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Weighing Private Option Boost, Medicare Cuts To Scale Uncompensated Care

5 min read

Hospitals around the state have reported that the so-called “private option” provided a needed boost by reducing losses associated with uncompensated care.

A recent survey by the Arkansas Hospital Association reiterated that fact when it found that inpatient admissions of people without insurance dropped by nearly 49 percent during 2014. That was the first year of Arkansas’ unique approach to expanding Medicaid by buying private health insurance for more than 200,000 residents whose household income is too high for traditional Medicaid but too low to afford insurance premiums.

But at the same time, hospitals also are experiencing cuts to Medicare reimbursements that are forcing them to reduce expenses and add services to make up for the shortfall.

Paul Cunningham, executive vice president of the Arkansas Hospital Association, said in an interview last week that the state’s hospitals expect to lose about $2.5 billion in Medicare revenue over a 10-year period that began in 2012.

Cuts to reimbursements have been made for years but accelerated after the implementation of the Affordable Care Act. Those cuts were made with the passage of the 2011 Budget Control Act and two tax acts that were passed in 2012 that both made additional reductions. The Congressional budget deal known as sequestration required under the 2011 law alone cut 2 percent of Medicare payments to all providers, Cunningham said.

Because those cuts are so severe, even the benefits of the private option have not made up the difference.

“That will probably never happen. What this does is it certainly backfills a part of that hole, and it just makes it a bit easier to manage the reductions in the Medicare reimbursements,” Cunningham said.

Private Option Boost

The state Hospital Association last month released the results of a survey focusing on the effects of the private option. In total, 56 acute care hospitals and six specialty hospitals — more than 80 percent of facilities in the state — responded, providing insight into amount of uncompensated care the hospitals provide and the lingering effects of Medicare cuts.

Cunningham said that uncompensated care provided to uninsured patients dropped by $149 million in 2014 after the implementation of the private option. For hospitals, he said, that is the private option’s “primary benefit — and it’s a huge benefit.”

And rural hospitals, which tend to have narrower margins than larger health systems, likely felt a greater impact, Cunningham said.

“If the private option is in place and it’s reducing uncompensated care, then that just makes their situation a bit more tenable and more manageable,” he said.

But Cunningham warned against conflating those gains with making up for Medicare losses.

Scott Barrilleaux, CEO of Drew Memorial Hospital in Monticello, said the private option helped turn the hospital’s operating budget around. He said that after a $641,000 loss in the fiscal year that ended March 31, 2014, the facility had a $459,000 profit in fiscal 2015.

The private option has also helped reduce debt owed to the hospital from nearly $5.7 million in fiscal 2013 to just over $3 million as of March 31.

“It’s been a very positive thing for us,” Barrilleaux said.

But Barrilleaux said that between 2014 and 2015 the hospital also experienced an 8 percent slide in Medicare revenue along with an 8 percent increase in total admissions. Barrilleaux said the latter is largely because of a growing population in Monticello, which the hospital hopes to keep up with despite the Medicare cuts. Those cuts could easily swing the hospital’s budget again if new revenue sources aren’t developed, he said.

“A 4 percent profit margin could easily become a 10 percent loss in a matter of five years,” Barrilleaux said.

Ray Montgomery, president and CEO of Unity Health (formerly White County Medical Center) in Searcy, also said savings from the private option didn’t make up for reduced Medicare payments to his facility. He said his facility expects a net gain of $37 million associated with the private option over the next six years, but will also experience $63 million in Medicare cuts. Between the two programs his facility would still see a net negative of $25 million.

“It’s helping us, and that’s why this is so important, because there are hospitals that could not handle that significant burden,” Montgomery said.

But the future of the private option remains unclear. The Governor’s Advisory Council on Medicaid Reform, led by Dr. Greg Bledsoe, the state’s surgeon general, has been given the job of reviewing the program and offering recommendations for moving forward.

Montgomery, who serves on the advisory board, said it was too early to say what those recommendations might be and that the council was still gathering information.

Adding Services, Making Cuts

Several hospital administrators reached last week said they were considering expansions and adding services to try to increase revenue to make up for the Medicare reductions.

Barrilleaux said Drew Memorial plans to begin construction by the end of the year on a nearly $26 million expansion that would grow the hospital’s labor, delivery and recovery, and surgical services.

Montgomery said he plans to expand Unity Health’s fledgling residency program and add psychiatric services. Over the next three years, he said, he hopes to hire the equivalent of more than 100 full-time employees.

Barrilleaux and Montgomery both said they were reviewing areas where expenses can be reduced, including negotiating contracts with vendors and buying less expensive pharmaceuticals.

Roxane Townsend, CEO of the UAMS Medical Center in Little Rock, said that before the private option, 14 percent of her patients were uninsured, which fell to about 4 percent after its implementation.

Townsend said the hospital is moving forward with expansion plans that were reported by Arkansas Business in May. She said work began on the project in recent weeks and that Deloitte Consulting has been hired to compile a financial feasibility report. That report is expected in October.

UAMS Chancellor Dan Rahn said that across all programs, the university estimates an $18 million net positive revenue as a result of the private option. But Medicare cuts across all programs — totaling $6.5 million — create a hole that won’t keep up with inflation.

“That is not enough to keep pace with the escalating cost for pharmaceuticals, equipment costs, personnel expenses — just keeping our employees at par with inflation — and other expenses. So we’re still having to cut expenses in order to maintain fiscal balance,” Rahn said.

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