Source: http://garnerhealth.com/poor-get-poorer-fate-californias-hospitals-affordable-care-act/
Timestamp: 2019-04-23 10:24:19+00:00

Document:
A penalty of as much as 3.0% for the hospitals which fail to meet the standards set forth in the Hospital Readmission Reduction Program (“RRP”).
In addition to a penalty up to 2% for lapses in inpatient quality reporting and similar penalty relating to outpatient quality reporting,  a 2% cut in Medicare due to sequestration as well as a penalty for those hospitals which fail to attest for “Meaningful Use”, collectively the potential for any hospital to lose more than 10% of its Medicare revenue creates daunting challenges, especially with those institutions in California already struggling financially not to mention lacking the resources to establish the necessary infrastructure to compete in this era of change.
Medicare is the federal program that provides health care coverage to individuals aged 65 or older. Medi-Cal offers similar access for medical services in California for qualifying individuals, many of whom are poor. Before the Affordable Care Act, Medicaid covered almost 60 million people nationwide, and as of October 2013, 8.5 million in California. Under the Affordable Care Act, the number of Medicaid beneficiaries is likely to increase to 93 million across the country by 2020 and an additional 1 million beneficiaries may join the Medi-Cal program by January 2015. Combined, Medicare and Medicaid pay for more than half of the annual hospital bills in America.
The level at which Medicare and Medicaid reimburse is not market driven, but dictated by legislation and policy. Historically the Federal Government has shouldered more than half of the Medicaid expense, with an average of 43% from that total coming from the states. Medicaid rates are historically lower, as the program covered the poor and disabled. In 2010 the estimated difference between the national hospital industry’s cost of care to Medicare and Medicaid beneficiaries and total reimbursement was over $27 billion.
Certain hospitals in California are particularly vulnerable to these reimbursement challenges, especially those located in the more remote counties throughout the state. For example, In 2010 California’s DSH revenue was 54 percent of the total DSH costs for its public hospitals, but in 2019 that percentage may drop as low as 35 percent. Likewise, more than half of the urban safety-net hospitals in America lost money in 2009, and generally their operating margin was minus .06 percent (–0.06%). It is estimated, however, that the Affordable Care Act will force an additional 10% of the urban safety-net hospitals to lose money and reduce their median operating margin to minus 2.02 percent (-2.02%). California faces the same challenges, but the state has taken proactive measures in an attempt to mitigate these financial hurdles, such as transitioning the Medi-Cal system away from cost-based to a prospective payment system, embracing Medicaid expansion, promoting it extensively throughout the state, and paying higher reimbursement rates to safety-net hospitals for new Medi-Cal beneficiaries.
California also faces an additional challenge due to 23% of the nation’s unauthorized immigrants who live in the state. This group generally remained uninsured after the Affordable Care Act, yet California’s safety-net hospitals must still treat the 2.55 million living within its borders. Certain local movements in California, however, have recently focused on funding undocumented residents.
Distressed hospitals are those operating with an EBITDA (earnings before interest, taxes, depreciation, and amortization) of 0% or less annually. This is a significant percentage of America’s hospitals, as more than one-third of the nation’s hospitals had a negative operating profit margin in 2012 (22.4% of the hospitals in California operated at a loss in 2010). Even with other resources, the number of hospitals with a negative total margin exceeded one-quarter of all hospitals in America.
Almost all hospitals rely upon Medicare and Medicaid payments, yet because so many still struggle with razor-thin profit margins at best, downward fluctuations in federal reimbursement will inevitably impact any remaining profitability. California’s 373 hospitals, for example, had an average operating profit margin of 2.63% in 2012.
Because so much of the hospital industry relies on Medicare and Medicaid revenue, any reductions in reimbursement can be detrimental to the financing of distressed hospitals. The Affordable Care Act and its estimated $155 billion in cuts for hospital payments over the next decade is more than just cause for alarm. These reductions are not just the attack on Medicare’s $556 billion in annual spending or the $125 billion related to hospital inpatient costs. Such cuts to already cash-strapped facilities may deprive these hospitals of funding for capital improvements and maintenance, acquisitions, updating equipment and technology, staffing and relating training, or debt services.
