SD17 - Funding the State and Local Hospitalization Program

  • Published: 1988
  • Author: Joint Legislative Audit and Review Commission
  • Enabling Authority: Senate Joint Resolution 87 (Regular Session, 1986)

Executive Summary:
Senate Joint Resolution 87 (SJR 87), passed by the 1986 session of the General Assembly, directed JLARC to study the formulas used to distribute funds for the State and local hospitalization program (SLH), and the State and local cooperative health department program (CHD). The resolution instructed JLARC to make recommendations for formula revisions and to include cost estimates for alternative plans.

This report reviews the current funding formula for the SLH program. It includes the identification of SLH program costs, the methods for calculating the local shares of the program costs, and methods for distributing the State and local responsibility for program funding. The JLARC review of the CHD funding formula is contained in a separate report.

The Current Formula Has Limitations

The SLH program was established in 1946 by the General Assembly to provide hospitalization to indigent and medically indigent persons. "Indigent" generally refers to people whose income places them at or below the poverty level. "Medically indigent" generally refers to people who become impoverished due to the medical expenses they have incurred.

The Department of Social Services (DSS) distributes appropriated SLH funds to all local governments on the basis of population. Local government participation in the SLH program is voluntary. The State finances 75 percent of program operations, while localities finance 25 percent.

The current formula has several limitations: (1) allocating funds based on population does not reflect need for the program, (2) some localities choose not to participate in the program, (3) some localities do not fully match their State allocation for the program, (4) localities must expend local funds before requesting reimbursement from the program reserve fund, and (5) reserve funds are used to meet routine demand for reimbursed program services.

The SLH funding formula has come under frequent scrutiny by the General Assembly, and several studies have been made of the program over the course of its 40-year history. A variety of study groups and legislative proposals have attempted without success to bring about changes to the formula.

The Funding Process Should Address the Goals of Equal Access and Tax Equity

The funding of any State program is designed to promote certain goals. The success of the program itself is often dependent on how well the methods used to fund the program help to achieve those goals. When funds are distributed unfairly, or inequitably, the program goals cannot be effectively achieved.

In evaluating the various methods by which the State could fund the SLH program, two primary goals were considered: equal access to needed program services, and tax equity. The goal of equal access can be promoted by the explicit recognition of program costs to meet the need for hospital-related services by eligible indigent residents. Tax equity can be achieved by ensuring that the proportion of resources required from local governments to fund hospital-related services does not vary greatly across localities.

More Can Be Done to Achieve Equal Access

Current SLH program expenditures do not adequately promote equal access goals. Eligibility requirements and reimbursable services vary across localities, and local participation in the program is not required. In addition, program expenditures do not account for the cost to meet the total demand for SLH services experienced in localities that participate in the program. Many localities deplete their allocated State funds. They may not have the fiscal means to match State SLH reserve funds to meet the needs of their indigent residents.

An analysis of costs to fund the SLH program revealed that several changes to the program structure are necessary to promote equal access to needed hospital-related services.

Recommendation (1). The General Assembly may wish to amend Section 63.1-139 of the Code of Virginia to require the use of uniform eligibility criteria developed by DSS for the SLH program. Such criteria should establish specific resource and income criteria, and should take into account cost-of-living variations in different parts of the State.

Recommendation (2). The General Assembly may wish to direct the Department of Social Services to develop mandatory minimum service requirements for the SLH program. These should stipulate that every locality submit a program plan biennially. These service requirements should also specify (a) the types of services which should be offered and are reimbursable by the program, (b) whether or not funds can be used to supplement other payment sources, (c) the number of days to be covered by reimbursement, and (d) procedures for reviewing requests for additional coverage.

Recommendation (3). The General Assembly may wish to amend §63.1-135 of the Code of Virginia to require that all cities and counties in the Commonwealth of Virginia participate in the SLH program.

The achievement of equal access is also dependent on the extent to which program costs are recognized by the State, and whether or not these costs are included in the distribution system for the program. SLH program costs should cover the cost to meet the need for program-reimbursed services by eligible applicants.

Because an assessment of the health status of indigents was not undertaken during this review, it was difficult to determine the need for program services in each locality. The lack of uniform eligibility for the program, and the diversity of the target population also made it difficult to determine who is eligible to receive services under the SLH program.

