POLICY focus A publication of the California Association of Public Hospitals and Health Systems Medi-Cal Disproportionate Share Hospital Payment Program In 1991, California enacted legislation (SB 855) to establish the Medi-Cal Disproportionate Share Hospital Program (DSH). The program generated new federal funding to supplement general Medicaid (known as Medi-Cal in California) payments to hospitals that treat the greatest numbers of Medi-Cal and uninsured lowincome patients. This program has enabled California s public hospitals to survive through the very turbulent 1990s, marked by a changing economy and lengthy recession, historic state budget deficits, declining state and local funding for health care, ever-growing rates of uninsurance, the rapid growth of managed care and an increasingly competitive health-care marketplace. Without the critical DSH program dollars, California s public health care systems would have collapsed jeopardizing access to health care not only for the lowincome and uninsured, but for all Californians. The SB 855 program has brought in nearly $10 billion in federal revenues to California since 1991. These funds have supported over 130 hospitals including public, University of California, children s and private hospitals at no cost to the state. Moreover, the state budget itself has benefited from this program through receipt of the so-called administrative fees associated with the program. These fees have totaled over $1.4 billion during the last eight years. In addition, because the DSH program was providing supplemental funding to key hospitals, the state gave few if any regular Medi-Cal rate increases to cover the normal costs of inflation, the increasing severity of illness and other factors. It is estimated that the state has saved more than an additional $1.6 billion through such foregone rate increases. Although the SB 855 program has been remarkably successful and now enjoys a measure of stability, there are a number of important policy issues that demand CONTENTS n n DSH: The Basics Near-meltdown of DSH n Stabilization Plan of 1997 n attention. This status report provides background and analysis regarding the structure of the program and details the current policy issues that need to be addressed. Current Policy Issues Copyright 2000 CAPH Updated for 2000!
During the mid-1980s Congress recognized that a limited number of hospitals were shouldering a disproportionate share of the responsibility for providing care to low-income populations. These hospitals were generally located in poor urban communities, faced large uncompensated care burdens, did not serve many privately insured patients (from whom they could cost shift), and experienced aboveaverage costs due to the medical complexity of patients. Believing that targeted assistance to these hospitals was needed in order to preserve access to care for lowincome populations, Congress authorized supplemental payment adjustments (i.e., disproportionate share payments ) for these hospitals in both the Medicare and Medicaid public insurance programs. Thus began the federal Disproportionate Share Hospital (DSH) payment programs. This paper will focus only on the Medicaid DSH program, known in California as the Medi-Cal DSH program. Financing of the Medi-Cal DSH Program The DSH program in California is funded solely by public entities counties, the University of California and hospital IGTs from public entities: $1 billion DSH: THE BASICS California s DSH program has brought in nearly $10 billion of federal funds since 1991. Federal match: $1 billion = Fig. 1 The stream of funding for California s DSH Program 2 California DSH Fund: $2 billion districts (Fig. 1). Neither the state nor private hospitals contribute funding to the program. Public entities make intergovernmental transfers (IGTs) to the state, which, in turn, uses the funds to obtain a federal match. From 1991-1998, public entities each year transferred to the state approximately $1.1 billion in IGTs, which were matched to bring in about $1.1 billion of federal DSH funds. (The exact ratio each year is dependent on the Federal Matching Assistance Payment percentage, known as FMAP, which is 51.67 percent for FY 1999-2000.) It is important to emphasize that although a total of $2.2 billion was distributed to hospitals in FY 1999-2000, only the federal share $1.1 billion should be considered as supplemental revenue. Eligibility criteria for hospitals in California Only hospitals that serve, according to formula, a disproportionately high volume of Medi-Cal and low-income uninsured patients are eligible for DSH funding. Federal law allows states to designate hospitals with a Medicaid utilization rate as little as one percent to be eligible for federal