Americans rely heavily on hospital emergency departments, and Californians are no exception. The number of emergency department visits at California Hospitals increased 13.2% between 2005 and 2010 (from 5.4 million to 6.1 million annually). Under the Emergency Medical Treatment and Labor Act (“EMTALA”) hospitals must provide medical care to patients who present at their emergency rooms, without regard to their immigration status, much like a hospital’s obligation to treat notwithstanding an ability to pay. Hospitals in the United States provided $41.1 billion in uncompensated care in 2011, including “bad debt” (services for which hospitals expected to be paid but were not paid) and “charity care” (services for which payment was never expected). California hospitals saw uncompensated care (charity care and bad debt) rise by 50% between 2001 and 2010 (increasing to $2.4 billion).
Historically, Medicare recognized the financial burden hospitals faced from treating uninsured patients, and in particular how this fell disproportionately on hospitals servicing poor urban and rural communities. Medicare responded to this discrepancy by providing supplemental payments to affected facilities as a means of compensation. Known as Disproportionate Share (“DSH”) payments, such funding has so far exceeded $20 billion annually. With the assumption that the Affordable Care Act will reduce the number of uninsured, federal legislation slashed DSH monies in FY 2014, separating payments into two parts: (1) Twenty-five percent of the amount a hospital previously received under Medicare DSH; and (2) the remaining 75% as “an additional payment for the DSH hospital’s proportion of uncompensated care, determined as the product of three factors.” For California hospitals, the net result under the Affordable Care Act was yet another decrease in operating margins as the flow of patients to California emergency departments increased.
Since its shift in the 1980s to the Prospective Payment System (“PPS”), Medicare has reimbursed hospitals for inpatient care by using a predetermined amount per discharge, dependent upon several factors, including the particular clinical category and a geographically indexed labor cost component (known as Diagnosis-Related Groups (“DRGs”)). In 2008, Medicare modified the DRG system and its rates by clinically categorizing patient cases into different Medicare severity-diagnosis related groups (“MS-DRGS”), as well as identifying whether a patient has a complication or co-morbidity. For outpatient procedures Medicare pays hospitals a predetermined amount for each of approximately 850 ambulatory payment classification groups.
California hospitals face more challenges to its Medicare revenue due to poor performance in the Hospital Value-Based Purchasing (“VBP”) Program. The Hospital VBP Program creates incentives for hospitals to improve upon performance (i.e., quality) rather than limit their focus to the number of procedures or patients treated (i.e., quantity), let alone the cost involved in providing such care (i.e., expenses). In its first year, the Hospital VBP Program reduced DRG payments to over “3,000 hospitals by 1 percent, to create a pool of funds from which value-based (i.e., performance based) incentive payments will be made.” The program’s second and third years are on similar tracks, reducing payments in FY 2017 by 2.00%.
This Hospital VBP Program measures performance in clinical areas while concurrently monitoring patient satisfaction through Hospital Consumer Assessment of Healthcare Providers and Systems (“HCAHPS”) surveys, among others. These mail and telephone surveys (conducted by private companies) obtain feedback from patients who must rank hospitals in eight separate areas of experience (including communication with nurses and doctors, pain management, and cleanliness, and whether or not the patient would recommend the hospital to a friend or family member). The HCAHPS surveys make up 30% of a hospital’s Total Performance Score (“TPS”) under the VBP Program, and the other 70% comes from the hospital’s performance in its Clinical Process of Care criteria, including those in such areas as acute myocardial infarction, heart failure, pneumonia and surgical care improvement. Hospitals that consistently perform poorly will not be entitled to any of the bonus pools created by the increasing holdbacks.
For hospitals that treat primarily poor and elderly patients and lack the resources to invest in improving their infrastructure, obtaining high marks under the VBP Program may prove elusive, if not impossible. For example, financially distressed hospitals frequently are forced to curtail capital improvements, leading to a deterioration of the hospital’s physical plant. Patients treated in an older, less attractive hospital may rank it lower based upon a misguided perception, irrespective of the quality of care. As a result, financially distressed hospitals may have a hard time obtaining scores that would result in additional funding under the bonus pool, and may even face a permanent reduction without much hope of participating in the bonus pool.
