Medicaid Payment and Reimbursement

CHIP Deal Lifts Pressure on Hospital Margins

January 25, 2018 9:34 am

The CHIP funding deal could complicate a deal on a Medicare extenders package of add-on payments.

Jan. 24—Children’s hospitals got a big financial boost from the recent deal to fund the Children’s Health Insurance Program (CHIP) for six years as part of a short-term funding bill.

Children’s hospitals, which generate 52 percent of their gross revenue from Medicaid and CHIP, celebrated the bipartisan deal, which ended a federal shutdown and funded the federal government through Feb. 8.

“This extension will ensure access to a range of pediatric services—from preventative visits to life-saving treatments—for millions of children in working families,” the Children’s Hospital Association said in a written statement. “Children’s hospitals across the nation applaud this important action on children’s health care.”

The program provides coverage for 8.9 million enrollees who exceed income limits for Medicaid coverage.

Moody’s Investor Services earlier this month cited the lack of permanent CHIP funding as a credit-negative for children’s hospitals, given their heavy reliance on Medicaid and CHIP payments. That’s in sharp contrast to adult hospitals, which garner only 15 percent of gross revenue from Medicaid and CHIP.

Children’s hospitals had urged renewal of CHIP since its authorization expired in September 2017.  After the expiration, the Trump administration provided supplemental funds on an administrative basis to extend the program—which is operated by the states—but states were beginning to exhaust available funds. Some states had already taken steps to notify families that their children’s coverage may soon end as the programs prepared to shut down.

“The extension of CHIP helps to support the nation’s health care safety net and provides services to some of our most vulnerable patients,” Darrell G. Kirch, MD, president and CEO of the Association of American Medical Colleges, said in a written statement.

A short-term funding disruption in CHIP would not have had lasting negative credit implications because most children’s hospitals have strong enough liquidity and cash flow to temporarily absorb higher amounts of uncompensated care, according to Moody’s. For instance, median days of cash on hand is 379 for children’s hospitals, compared with 205 for adult hospitals.

Since CHIP’s enactment 20 years ago, the share of uninsured children fell to 4.5 percent by 2015 from 13.9 percent in 1997, according to the Medicaid and CHIP Payment and Access Commission (MACPAC) The result is that children’s hospitals report lower rates of self-pay patients, for whom hospitals are generally uncompensated, than do other hospitals.

Funding Details

A less appealing aspect of the CHIP funding deal is that it will reduce the enhanced federal matching rate from 23 percent to 11.5 percent in FY20.

Another potential wrinkle is that CHIP funding approval eliminates a potential offset for costly Medicare extenders that hospitals are seeking, Emily Evans, managing director for Hedgeye, a market research firm, wrote in an investor’s note.

The Congressional Budget Office had previously estimated that extending CHIP would decrease the deficit by $6 billion. Such funding was being considered at one point to pay for the Medicare extenders, and CHIP reauthorization and the extenders package were usually approved in tandem by Congress.

Other payment offsets under consideration include modification of payments for critical access hospital swing beds, according to a House Ways and Means Committee summary.

Industry observers expect the next federal funding deal also to try to address the Medicare extenders, which include the Medicare Dependent Hospital program and the Low-Volume Adjustment program.

Additionally, hospital advocates are pushing for the next budget deal to address Medicaid disproportionate share hospital (DSH) cuts, which began Oct. 1. The $2 billion in Medicaid DSH cuts in FY18 will increase over the next several years until reaching a total of $43 billion by 2025. Required by the Affordable Care Act (ACA), the cuts were delayed for four years by previous congressional actions. Hospital advocates are seeking at least another two-year delay.

Other Provisions

The CHIP deal also included several healthcare tax provisions, including:

  • Delaying the ACA medical device tax through 2019
  • Delaying the ACA health insurance tax through 2019
  • Delaying the start of the ACA tax on high-cost health insurance plans from 2020 to 2022

Tracy Watts, a senior partner for Mercer, said implementation of the high-cost insurance tax, known as the Cadillac tax, could compel employers to stop offering wellness programs and on-site clinics, and to push more out-of-pocket costs onto employees as a way to get premium costs below the tax threshold.

Mercer estimated in September that 31 percent of employers with 500 or more employees would have owed the 40 percent excise tax in 2020.

An August analysis by Oliver Wyman—funded by UnitedHealth Group—projected that in 2018, the 2.6 percent health insurance tax would have increased premiums by $158 per person in the individual market, $185 per individual and $500 per family in the small-employer market, and $188 per individual and $540 per family in the large-employer market.

“These are the kind of solutions that will improve the affordability, availability and value of health insurance coverage for millions of Americans,” America’s Health Insurance Plans said about the tax delays in a written statement.

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare 


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