States push new hospital funding arrangements

States are implementing a growing number of initiatives to provide funding for rural or otherwise financially struggling hospitals.

This push comes amid data showing that a record number of hospitals are financially distressed, and advocates warn that coming federal Medicaid cuts will worsen the situation.

Indiana targeted funds

Indiana hospitals celebrated a new arrangement within long-standing, federal-state funding arrangements, known as Medicaid state-directed payments (SDPs).

On May 1, at the state’s request, CMS approved a new $1.9 billion SDP for Indiana that tiered hospital payments over the course of the year based on their average commercial rates (ACRs).

State officials said the new model will provide all hospitals with some Medicaid rate increase, but the biggest increases will go to rural and critical-access hospitals (CAHs) because they charge the lowest commercial prices.

Public rural hospitals, CAHs and hospitals previously subject to federal consent decrees were projected to receive the highest reimbursement increase — up to 158% of the state’s Medicaid fee schedules. Hospitals with the highest ACRs will have increases limited to 125% of the Medicaid fee-for-service rate.

Indiana officials also said the new SDP will pressure high-cost hospitals and health systems to lower rates they charge to commercial plans.

“This action provides a critical lifeline, underscoring a simple reality: Base Medicaid rates do not cover the cost of care,” Scott Tittle, president of the Indiana Hospital Association (IHA), said in a written statement. “While Indiana’s specific approach is unique, the state is now joining more than 40 others that have taken this step to address chronic Medicaid underpayment by utilizing federal supplemental payments.”

Tittle said the SDP funds still do not fully close the gap in Medicaid underpayments and that “more work remains to ensure Medicaid reimbursement is sustainable long term.”

He also noted that hospitals increased their share of the state funding for the SDP through higher provider taxes. Previously, the tax was 6% for inpatient services and about 4.5% for outpatient services. In May, it was increased to 6% for both inpatient and outpatient services.

The Indiana SDP is a marked departure for CMS-approved SDPs, which generally provide uniform rate increases across all hospitals in a state or target funds to specific institutions — usually academic medical centers.

Critics of SDPs have long complained that they primarily benefit the largest and highest-margin health systems in most states because those have the largest number of Medicaid patients.

Illinois loans and grants

On June 16, Illinois Gov. JB Pritzker signed SB3365 into law, which is a Medicaid omnibus bill that provides additional distressed hospital funding.

The law creates the distressed hospital loan program, which will provide interest-free cash flow loans to public, not-for-profit and for-profit hospitals in significant financial distress to prevent closure or facilitate reopening.

The program, which launches in January, requires hospitals with outstanding state debts, such as outstanding provider taxes, to submit a hospital emergency and financial contingency plan for rapid and orderly resolution of finances and operations. It is a provision that could affect many of the state’s struggling hospitals, given a Chicago Tribune report that found most owing either repayment of state advance-payment money or provider taxes were not compliant with their payment plans.

The program also will require hospitals receiving loans to submit independent financial audits for any fiscal year in which a loan is outstanding.

“As uncertainty grows at the federal level, Illinois is taking proactive steps to protect residents and build a stronger, more resilient healthcare system,” said Lt. Gov. Juliana Stratton in a press release.

The law also changed safety net hospital add-on payments and extends the eligibility period for hospitals that would have qualified previously if they also were designated federal rural referral centers.

The state budget package also included $118 million in grants for 17 safety-net hospitals, which do not need to be repaid.

“Members of both Chambers listened to the concerns of the hospital community and worked in good faith to protect access to healthcare services in communities across Illinois, increase access to quality healthcare in underserved communities, and ensure hospitals remain the economic cornerstone of towns and cities across the state,” A.J. Wilhelmi, president and CEO of the Illinois Health and Hospital Association, said in a written statement. “This state budget will support Illinois hospitals and their mission to provide all Illinoisans with the quality, compassionate and world-class healthcare they need and deserve.”

The measure also directs state health officials to develop a healthcare system reform report. It will recommend steps for the system to prepare for looming federal changes anticipated to result in more uninsured individuals and billions of dollars in federal Medicaid cuts. 

Minnesota account

On May 26, Minnesota Gov. Tim Walz (D) signed a healthcare policy and financing bill (HF4466/SF4612) that created a $30 million statewide program to provide immediate financial relief. That will provide $50,000 for the 76 CAHS and the one rural emergency hospital, while other hospitals could apply based on their uncompensated care claims.

Another $205 million was provided to Hennepin Healthcare (formerly Hennepin County Medical Center), which has faced an ongoing financial crisis due to leadership turmoil, elevated market costs and highest-in-the-state shares of uninsured and Medicaid patients. Of that, $100 million would provide state funding to cover the county share of Hennepin Healthcare’s SDP revenue.

The legislation also indicated an intent to create a $500 million hospital stabilization reserve account for financially distressed hospitals but no funding was allocated to that.

Some rural hospital leaders voiced concerns in local media reports that they will not be able to meet the uncompensated care levels in the stabilization account, and only Hennepin Healthcare will be able to meet those.

Joe Schindler, vice president of finance policy and analytics at the Minnesota Hospital Association (MHA), said the legislation left eligibility for those funds vague and the legislature would need to clarify it next year.

MHA also plans to seek increased state financial support to offset coming federal cuts that were projected to result annually in about $350 million less hospital Medicaid revenue and a $260 million in increase in charity care costs.

“We’d have to see this $30 million uncompensated care pool grow to a larger level just to try and offset some of those Medicaid losses, but in addition to that, we think the rates overall in the Medicaid program have to improve,” Schindler said in an interview.

Michigan fund

A more controversial approach has been proposed by legislative leaders in a package of new Michigan legislation, which would create a healthcare cost-reduction fund. That will collect financial penalties and assessments from hospitals and then distribute funds as grants to struggling healthcare facilities.

The source of the money for the fund — a 12% tax on the value of any healthcare consolidation — as well as mandated price cuts and reference-based pricing, elicited opposition from hospital executives and advocates.

“Memorial [Healthcare] would receive no help from the bill and the price to pay for any rural hospital in order to receive grant funds at the fund end would likely mean closure or selling out to private interests well before accessing those funds,” said Ben Frederick, associate vice president of advocacy, government relations and business development at Memorial, at a June 25 legislative hearing.

Frederick criticized the source of funding as penalties and taxes on other hospitals. He also cited the bill’s requirements that funding only go to rural hospitals operating at -3% or worse margins for three years “with no sign of improvement” and determined by a newly appointed review board.