This reduction especially affects urban safety-net hospitals, which treat more seriously ill, low-income patients who are more likely to respond with negative comments on the VBP Program. In addition, urban safety-net hospitals believe “[b]oth the survey’s questions and manner in which they are weighted appear to be biased against large urban hospitals.” Of course, these are the hospitals most in need of these funds. This includes the 68% of California hospitals penalized in November 2013 under the Hospital VBP Program. These 161 penalized hospitals, compared to the 72 that received bonuses, had an average penalty of minus .29 percent (-0.29%), bringing the state average to minus .13 percent (-0.13%) overall.
Under the ACA Hospitals face another potentially significant cut in their Medicare revenue, as much as 3% in FY 2015, as it relates to patient readmissions under the Hospital Readmissions Reduction Program (“RRP”). Almost 20% of Medicare patients – about 2 million patients per year – qualify as hospital readmissions within a month. These readmissions cost the Medicare program in excess of $17 billion annually. In an effort to reduce this cost, the Hospital RRP forces hospitals to focus on patient care after discharge, as the Affordable Care Act penalizes hospitals with excessive readmission rates.
In October 2012 Medicare reduced payments to 2,217 hospitals nationwide because of unacceptable readmission rates, and again in 2013 to 2,225 hospitals. This maximum penalty increased to 2% in October 2013 and will increase again to 3% in October 2015.
Like most of the nation’s health care institutions, the struggling hospitals in California rely heavily on Medicare and Medicaid reimbursements. While the Affordable Care Act was designed to increase hospital revenue by lowering the number of uninsured, changes to the reimbursement structure have already started to take its toll statewide. Hospitals already in financial distress before the Affordable Care Act bear the bulk of this brunt as they continue to experience substantial negative financial results, adding to a growing list of those institutions that have ceased to operate.
 This article is a revised and updated version of a 2012 article published by the authors, see Maizel, Samuel R. and Garner, Craig B., The Poor Get Poorer: The Fate of Distressed Hospitals Under the Affordable Care Act, 12 Norton Bankr. L. Adviser 1 (Dec. 2012), and is republished here with the permission of Thompson Reuters and Norton Bankruptcy Law Advisor.
 Sam Maizel is a partner with Pachulski Stang Ziehl & Jones LLP, the nation’s largest restructuring and insolvency law firm. His practice includes advising and representing businesses on bankruptcy matters and financial restructuring in and out of court, with an emphasis on the healthcare industry. Before joining Pachulski Stang, he represented the federal government in bankruptcy, district, and appellate courts nationwide as a trial attorney in the US Department of Justice’s Commercial Litigation Branch. He has also served in US Army’s The Judge Advocate General’s Corps, including service in Operation Desert Shield/Desert Storm, for which he was awarded the Bronze Star Medal. He has lectured extensively, is widely published, and been interviewed on television and radio on bankruptcy topics. Additional information can be found at www.pszjlaw.com.
 Craig Garner is an attorney and health care consultant, specializing in issues surrounding modern American health care and the ways in which it should be managed in its current climate of reform. Craig’s law practice focuses on health care mergers and acquisitions, regulatory compliance and counseling for providers. Craig is also a Fellow of the American College of Healthcare Executives and an adjunct professor of law at Pepperdine University School of Law, where he teaches courses on Hospital Law and the Affordable Care Act. Between 2002 and 2011, Craig was the Chief Executive Officer at Coast Plaza Hospital in Norwalk, CA. Additional information can be found at www.garnerhealth.com.
 See Stephen M. Blank, Health Care Fraud, 46 Am Crim. L. R. 701, 703 (Spring 2009).
 Pub. L. No. 111–148, 124 Stat. 119 (2010) codified as amended in scattered sections of 26 and 42 U.S.C.
 See, e.g., National Fed. of Indep. Business v. Sebelius, 132 S. Ct. 2566, 2571 (2012).
 See, e.g., Neuhausen at n.4.
 See 42 U.S.C. § 1395ww(r).
 See 42 U.S.C. § 1395ww(o).
 See 42 U.S.C. § 1395ww(q).
