SD36 - Funding of Indigent Hospital Care in Virginia

  • Published: 1993
  • Author: Joint Legislative Audit and Review Commission
  • Enabling Authority: Senate Joint Resolution 180 (Regular Session, 1991)

Executive Summary:
Large numbers of poor Virginians are without health insurance, and the cost of insurance and health care services is increasing. As a result, the State's indigent care programs have experienced significant growth, which is expected to continue into the future. In response to this concern, the General Assembly directed the Joint Legislative Audit and Review Commission (JLARC) to study the Commonwealth's Medicaid program and the indigent care appropriations to the State teaching hospitals and the Medical College of Hampton Roads (MCHR).

This report is one in a series completed in response to SJR 180 (1991). The report addresses three of 11 specific directives contained in SJR 180, in the context of hospital care:

• Review of eligibility, scope of services, and reimbursement rates for indigent care at the University of Virginia Medical Center (UVAMC), the Medical College of Virginia Hospitals of Virginia Commonwealth University (VCU/MCVH), and MCHR; and a determination of the appropriateness of general fund and Medicaid allocation methodologies.

• Examination of the relationship between Medicaid and other State programs to promote optimal utilization of State funds.

• Identification of options for using Medicaid funds for services currently supported with general funds.

The results of the review show that the State is the largest single source of indigent hospital care funding in Virginia. Furthermore, the two State teaching hospitals are the major providers of this care.

The review found that the State teaching hospitals are accountable for the use of State funds. However, the General Assembly should clarify its position on certain reimbursement, eligibility and service practices at the State teaching hospitals, such as the use of indigent care funding for out-of-state patients. The State should also develop a more comprehensive method for deciding indigent care funding levels at the State teaching hospitals. In addition, MCHR should be required to revise its methods for requesting indigent care appropriations.

The review also found that there are limited opportunities for optimizing State funds through the Medicaid program. The State is already achieving major savings by using federal Medicaid funds to subsidize a portion of the non-Medicaid indigent care provided at the State teaching hospitals. New federal regulations and other factors may make it difficult to expand this policy. However, several options are presented for consideration by the General Assembly.

The State Is the Largest Payor for Indigent Hospital Care

The State oversees four major financing mechanisms for indigent hospital care:

• The Virginia Medicaid program,

• The State and Local Hospitalization (SLH) program,

• The Indigent Health Care Trust Fund (Trust Fund), and

• Indigent care appropriations to UVAMC, VCU/MCVH, and MCHR.

An additional source of funding for indigent hospital care is unsponsored care provided by hospitals. Unsponsored care includes charity care and bad debt for which a hospital receives no payment.

Because of a lack of comprehensive, statewide spending data for indigent hospital care, an estimate of the total amount was developed. This JLARC estimate indicates that in FY 1991, approximately$691 million was spent on indigent hospital care in Virginia. More than $293 million (42percent) of this spending came from State general funds (see figure on page ii of the report). Federal funds accounted for nearly $185 million (27 percent) of total spending, and local funds accounted for $1.4 million, or less than one percent of total spending. Hospital unsponsored care accounted for nearly $212 million, or 31 percent of total spending for indigent hospital care.

VCU/MCVH and UVAMC Are Major Providers of Indigent Hospital Care In the State

Of the estimated $691 million spent on indigent hospital care in FY 1991, VCU/MCVH and UVAMC accounted for about one-third (see figure on page iii of the report). Virginia Medicaid reimbursement and the indigent care appropriations comprised more than 90 percent of these funds. Together the State teaching hospitals received $154 million of the $293 million in State general funds spent on indigent hospital care.

There are several reasons why the State teaching hospitals accounted for this level of spending. Both VCU/MCVH and UVAMC serve a high volume of indigent patients compared to most other hospitals in the State. In addition, the teaching mission of these institutions makes them more expensive than most other hospitals in the State. Also, the State funds a greater share of costs at these institutions than at other hospitals.

Indigent Care Reimbursement Rates Are Reasonable at the State Teaching Hospitals, But Legislative Intent Should Be Clarified for Several Other Issues

To determine the reasonableness of the eligibility, scope of services, and reimbursement rates for the indigent care appropriations at VCU/MCVH and UVAMC, a comparison was made between these elements and those in place for other State indigent hospital programs. Although a comparative analysis of reimbursement rates found the indigent care rates to be reasonable, three concerns were identified.

First, the two State teaching hospitals currently receive general funds for their unreimbursed Medicaid costs. This may conflict with federal and State Medicaid policies of accepting Medicaid reimbursement as payment in full. The two teaching hospitals received more than $2.7 million in general funds for these costs in FY 1992.