DSH payments. Unlike many other states, however, California has implemented the narrowest eligibility criteria allowed under federal statute. Federal law mandates states to make eligible for DSH payments any hospital with either (1) a Medicaid utilization rate that is at least one standard deviation above the statewide mean or (2) a low-income utilization rate (LIUR) that exceeds 25 percent (Fig. 2). This mandated standard is the standard that California has adopted. Two DSH Eligibility Tests UTILIZATION-BASED TEST Medi-Cal inpatient utilization 1 2 m 42.5% *Low Income Utilization Rate = Fig. 2 Medi-Cal DSH eligibility requirements REVENUE-BASED TEST LIUR*> 25% Proportions of Medi-Cal + charity revenues Total revenues In California, the mean Medi-Cal utilization rate is 24.4 percent and one standard deviation above the mean is 42.5 percent for FY 1990-2000. The low-income utilization rate formula (LIUR) is set forth in federal law and is based on the
Located in 36 counties representing 95 percent of the state s population, over 130 California hospitals receive DSH payments. ratio of a hospital s revenues associated with Medicaid and charity patients as compared to all revenues for hospital services. In FY 1999-2000, 137 public and private hospitals about one in four hospitals statewide were eligible for Medi- Cal DSH funds. At least one hospital in each of 36 counties of California, representing 95 percent of the state s population, qualified for and received Medi-Cal DSH payments. Distribution of DSH funds to qualified hospitals Medi-Cal DSH funds are distributed to hospitals according to a complex formula established in state law. A per diem rate is calculated, which takes into account the type of hospital (e.g., a major teaching hospital, a children s hospital, or a community hospital) and the volume of care the hospital provides to low-income populations, as measured by the LIUR. For example, a major teaching hospital receives a higher per diem than a community hospital. Similarly, a hospital with a high LIUR will receive more funding than a comparable hospital with a lower LIUR. Most public hospitals have LIURs ranging from 70 percent to 100 percent, reflecting the high volume of care they provide to low-income populations (Fig. 3). 70 % 50 % 1997-98 Average LIURs NEAR- MELTDOWN Beginning in the mid-1990s, a number of pressures placed increasing strain on the Medi-Cal DSH program. In 1997, those pressures reached a breaking point, threatening a total collapse of the program. Medi-Cal DSH funding to public hospitals was projected to decline so low that public entities would no longer be able to make the IGTs necessary to fund the program. Without the IGTs, California stood to lose more than $1 billion a year in federal funds. Four factors, in particular, created the near-meltdown situation. 1 The level of federal funding provided to public hospitals through the Medi-Cal DSH program declined by nearly 50 percent between 1992 and 1997. In 1991, only 69 public and private hospitals qualified for funding under California s DSH program. In that first year, public hospitals received nearly 70 percent of federal DSH funds. Between 1992 and 1997, the number of and level of DSH funding to private hospitals more than doubled (Fig. 4). Federal DSH funding to public hospitals dropped from Millions $800 $700 $600 $500 $400 $300 $200 $100 $0 91-92 96-97 Publics 48% decrease 91-92 123% increase 96-97 Privates Fig. 4 Change in federal DSH payments to public and private hospitals between FY 1991-92 and FY 1996-97. 30 % 10 % Publics (67%) Privates (31%) Fig. 3 Average low-income utilization rates for FY 1997-98 approximately $650 million in FY 1991-92 to under $370 million in FY 1996-97, with further declines expected. These trends were the result of an increasingly competitive marketplace in which various hospitals now aggressively sought 3
Medi-Cal program patients, primarily healthy moms and kids. While the LIUR formula was supposed to recognize service to both Medi-Cal and uninsured patients, many private hospitals qualified on the basis of Medi-Cal activity alone. Full implementation of 2the hospital-specific payment limits enacted in the federal Omnibus Budget Reconciliation Act of 1993 (OBRA 93) meant that public hospitals were restricted in the amount of Medi-Cal DSH funding they could receive. As a result of the rapid growth in federal DSH expenditures during the prior two years and the fact that a number of states were misusing federal DSH funds for non-health purposes, Congress enacted legislation in 1993 limiting each hospital s DSH payments to an amount equal to the hospital s unreimbursed costs associated with serving Medicaid patients and the uninsured. In order to protect the safety