 See PAMC, Ltd. v. Sebelius, 747 F3d 1214, 1217 (9th Cir. 2014) (affirming the decision to reduce hospital’s Prospective Payment System increase by two percent when provider failed to submit quality data by the stated deadline); see also Eleanor D. Kinney, JD, MPH, The Affordable Care Act and the Medicare Program, Linking Medicare Payment to Quality Performance, 68 N.Y.U. Ann. Surv. Am. L. 567, 592 (2013).
 See 2 U.S.C. § 901a(6)(A).
 See 42 C.F.R. § 495.6; but see generally 79 Fed. Reg. 52910 (Sept. 4, 2014) (changing the meaningful use stage timeline and the definition of certified electronic health record technology).
 For a comprehensive discussion of the potential impact of the Affordable Care Act on the health care sector see David Gruber, Getting Much Closer to the Cost Precipice, Alvarez & Marsal Healthcare Industry Group (2012). For a detailed discussion of the potential impact of the Affordable Care Act on Urban Safety-Net Hospitals, see National Association of Urban Hospitals, The Potential Impact of the Affordable Care Act on Urban Safety-Net Hospitals (Sept. 2012); see also Neuhausen, supra n.4.
 Sidney D. Watson, Embracing Justice Roberts’ “New Medicaid,” 6 St. Louis U. J. Health L. & Pol’y 247, 250 (2013); see also Congressional Budget Office, Data released February 2011. Spending and Enrollment Details for CBO’s March 2012 Baseline Medicaid, available at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43059_Medicaid.pdf.
 See, e.g., Tammy Lundstrom, Under-Reimbursement of Medicaid and Medicare Hospitalizations as an Unconstitutional Taking of Hospital Services, 50 Wayne L. Rev. 1243, 1248 (Winter 2005).
 See Julie Bienstock, Administrative Oversight of State Medicaid Payment Policies: Giving Teeth to the Equal Access Provision, 39 Fordham Urb. L.J. 805, 814 (Mar. 2012). In the 2013-14 Fiscal Year, California will receive an estimated $36.5 Billion in Federal funds for Medi-Cal spending. See Expanding Horizons: Key Facts about the Medi-Cal Program as California Implements Health Care Reform, California Budget Project at 41 (Apr. 2013).
 See Ezra Klein, Don’t worry about Medicare. Worry about Medicaid, The Washington Post (May 5, 2011), available at http://www.washingtonpost.com/blogs/wonkblog/post/dont-worry-about-medicare-worry-about-medicaid/2011/05/03/AFitL0zF_blog.html.
http://www.aha.org/research/policy/finfactsheets.html (noting that hospitals have absorbed $122 billion in new Medicare cuts since 2010).
 See Neuhausen, supra n.4 at 988; see also infra n.50.
 See supra n.15 at 7.
 Cal. Welf. & Instit. Code § 14105.28.
 See Neuhausen, supra n.4 at 993-94.
 Jeffrey S. Passel and D’Vera Cohn, Unauthorized Immigrant Population: National and State Trends, at 15 (Pew Research Center, Feb. 1, 2011). Approximately 6.8% of those living in California are unauthorized. Id.
 See 26 U.S.C. § 5000A(d)(3); see also Nadereh Pourat, et al., Assessing Health Care Services Used by California’s Undocumented Immigrant Population in 2010, 33:5 Health Affairs 840 (May 2014).
 See generally Passel, supra n.30; see also Helen Lee, Laura Hill and Shannon McConville, Access to the Health Care Safety Net in California at 15 (Public Policy Institute of California, Oct. 2012) (noting the number of unauthorized residents specifically for the Los Angeles, Inland Empire and Central Valley regions).
 See, e.g., Stephen Frank, Los Angeles County Supervisors to Spend $60 million on Health Care for Illegal Aliens, California Political Review (Sept. 25, 2014), available at http://www.capoliticalreview.com/capoliticalnewsandviews/los-angeles-county-supervisors-to-spend-60-million-on-health-care-for-illegal-aliens/; Marc Benjamin, Health-care bill for Fresno County’s undocumented gains state approval, The Fresno Bee (Aug. 29, 2014), available at http://www.fresnobee.com/2014/08/29/4095553/health-care-bill-for-fresno-countys.html.
 Cf., “EBITDAR” (earnings before interest, taxes, depreciation, amortization, and restricting or rent costs) and “EBITDAM” (earnings before interest, income taxes, depreciation, amortization, and management fees).