Second, the State teaching hospitals have used their general fund appropriations to subsidize the indigent care of non-Virginians, which cost the State about $2.6 million in FY 1992. Most of this care has been provided to West Virginians at UVAMC. Of the states bordering Virginia, only North Carolina provides indigent care funding that can be used to provide care to Virginians, but only under certain limited circumstances.

Third, the indigent care appropriations have been used to reimburse the teaching hospitals for services they provided to indigent patients that would not be reimbursable under Virginia Medicaid. One costly example is certain types of transplants -- liver, heart, and bone marrow. In FY 1992, UVAMC and VCU/MCVH were reimbursed more than $2.7 million in general funds for 38 of these transplants.

The issue of transplants is complicated by the fact that 12 of the 30 transplant recipients at UVAMC in FY 1992 were Medicaid eligible. If Virginia Medicaid had covered these services, $1.2 million in general funds could have been saved on these transplants. It is not clear at this point whether Virginia Medicaid should revise its transplant policy. More information is needed on the hidden demand for transplants, as well as alternative means of financing transplants through Medicaid.

The following recommendations are made in response to these findings:

• The General Assembly should clarify its intent concerning the funding of unreimbursed Medicaid costs through the indigent care appropriations.

• The General Assembly should clarify its intent concerning whether the indigent care appropriations should be used to reimburse the State teaching hospitals for services provided to non-Virginians.

• The Secretary of Health and Human Resources, with support from the Secretary of Education, should study the current Medicaid limits on transplant services.

• The General Assembly should clarify its intent concerning the scope of services reimbursable through the indigent care appropriations.

A More Comprehensive Approach Is Needed to Determine Appropriate Funding Levels at the State Teaching Hospitals

In the past, the indigent care appropriations to the State teaching hospitals have been based on a decision to fund a certain percentage of their reported indigent care costs. Despite receiving a reduced percentage of costs in recent years, the institutions have taken steps to remain financially sound.

There is no guarantee, however, that this will continue in the future because the health care and medical education environments are in a state of flux. To ensure that State general funds are used as cost effectively as possible, the State needs to adopt a multi-faceted approach to indigent care funding. This approach should be focused on institutional performance with respect to State policy goals for indigent care and medical education.

The following recommendation is made:

• The Department of Planning and Budget should consider the following factors as it considers the State teaching hospitals' budget requests for general fund support of indigent care and medical education: (1) the volume of indigent care each institution will be expected to provide, (2) the medical education programs each institution will be expected to provide, (3) the cost effectiveness of each institution, (4) the impact of federal and State Medicaid policy changes as well as State hospital cost containment policies, (5) other providers' perceptions of payment equity, (6) each hospital's overall payor mix, financial position, capital needs, and bond rating.

Joint Budget Review Should Be Conducted

The State teaching hospitals pursue a dual mission of health care and education. Currently, recommendations for indigent care funding at the State teaching hospitals are overseen by the education secretariat, while Medicaid funding is overseen by the health and human services secretariat. There is no formal mechanism to ensure that the Secretary of Education has an opportunity to comment on Virginia Medicaid policy changes which could significantly impact the State teaching hospitals. Similarly, there is no formal mechanism to allow the Secretary of Health and Human Resources to comment on the cost effectiveness of the indigent care appropriations to the teaching hospitals.

As the health care and medical education environments grow increasingly complex, it will be important to ensure that health care policies do not compromise the education mission of the State teaching hospitals, and vice versa. Therefore, the following recommendation is made:

• The Secretary of Education and the Secretary of Health and Human resources should develop a memorandum of agreement to implement joint budget development and associated program review for the State leaching hospitals and the Medical College of Hampton Roads. This agreement should exclude dual oversight of budget execution.

Method for Determining Indigent Care Losses Should Be Revised at the Medical College of Hampton Roads

MCHR participates in the provision of a substantial amount of indigent care through its faculty practice plans and educational programs at various area hospitals. The State has provided indigent care funds to MCHR since 1978, including an annual appropriation of more than $4 million.

In its budget addenda for the FY 1992-94 biennium, MCHR requested additional funding of $2.8 million. There are three concerns about this budget request which should be addressed. First, MCHA's estimate of indigent care losses was based on charges rather than costs. Second, the estimate of indigent care losses included Medicaid contractual adjustments (the difference between Medicaid charges and reimbursement), which may be inconsistent with State Medicaid policy. Third, MCHR's estimate did not consider the financial impact of the Trust Fund on the affiliated teaching hospitals.