net, the 1993 law provided a transition period for public hospitals: The cap was set at 200 percent (rather than 100 percent) of such unreimbursed costs for public hospitals during the first year the cap was effective. California public hospitals DSH payments are disproportionately are limited to affected in fact, penalized by the OBRA 93 each hospital s unreimbursed caps as a direct result of expenses for the way California s Medi-Cal and program is structured. uninsured Because public entities patients. provide the IGTs that fund the program, Medi-Cal DSH payments to public hospitals appear artificially high since they reflect a recovery of the IGT amounts that allow the program to exist (Fig. 5). Public hospital DSH payments are, therefore, more vulnerable to the OBRA 93 cap limitations, even though public hospitals provide a significant volume of unreimbursed care to lowincome populations. In fact, they provide 74 percent of all indigent care in California. Full implementation of the OBRA 93 caps threatened to dramatically reduce the level of Medi- Cal DSH payments public hospitals could receive, which would have compromised the ability of public entities to make future IGTs. The IGT Effect* PUBLIC HOSPITAL A DSH Payment: $45 million (includes $30 million IGT recovery) Public entity transfers IGT: $30 million PRIVATE HOSPITAL B DSH Payment: $15 million Federal DSH Funds: $15 million * for illustration purposes only; actual amounts vary Federal match: $30 million Federal DSH Funds: $15 million Fig. 5 Because public entities provide the IGTs that fund the Medi-Cal DSH program, payments to public hospitals appear artificially high. 4
STABILIZATION PLAN OF 1997 In order to avert collapse of the SB 855 program, a multipronged stabilization plan was needed at both the California and federal levels. The successful plan, which was implemented in 1997, included three key elements: The public funders of the 3Medi-Cal DSH program are required to transfer an additional payment to the state as an administrative fee, which effectively reduces the amount of real federal DSH funds received by public hospitals. During the early and mid-1990s, California was in a severe recession, and the state experienced record-high budget deficits. In order to help alleviate these fiscal difficulties, the state increased the SB 855 program administrative fee from $89 million in FY 1991-92 to nearly $240 million in FY 1995-96. The administrative fee is paid entirely by public entities through an additional IGT. 4 Some counties converted their public hospitals to private status, thereby reducing the number of public entities that make IGTs to fund the Medi-Cal DSH program. Once a public hospital converts to a private status, the public entity is no longer responsible for or, in fact, permitted to make an IGT, although the hospital remains eligible to receive Medi-Cal DSH funds. As more public hospitals privatized, the remaining public entities were being forced to shoulder a greater proportion of the IGT responsibility. As with the administrative fee, since a public hospital s Medi-Cal DSH payments are calculated under a separate formula, any increase in the IGT has the net effect of reducing the level of federal DSH funding to that hospital. Relief for public hospitals from OBRA 93 caps. As described previously, public hospitals were being penalized under the OBRA 93 legislation as a result of the way California s DSH program is structured. The federal Balanced Budget Act of 1997 provided California public hospitals with greater flexibility under the OBRA 93 hospital-specific caps. Specifically, for two years, the caps would be applied to public hospitals at 175 percent of unreimbursed costs associated with Medi-Cal and uninsured patients, instead of 100 percent. Congress permanently extended this law in 1999. Reduction in the state administrative fee. Building on a reduction in the state administrative fee of $10 million for FY 1996-97, the state Legislature further reduced the fee by $75 million for FY 1997-98 to $154 million. Subsequently, in 1998, the Legislature again reduced the fee by another $40 million for FY 1998-99 and beyond, in order to partially address long-standing reductions in county funding resulting from, among other things, property-tax diversion. Restoration of equity in payments to eligible hospitals. In order to halt the continued erosion of Medi-Cal DSH payments to public hospitals, the state adopted legislation, AB 768, to guarantee that public hospitals received 50 percent of federal DSH funding for FY 1997-98. AB 768 ensured that public hospitals received a fair and predictable share of federal DSH funds and protected them against having to absorb the full costs associated with privatization of public hospitals to private status, since the impact would now be spread among all Medi-Cal DSH hospitals. 5