 See Hospital Financial Performance, California Office of Statewide Health Planning and Development at 4 (Oct. 2011), available at http://www.oshpd.ca.gov/HID/Products/Hospitals/AnnFinanData/HospFinanPerform/HospitalFinancialPerformance.pdf.
 Quorum Health Resources, supra n.23 at 2. The operating margin is probably the most commonly used financial ratio to measure a hospital’s financial performance, as it compares total operating revenue against total operating expenses. However, total margin may more accurately represent a hospital’s financial health, in that it compares a hospital’s net income against its total operating revenue. In California, for example, such revenue may include disproportionate share payments, distressed hospital payments and quality assurance fees (a form of Medi-Cal supplemental revenue). See, e.g., Cal. Welf. & Inst. Code § 14169.31. For many California hospitals, this non-operating revenue from various government sources can far exceed total operating profits. Because total margin also includes investment income, the results can be quite volatile.
 See How Would the Medicaid Expansion Affect California? Center on Budget and Policy Priorities, available at http://www.cbpp.org/files/healthtoolkit2012/California.pdf. California may spend up to $7.7 billion on Medi-Cal through 2022, although an estimated 3.8 percent is due to the Affordable Care Act. See John Holahan, The Cost and Coverage Implications of the ACA Medicaid Expansion: National and State-by-State Results, Urban Institute and Kaiser Family Foundation at 8 (Nov. 2012).
http://www.vcstar.com/news/some-local-hospitals-struggle-for-profit-others. See also Robert Weisman, Questions raised about the future of Mass. Hospitals, The Boston Globe (Sept. 7, 2012), available at http://www.boston.com/news/nation/2012/09/07/with-profitability-down-questions-are-being-raised-about-the-future-massachusetts-hospitals/mcwyKQv2YQn3eoBlpQq65M/story.html; Dan Goldberg, N.J. hospitals saw smallest profit margin in 3 years in 2012, Newark Star Ledger (Dec. 21, 2012), available at http://blog.nj.com/ledgerupdates_impact/print.html?entry=/2012/12/nj_hospitals_saw_smallest_prof.html. (New Jersey’s hospitals fared even worse with a 0.3% profit margin in 2011).
 Jordan Rau, Hospitals Face Pressure to Avert Readmissions, The New York Times, Nov. 26, 2012, available at http://www.nytimes.com/2012/11/27/health/hospitals-face-pressure-from-medicare-to-avert-readmissions.html.
 See, e.g., Sarah Q. Duffy and Bernard Friedman, Hospitals With Chronic Financial Losses: What Came Next, 12:2 Health Affairs 151, 160 (Summer 1993).
 Renee Y. Hsai, M.D., Trends in Adult Emergency Department Visits in California by Insurance Status, 2005-2010, 310:11 Jama 1181 (Sept. 18, 2013).
 42 U.S.C. §1395dd; see also Laura D. Herner, The Scapegoat: EMTALA and Emergency Department Overcrowding, Journal of Law and Policy, 695 (2006).
 See, e.g., Baystate Med. Ctr. v. Leavitt, 545 F. Supp. 2d 20, 22 (D.D.C. 2008) (“Congress concluded that additional DSH payment was necessary for hospitals serving a disproportionate share of low-income patients because they have higher costs per case.”).
 Id.; see also Portland Adventist Med. Ctr. v. Thompson, 399 F.3d 1091, 1096 (9th Cir. 2005).
 78 Fed. Reg. 50496, 50613 (Aug. 19, 2013); see also National Association of Urban Hospitals, The Potential Impact of the Affordable Care Act on Urban Safety-Net Hospitals at 2 (Sept. 2012).
 42 U.S.C. § 1395ww(r). These three factors, which now make up 75 percent of the Medicare DSH funds to which a hospital may be entitled, include: “(1) 75% payment of the payments that would otherwise be made [under the old DSH methodology]; (2) 1 minus the percentage change in the percent of individuals under the age of 65 who are uninsured (minus 0.1 percentage points for FY 2014, and minus 0.2 percentage points for FY 2015 through FY 2017); and (3) a hospital’s uncompensated care amount relative to the uncompensated care amounts of all DSH hospitals expressed as a percentage.” See 78 Fed. Reg. 50,496, 50,613 (Aug. 19, 2013).