MCHA's indigent care losses appear to be significantly less when they are determined on the basis of costs excluding Medicaid contractual adjustments. Under this approach, the adequacy of indigent care reimbursement rates appears more favorable than previously reported. In order to move toward a more appropriate basis for determining indigent care funding levels for MCHR, the following recommendations are made:

• The Medical College of Hampton Roads should use costs rather than charges as the basis for requesting indigent care appropriations and reporting indigent care losses, and should subtract net positive payments from the Indigent Health Care Trust Fund when determining indigent care losses.

• The General Assembly should clarify its intent for the inclusion of unreimbursed Medicaid costs in the determination of indigent care losses at the Medical College of Hampton Roads.

• Because of the presence of the Indigent Health Care Trust Fund, the General Assembly should clarify its intent to use the indigent care appropriation to subsidize charity care provided by the Medical College of Hampton Roads affiliated hospitals;

• The Medical College of Hampton Roads should modify its plan for apportioning the State indigent care appropriations to reflect the actual apportionment between the Medical College and the affiliated hospitals.

There Are Limited Options for Using Medicaid Funds for Hospital Services Currently Supported with General Funds

Because of the availability of federal matching dollars, it is often more cost effective to finance a service through the Medicaid program rather than through a program which is entirely State funded. There are three general ways in which to optimize State general funds through Medicaid: (1) expand Medicaid eligibility to include recipients covered under other State funding mechanisms, (2) expand Medicaid services to include those covered under other programs t and (3) use Medicaid funds to cross-subsidize other programs without changing eligibility or services.

Medicaid Eligibility Expansions Would Not Be Cost Effective. It would not be cost effective to expand Medicaid eligibility to enroll people covered by the SLH program or the Trust Fund. The primary reason is that because of Medicaid's status as an entitlement program, the new demand created by expanded eligibility would exceed any general fund cost savings.

Medicaid Service Expansions Would Not Be Cost Effective At This Time, But the 21-day Limit on Hospital Stays Should Be Reevaluated. Earlier it was noted that further research is necessary to determine whether it might be cost effective to expand Medicaid services to include certain transplants. Another important Medicaid service limitation is the 21-day limit on adult lengths of stay. In FY 1991, the 21-day limit appears to have cost the State $2.3 million in general funds at the State teaching hospitals. Limited information on the impact of this restriction at non-State hospitals indicates that it would not be cost effective for the State to lift the 21-day limit at this time.

However, the 21-day limit should be subjected to further study based on more comprehensive information. The following recommendations are made:

• The Department of Medical Assistance Services should develop reporting mechanisms for Virginia Medicaid, the State and Local Hospitalization program, and the Indigent Health Care Trust Fund which will allow monitoring of the 21-day length of stay Medicaid limit to occur.

• The Joint Commission on HealthCare should ensure that the current 21-day length of stay limit on adult inpatient hospital stays is reconsidered during the work conducted by the 1995 task force on Medicaid inpatient reimbursement.

Expanded Use of Medicaid to Cross-Subsidize the Indigent Care Appropriations Depends on Federal Regulations. During FY 1992, the general fund appropriations to VCU/MCVH and UVAMC were reduced by $40.8 million. This funding was replaced with enhanced Medicaid payments of approximately $36 million, of which $18 million was general funds. For the 1992-94 biennium, $210.7 million in indigent care appropriations were made to the State teaching hospitals, with $65.8 million being federal Medicaid funds.

Beginning in FY 1993, the federal government placed interim limits on the amount of enhanced Medicaid payments that can be made. These limits indicate that there is potential for increasing federal funding of the indigent care appropriations at VCU/MCVH and UVAMC. However, a final federal policy will have to be enacted before final decisions can be made. It may also be possible to implement an enhanced Medicaid disproportionate share adjustment policy for MCHR. However, the unique status of MCHR as a non-State agency adds to the complexity of this option. Therefore, the following recommendation is made:

• The Joint Commission on HealthCare should request the Secretary of Health and Human Resources and the Secretary of Education to examine the feasibility of using Medicaid funds to cross-subsidize the indigent care appropriations at the Medical College of Hampton Roads and its affiliated hospitals.

Using Medicaid Funds to Cross-Subsidize the SLH Program or Trust Fund Would Be Difficult. JLARC staff examined whether the State could also reduce general fund expenditures by using federal Medicaid dollars to cross-subsidize the SLH program or the Trust Fund. The objective would be to change the funding sources to obtain federal funds without compromising the mission of either program. However, federal Medicaid regulations in conjunction with complex legal and administrative requirements would make it difficult to cross-subsidize these programs without compromising their current missions. There are other options for maximizing federal funds, but these would require significant changes to the SLH program and the Trust Fund as they currently exist.