In order to continue the The threepronged more years, in 1998, stabilization plan for two stabilization California enacted plan of 1997 legislation, AB 2087, to enabled extend the principles of California to AB 768 through state receive its full fiscal years 1998-99 and allotment of 1999-2000. Through AB federal DSH 2087, California will funds. continue to receive its full allotment of federal DSH funds allowed under federal law. Moreover, AB 2087 makes additional changes related to the privatization of public hospitals, one of the factors that contributed to the destabilization of the Medi-Cal DSH program. The new law excludes public hospitals that had already converted to private status from certain supplemental distributions of Medi-Cal DSH funds and significantly limits overall payments to any public hospital that converts after June 30, 1997. CURRENT POLICY ISSUES 1999 $1.068 billion 2000 $986 million 2001 $931 million 2002 $877 million Fig. 6 Reduction of federal DSH funding required by the BBA of 1997. allotment between 1998 and 2002 decreasing from $1.085 billion to $877 million (Fig. 6). The loss of $200 million in federal funds will have a significant impact on hospitals ability to provide care to low-income populations. It is essential that these cuts be minimized to the greatest extent possible by freezing state allotments at the 2000 funding level. Although California s DSH program currently enjoys stability, new challenges confront the program. These policy issues, the impact of which is compounded by the growing crisis of the uninsured and the limited success of incremental reform measures, must be addressed to preserve access to health services for all Californians. They include: n DSH reductions contained in the federal Balanced Budget Act of 1997. The federal Balanced Budget Act of 1997 fixed in law each state s federal DSH allotment through the year 2002. Nationwide, DSH spending will be reduced by $10.4 billion between 1998 and 2002. However, federal DSH expenditures are allowed to increase after 2002 by the percentage change in the Consumer Price Index, subject to a ceiling of 12 percent of each state s total annual Medicaid expenditures. California will experience a 20 percent decline in its federal DSH 6 n Expiration of the stability plan contained in AB 2087. The core elements of AB 768 and AB 2087, combines with reductions in the administrative fee, restored a measure of equity and predictability into the DSH program. In order to preserve the program into the future the priniciples embodied in AB 2087, particularly those ensuring public hospitals a fair, appropriate and predictable share of federal DSH funds, must be extended permanently. In addition, with the state no longer facing budget deficits and to maximize federal funding for DSH hospitals, the administrative fee now set at $84 million should be eliminated.
MEMBERS SAN FRANCISCO COUNTY San Francisco Department of Public Health/ Community Health Network of San Francisco San Francisco General Hospital Laguna Honda Hospital and Rehabilitation Center SAN JOAQUIN COUNTY San Joaquin County Health Services San Joaquin General Hospital SAN LUIS OBISPO COUNTY San Luis Obispo County Health Agency San Luis Obispo General Hospital SAN MATEO COUNTY San Mateo County Health Services Agency San Mateo County Health Center SANTA CLARA COUNTY Santa Clara Valley Health & Hospital System Santa Clara Valley Medical Center VENTURA COUNTY Ventura County Health Care Agency Ventura County Medical Center ALAMEDA COUNTY Alameda County Health Care Services Alameda County Medical Center CONTRA COSTA COUNTY Contra Costa Health Services Contra Costa Regional Medical Center FRESNO COUNTY University Medical Center KERN COUNTY Kern Medical Center LOS ANGELES COUNTY Los Angeles County Department of Health Services Harbor-UCLA Medical Center High Desert Hospital King/Drew Medical Center Olive View-UCLA Medical Center Rancho Los Amigos National Rehabilitation Center LAC+USC Medical Center MARIN COUNTY Health & Human Services of Marin County MONTEREY COUNTY Natividad Medical Center ORANGE COUNTY University of California Irvine Medical Center RIVERSIDE COUNTY Riverside County Health Services Agency Riverside County Regional Medical Center SACRAMENTO COUNTY University of California Davis Medical Center SAN BERNARDINO COUNTY Arrowhead Regional Medical Center SAN DIEGO COUNTY University of California San Diego Medical Center Key Hospitals/Medical Centers Health Systems 7
CALIFORNIA ASSOCIATION OF PUBLIC HOSPITALS AND HEALTH SYSTEMS 2000 Center Street, Suite 308 n Berkeley, CA 94704 n 510.649.7650 n fax: 510.649.1533 n www.caph.org