 See Private Essential Access Community Hospital, The Impact of Medicare Disproportionate Share Reductions on Private Safety-Net Hospitals in California 5 (Jan. 2011), available at http://www.peachinc.org/wp-content/uploads/2011/03/January-2011-Impact-of-Medicare-DSH-cuts-to-Californias-private-safety-net-hospitals.pdf.
 See generally Neuhausen, supra n.4; Hsai, supra n.44. In parts of Central California, for example, as many as 40% of the population are uninsurable farm-workers. Id. Other states face similar concerns. In New York, a Brooklyn hospital estimated that 20% of its patients were uninsurable, and the New York public hospital system estimated that 40% of its 480,000 uninsured patients in 2011 will remain that way. For those hospitals in New York that have historically received $2.84 billion annually in DSH payments, by 2019 this amount will be cut in half. See generally Bernstein, supra n.51.
. See Section 101(c) of the Tax Equity and Fiscal Responsibility Act (“TEFRA”), Pub. L. No. 97-248, 96 Stat. 324 (1982).
 42 C.F.R. § 412.4. A more detailed description of the acute inpatient payment system used by Medicare can be found at http://www.medpac.gov/documents/MedPac _Payment_Basics_11_hospital.pdf.
 Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy at 50 (Mar. 2012). A more detailed description of the outpatient payment system can be found at: http://www.medpac.gov/documents/MedPac_Payment_Basics_11_OPD.pdf. See also 74 Fed. Reg. 24080, 24092 (May 22, 2009) (“We believe that revisions to the DRG system to better recognize severity of illness and changes to the relative weights based on costs rather than charges are improving the accuracy of payment rates in the IPPS.”).
 Medicare Payment Advisory Committee, supra, n.58 at 54.
 Id. CMS adopted the HCAHPS survey in October 2006 as a measure in the Hospital IQR, with the first public reporting of HCAHPS scores in March 2008. See 76 Fed. Reg. 26489, 24898 (May 6, 2011).
 See, e.g., Karen Kane, What Does Quality Cost? Analyzing the Patient Protection and Affordable Care Act’s Value Based Purchasing Provision and How It Could Affect the Delivery of Care by Hospitals, 14 Duq. Bus. L. J. 69, 78-80 (2011).
 See, e.g., Duffy, supra n. 42 at 160.
 See generally Neuhausen, supra n.4; see also supra n.15 at 5-7.
http://www.kaiserhealthnews.org/Stories/2013/November/14/value-based-purchasing-medicare-by-state-chart.aspx. The national average was minus .03 percent (-0.03%) overall. Id.
 See 42 U.S.C. § 1395ww(q); Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, at 54 (Mar. 2012).
 Jordan Rau, Hospitals Face Pressure to Avert Readmissions, The New York Times, Nov. 26, 2012, available at http://www.nytimes.com/2012/11/27/health/hospitals-face-pressure-from-medicare-to-avert-readmission.html.
“Aggregate payments for excess readmissions = [sum of base operating DRG payments for AMI x (Excess Readmission Ratio for AMI-1] + [sum of base operating DRG payments for HF x (Excess Readmission Ratio for HF-1] + [sum of base operating DRG payments for PN x (Excess Readmission Ratio for PN-1)]. [¶] Aggregate payments for all discharges = sum of base operating DRG payments for all discharges. Ratio = 1 – (Aggregate payments for excess readmissions/Aggregate payments for all discharges.)” Id.
http://www.kaiserhealthnews.org/stories/2012/august/13/medicare-hospitals-readmissions-penalties.aspx. Three hundred seven (307) of those hospitals were cut 1% of their patient reimbursements for a year, yielding the maximum penalty. Id.
 Jordan Rau, Armed With Bigger Fines, Medicare To Punish 2,225 Hospitals For Excess Readmissions, Kaiser Health News (Aug. 2, 2013), available at http://www.kaiserhealthnews.org/Stories/2013/August/02/readmission-penalties-medicare-hospitals-year-two.aspx. Only 18 hospitals faced the maximum penalty in 2013. Id.
 National Association of Urban Hospitals, supra, n. 15, at 4.

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