For these reasons, a measure of the minimum demonstrated level of demand for the program was developed using paid SLH applications and applications that had been rejected for reimbursement because local SLH funds had been depleted. Demand for the program was estimated in localities that did not participate in the program during FY 1985 or FY 1986.

Recommendation (4). DSS should require all localities participating in the SLH program to collect and monitor SLH applications that are rejected because SLH funds have been depleted. Information on the number of days requested for reimbursement, the estimated cost of the reimbursement, and the type of service received should be collected for each rejected application. These data should be reported to DSS on an annual basis. DSS should use these figures to estimate costs for the SLH program biennially.

Implementing a Reserve Fund for the SLH Program

The current funding structure of the SLH program includes a $1,000,000 annual reserve fund. Only about 14 localities make use of the reserve fund on a regular basis to meet the demand for the program in their localities. A more efficient and equitable cost calculation and distribution system should alleviate the need for a reserve fund to meet routine program demand.

Recognizing the cost to meet program demand will help reduce locality use of the current reserve fund for the program. However, because program demand may be a conservative estimate of the need for the program in some localities, a reserve fund would be useful as a way to offset emergency or extraordinary circumstances that lead to heavy program usage. A reserve fund could be used to relieve extraordinary demands for services on a situational basis in some localities.

Recommendation (5). The General Assembly may wish to appropriate $500,000for use as an annual SLH reserve fund. Use of this reserve fund should be restricted to 'extraordinary" demands for program services. The current reserve fund should be reduced only if future appropriations recognize costs to meet routine demand for SLH in all localities.

The Department of Social Services should establish criteria explicitly defining (a) the types of extraordinary demand eligible for reserve funds, (b) how reserve/und disbursements are to be made, (c) how the amount of the disbursements are to be determined, and (d) when the disbursements are to be made.

More Can Be Done to Achieve the Goal of Tax Equity

SLH program funds are distributed to each Virginia locality based on the local population. The current distribution formula does not promote tax equity because it does not account for the ability of each locality to raise revenues to pay for the SLH program. The current funding formula used to distribute SLH funds to localities is clearly outdated. This report sets forth two alternative formulas based on local revenue capacity for determining local ability to pay for the SLH program. These alternative formulas will ensure that tax equity in achieved through the funding for the program.

Revenue capacity is a measure of the revenue-generating capacity of a locality, if statewide average tax rates are applied to each local tax base. The measure can be used to determine the local shares for the SLH program by converting it to a ratio which shows each locality's relative ability to generate revenues. The ratio is calculated by dividing each locality's per-capita revenue capacity by the statewide per capita revenue capacity.

The first alternative formula for determining local shares of SLH program funding is based on the local revenue capacity ratio. This formula can be used to require a statewide local share of 25 percent (as it is now), or 50 percent. The maximum share for any individual locality can also be set at either 25 or 50 percent. The formula ensures that localities with the greatest abilities to pay bear appropriate responsibility for funding the program. Localities with lesser abilities to pay are provided with greater State assistance in funding the program.

The second alternative formula for determining local shares is also based on the revenue capacity ratio for each locality. However, each locality's share is adjusted to reflect the adjusted gross income of local residents in relation to statewide adjusted gross income. Adjusting the local revenue capacity ratio for income recognizes that localities with residents who have lower incomes may have greater difficulty in taxing at statewide rates. The second formula can also be used to require a statewide local share of either 25 or 50 percent.

SLH Cost Estimate and Distribution Options

The JLARC staff review of SLH finding resulted in the development of several cost estimates to provide various levels of service reimbursement through the program funding. While nine cost estimates were developed for funding the program, only one cost estimate was used to demonstrate how the formula distributes funding responsibility between the State and localities. This cost estimate includes an amount of funding necessary to provide SLH reimbursement for inpatient, outpatient surgical, and nonsurgical outpatient and emergency services in all Virginia localities. The total State and local cost for the 1988-1990 biennium under this estimate is $26.1 million. All of the distribution options presented in this report are based on this cost estimate.

The cost estimates developed for the program provide a more accurate measure of the need, for the program. The formulas presented to determine local shares account for local ability to pay for the SLH program. Both formulas are based on revenue capacity, and represent significant improvements to the current formula. A more accurate program cost estimate and equitable distribution formula will ensure that the goals of equal access and tax equity are promoted through a revised distribution system.