloradans.(1)

In addition to covering more people, the act provides significant assistance to Colorado hospitals that treat Medicaid patients and the uninsured. Before the act, hospitals were paid approximately 56 cents for every dollar of care provided to a Medicaid patient. Under the act, those payments increased to just over 70 cents.(2) Nearly one-third of hospitals that had losses in 2009 were able to generate operating income in 2010, and operating losses for thirteen hospitals in 2010 would have been nearly 40 percent greater if not for revenue from the hospital provider fee, according to the Colorado Hospital Association.(3)

All of these benefits are paid for without a single dollar from Colorado's General Fund. In addition, the act reduces the cost of uncompensated care that otherwise is passed on, or shifted, to those who have health insurance.

Although Colorado is one of a very few states that use provider fees to expand Medicaid eligibility, almost all of the states (47) use the fees to help finance their Medicaid programs. In fact, states have relied more heavily on provider fees as other sources of funding dried up during the economic downturn.

Due to this widespread use of the provider fees for Medicaid – and the resulting growth in federal expenditures – these fees have become the target of several national deficit-reduction proposals.

The Simpson-Bowles commission (officially the National Commission on Fiscal Responsibility and Reform) proposed reducing the fees that states can impose upon Medicaid providers, which would reduce the amount of federal matching funds. The commission estimated the provision would cut federal expenditures by $6 billion in 2015 and $49 billion by 2020.(4)

The president's proposed budget for fiscal year 2012 embraces the Simpson-Bowles provision and modifies federal regulations to limit the amount of provider fee revenue that states may use to fund their share of Medicaid costs. These modifications would take effect beginning in 2015 and would reduce federal Medicaid spending by $18.4 billion between 2012 and 2021.(5) The president's deficit reduction proposal, released in April and entitled the Framework for Shared Prosperity and Shared Fiscal Responsibility, would also limit the states' use of provider fees.

All of these proposals would limit the notable achievements, not to mention the future, of the Colorado Health Care Affordability Act. It is unlikely that Colorado could replace that lost federal funding. That would threaten Medicaid eligibility expansions, improved reimbursement rates to Medicaid providers and reduced cost-shifting of uncompensated care.

It is unclear when any of these proposals, if adopted, would take effect. In the worst-case scenario, immediate implementation could impact Coloradans who have recently become eligible for Medicaid or would become eligible in 2012. Hospitals that treat Medicaid and uninsured patients could see lower reimbursement rates.

More than likely, these proposals would not take effect until after 2014, when the majority of the national Affordable Care Act's reforms and provisions are implemented.

If that happens it could have a significant financial impact beginning in 2017. Between 2014 and 2016, all of the Medicaid expansions created by the national Affordable Care Act will be paid for with federal funds. Beginning in 2017, Colorado will begin to pay a share of those costs, but the provider fee would pay about $236 million between 2017 and 2020.(6) If the provider fee were reduced or eliminated, Colorado's General Fund would have to cover a greater share of those costs.

The situation is further compounded by another deficit-reduction concept offered by the Obama administration – the "blended rate proposal." This proposal would replace all of the matching rates used by the federal government to reimburse state Medicaid and CHIP costs with a single state-specific "blended rate." Since the blended rate would be set below the reimbursement rate under current law, the federal government would save money.

All of these proposals would marginally reduce federal deficits without creating additional taxes. But they would do so at the expense of the most vulnerable in Colorado, and they would once again pass the cost of treating uninsured Coloradans on to hospitals and the insured. In the end, they would simply hand the problem over to the states to solve.

Colorado Sens. Mark Udall and Michael Bennet have stated that the recommendations of the Simpson-Bowles Commission represent a starting point for any deficit-reduction negotiations. In March, Sen. Bennet, along with Republican Sen. Mike Johanns of Nebraska, organized a bipartisan group of 64 senators that sent a letter to President Obama urging action on a comprehensive deficit-reduction plan that builds upon the work of the that commission.

While neither Senator has explicitly stated support for a provider fee adjustment, we would hope that they remember the comment made by Sen. Udall after the passage of the Colorado Health Care Affordability Act: "I am proud to see Colorado lead the charge to increase access to health care for our most vulnerable citizens."(7)

– Bob Semro

End notes
1) Steven Summer, president and CEO, Colorado Hospital Association, Presentation to the Colorado House Health and Environment Committee, Jan. 18, 2011.
2) Ibid.
3) Peg Burnett, CFO Denver Health, Presentation to the Colorado House Health and Environment Committee, Jan. 18, 2011.
4) Simpson Bowles Commission, Co-Chairs Proposal Power Point, November 2010, slide 35.
5) Kaiser Family foundation Policy Brief, Medicaid Financing Issues: Provider Taxes, May 31, 2011.
6) Beck, Melodie, and JBC Staff, FY2011-12 Staff Budget Briefing Department of Health Care Policy and Financing, Dec. 9, 2010.
7) Lund-Muzikant, Diane, Colorado Enacts Hospital Tax, April 30, 2009.