Creative payment strategy helps ensure a future for teaching hospitals - Cover Story

Healthcare Financial Management, Nov, 1998 by Donald R. Vancil, A. Laurie W. Shroyer

Teaching hospital costs are substantially higher than nonteaching hospital costs. Additional payment for teaching hospitals is necessary to cover the costs of graduate medical education. One study estimated expenses for graduate medical education to be as much as 14 percent of a teaching hospital's budget.(a)

Denver Health Medical Center (formerly, Denver Health and Hospitals) and the University Hospital, whose missions are specifically directed toward both teaching and providing care to low-income patients, were targeted as the primary recipients for this MTH payment program. These two large, Denver-based public institutions serve the largest combined Medicaid and medically indigent population in the state. Both institutions faced serious financial difficulties, with combined uncompensated care levels for calendar 1991 estimated at more than $76.5 million.(b) If these two facilities closed, not only low-income patients but also the state's graduate medical education programs would suffer greatly, considering that in FY91, the 281 house staff (interns and residents) full-time equivalents (FTEs) funded by University Hospital and Denver Health Medical Center represented 39 percent of all teaching facility house staff funding for that year, while the remaining funded house staff positions were distributed among 24 other organizations throughout the state.(c)

Before 1991, the Colorado Medicaid program had not paid hospitals for teaching-related activities. In 1991, due to the unique teaching missions of University Hospital and Denver Health Medical Center, Colorado Medicaid initiated the major teaching hospital (MTH) payment program. The original purpose of MTH was to leverage Federal funding for the existing Colorado Medically Indigent program, which was a non-Medicaid state program designed to partially fund the cost of treating medically indigent patients, at the two institutions. In 1994, the Colorado Medically Indigent programs for these two facilities were incorporated directly into the Medicaid disproportionate share hospital (DSH) program. Since then, additional Federal funds from sources other than the Medicaid program have not been available for payment for uncompensated care.

Given recent legislative and regulatory changes, the opportunities to finance Medicaid care under DSH have been severely limited. Specifically, the Balanced Budget Act of 1997 established DSH maximum allocations. For designated Federal fiscal years, the impact on Colorado is to limit the Federal component of DSH to $93 million in 1998, $85 million in 1999, $79 million in 2000, $74 million in 2001, and $74 million in 2002.

Given medical care inflation projections, significant DSH reductions may be forthcoming. As a result, MTH Medicaid payments may represent an option for other states to consider to preserve the financial viability of their teaching hospital system, to ensure the availability of a future physician workforce, and to expand access to care for Medicaid and medically indigent clients.

MEDICAID MTH PAYMENTS

In negotiating for government and nongovernment managed care contracts, teaching facilities may be placed at a competitive disadvantage because of their inherently higher cost structure. Many state Medicaid programs have recognized teaching hospital costs as part of their fee-for-service payments for healthcare services. As resources have diminished, however, state Medicaid programs are beginning to retreat from this policy; as part of Medicaid managed care programs, these special payments often are not made to teaching hospitals.

The Colorado Medicaid MTH program is similar to the DSH payment program in that these payments represent indirect healthcare reform policies designed to address inadequate payment to safety-net, teaching hospitals. The statutory provisions of the Social Security Amendments (section 1923), initiated as part of OBRA 1987 (section 4122), neither provide for nor prohibit special payments to major teaching hospitals.

Until 1991, Colorado had maintained a very conservative set of DSH strategies using only the minimum payment levels required. By law (CFR 42, Ch. IV, section 447.272), Medicaid aggregate hospital payments cannot exceed the amounts that would have been generated using Medicare payment principles. The exception to this upper payment limit, however, is DSH payments. Thus, MTH payments would be subject to this limitation in accordance with Medicaid payment principles. To address this potential concern, Colorado Medicaid requires as a condition of participation in the MTH program that no qualifying hospital can receive an average payment per Medicaid discharge that would exceed the facility's Medicare payment.

To qualify for MTH Medicaid allocations, a Colorado hospital must be affiliated with a university medical school program and maintain a minimum of 110 intern and resident FTEs as well as a minimum ratio of 0.3 intern and resident FTE per licensed bed. An MTH hospital also must qualify for eligibility as a disproportionate share provider. Additionally, an MTH hospital's combined Medicaid and medically indigent days must equal or exceed 30 percent of its total patient days for the prior fiscal year or the most recent year for which data were available. The number of medically indigent days is defined according to criteria established by the Colorado Medically Indigent program.