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State Budget Cuts Will Hit Arizona Hospitals - AZ Business Magazine Sept/Oct 2010

Despite Restoring Some Funds, State Budget Cuts Will Hit Arizona Hospitals

It was looking pretty grim at 1700 W. Washington St., as Gov. Jan Brewer and a badly splintered Arizona Legislature struggled to cobble together a state budget that would have the appearance of being balanced.

Taking a follow-the-money tactic, policymakers targeted programs such as education and health care that annually receive large sums of taxpayer dollars. The budget Brewer and Republican lawmakers put together, addressing a $3.2 billion shortfall for fiscal year 2011, sent shock waves throughout the health care community.

The Arizona Hospital and Healthcare Association (AzHHA) estimated the cuts would reduce hospital revenue by $1.15 billion in state and federal funds in FY 2011, which began July 1, and cost the overall health care community $2.7 billion. For example, the budget package eliminated coverage under the state’s Medicaid program — Arizona Health Care Cost Containment System (AHCCCS) — to 310,500 adults and children, and eliminated KidsCare, ending health care coverage for 47,000 children. KidsCare provides low-cost insurance for the children of parents who earn too much to qualify for Medicaid, but are still considered the so-called working poor.

Before the ink was dry on the bills the governor had signed, officials learned that the landmark health care reform bill passed by Congress prohibited such budget cuts under the threat of losing federal funds. So lawmakers passed another bill to restore money stripped from AHCCCS and KidsCare. Failure to have taken the follow-up action, officials said, could have cost Arizona more than $7 billion in federal money for health care.

AzHHA strongly supported the governor’s push for a temporary 1-cent sales tax increase, which voters approved by a 64 percent to 36 percent margin. The tax increase remains in effect until May 31, 2013, and is expected to generate about $3 billion over three years to protect education, public safety and health and human services from further cuts.

Despite avoiding a funding disaster, hospitals still are forced to deal with a considerable loss of government dollars. Laurie Liles, president and CEO of AzHHA, says hospitals sustained $50.1 million in cuts to the Disproportionate Share Hospital (DSH) program, which provides special funding to hospitals that treat a significant number of AHCCCS and uninsured patients. The state cut $16.7 million, resulting in a loss of $33.4 million in federal funds. The federal stimulus act of 2009 matches state dollars three-to-one for DSH, so when the state trims $1 from the program, the total loss is $4.

Hospitals also lost some $37.3 million in funding for graduate medical education, which helps pay for physician instruction programs.

“There is no funding for 2011,” Liles says. “That is a huge loss for Arizona, considering the significance of our physician shortage.”

In addition to those losses, the Legislature authorized AHCCCS to reduce all provider payments, including those to hospitals, by up to 5 percent for fiscal 2011.

“We don’t know what percentage cut that hospitals will receive,” Liles says. “Hospitals are planning on the full 5 percent, but we’re hoping it will be somewhat less.”

Since 2008, Arizona hospitals have sustained several hundred million dollars in payment cuts and freezes, which impact hospital employees — medical and non-medical, Liles says. The association has been monitoring how its member hospitals are dealing with the recession.

“We have found that hospitals are managing through a variety of ways,” Liles says, “with some staffing reductions, delays in capital construction and services to the community. Hospitals have had to make some very hard choices about services. Strategies that hospitals have been forced to employ affect all Arizonans.”

For example, Liles says, when hospitals are underpaid, either by AHCCCS or Medicare, hospitals shift those costs onto commercial health plans to make up the difference.

“We call that cost shift a hidden health care tax,” she says. “That results in higher premiums for businesses and families. We all end up paying for the cost shift that hospitals are forced to make.”

Liles, who previously was the chief lobbyist for AzHHA, says she spent a lot of time over the past few years visiting with legislators regarding the impact of the hidden health care tax.

In 2009, the Arizona Chamber Foundation, an affiliate of the Arizona Chamber of Commerce and Industry, determined that all purchasers of health care coverage pay 40 percent more for hospital care through commercial insurance as a result of underpayments from AHCCCS and Medicare, Liles says.

“We look for more of the same,” she says.

Hospitals are counting on Congress to continue funding AHCCCS at an increased level.

“We have shared our concern with our congressional delegation,” Liles says. “The enhanced federal medical assistance percentage is absolutely vital to Arizona.”

The increased funding amounts to about $480 million — money needed to cover the expanded AHCCCS population — that the state is mandated to continue covering as a result of national health care reform. Without additional federal funding, Liles wonders: “How are our Legislature and governor going to pay for that? We are concerned about the care we provide. There are only so many places our state can cut.”

By The Numbers: Health Care Cuts

  • $50.1 million in cuts to the Disproportionate Share Hospital (DSH) program
  • $37.3 million in funding for graduate medical education
  • AHCCCS can reduce all provider payments by up to 5 percent

Arizona Business Magazine Sept/Oct 2010