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Reform Update: Virginia hospitals face financial pain as Medicaid expansion battle continues

By Virgil Dickson
Posted: May 6, 2014 - 4:00 pm ET

Some Virginia hospitals could take a financial hit and doctors in the state may become less inclined to see Medicaid patients if the state government stops functioning because a current budget impasse does not get resolved by July 1 when the state's new fiscal year begins.

A government shutdown could mean a halt to Medicaid payments to hospitals and doctors. If that happens, organizations such as Virginia Commonwealth University Health System and the University of Virginia Health Systems could suffer long-term financial damage, depending on how long the shutdown lasts, said Rick Mayes, an associate professor in the University of Richmond's department of political science, and co-director of the university's Healthcare Studies major.

Virginia's Medicaid budget was $3.7 billion in fiscal 2014. But how much of that budget goes specifically to hospitals is not delineated. VCU and UVA hospitals treat the vast majority of Medicaid and uninsured residents in the state, with VCU deriving 49% of its patient income from those patient groups in fiscal 2013, according to financial data from the system.

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Financial losses could lead to hospitals cutting some underperforming services, charging non-Medicaid patients more for care, or selling more bonds to make up for the financial shortfall, Mayes said. The latter scenario could have a lasting impact on their credit ratings by increasing their debt loads.

“If their credit takes a hit, it could impact plans for expansion or buying new equipment, as they have to pay higher interest rates to take on more debt,” Mayes said.

The prospect of a shutdown revolves around a state stalemate over Medicaid expansion. The Democratic-controlled Virginia Senate last month passed a budget that included a provision in which the state would accept federal funds under the Affordable Care Act to establish a private Medicaid expansion similar to expansion efforts underway in Arkansas.

Under Medicaid expansion, as many as 400,000 uninsured Virginia residents could benefit. The ACA allows Medicaid expansion for people living at up to 138% of the federal poverty level, with the federal government picking up the full cost of expansion for the first three years and 90% of costs after that period.

The private expansion option, in which Medicaid expansion funds are used to buy private insurance, rather than to directly expand Medicaid, has been acceptable to some Republicans in other states anxious to find a way to secure federal expansion funding.

Expansion also appeals to hospitals, which see it as a way to cut down on their uninsured care provision and the bad debt that comes with it. Virginia hospitals have been vocal in saying expansion also could help offset expected cuts in Medicare reimbursements that will otherwise cost them millions of dollars.

The Virginia Hospital & Healthcare Association, which declined to comment on the current situation, has been lobbying for some type of expansion in Virginia's Medicaid program. One of its lobbying tools is a list of 107 hospitals in the state, showing what they will lose in Medicare cuts over the next two federal budget years, the Richmond Times-Dispatch reported.

Medicare automatic reductions will result in the loss to Virginia hospitals of $251 million in 2015 and $306 million in 2016, said Katherine Webb, senior vice president of the association.

But Virginia's Republican-controlled House of Delegates rejected the Senate spending plan and the private expansion option, seeking instead a budget bill with no reference to Medicaid expansion. Virginia Republicans have taken a hard line on expansion, echoing their party's position that Medicaid is a broken system that should not be expanded.

Virginia's Democratic Gov. Terry McAuliffe said he wants the Medicaid private option to be part of a budget bill passed by both houses. One of the sides needs to blink by June 30, when the current fiscal year ends, or the state government faces the prospect of a shutdown starting July 1.

To move things along, Virginia Senate Democrats sent a letter to House Republicans requesting a counter idea to close the coverage gap, something they had previously said they would do, but a Republican plan never materialized.

Because Virginia hasn't experienced such a shutdown in the recent past, it's unclear if hospitals will actually see immediate cessation of Medicaid payments July 1.

When Minnesota's government shut down in 2011 over a budget impasse, hospitals saw no immediate financial impact because the state's Medicaid program was deemed crucial, so there were no cuts or payment stoppages, according to Wendy Burt, a spokesman for the Minnesota Hospital Association.

Representatives from several state agencies in Virginia were unable to say if Medicaid payments would be protected in the same way.

Brian Coy, a spokesman for McAuliffe, stated that the governor “would use all of his powers to ensure that Virginians continue to receive the services they expect from their government,” but would not comment about whether there was an already established list that defined protected government services in the event of a shutdown.

Both the state hospital association and Dr. William Hazel, state secretary of Health and Human Resources, declined to comment on the potential impact of a shutdown on hospitals, saying instead that they are confident a budget deal will be reached.

A state shutdown could hurt Medicaid beneficiaries' access to doctors outside of hospitals, even after it ended, because it would further dissuade physicians from taking on those patients, according to Chip Jones, a spokesman for the Richmond Academy of Medicine, which represents more than 2,000 providers.

One option reportedly being considered by McAuliffe to get a budget approved and Medicaid expanded, is to issue an executive order that would create the private coverage option. Kentucky and Ohio both took similar routes to grow Medicaid in their states. However, three states, Georgia, Kansas and Tennessee, have enacted laws preventing their governors from acting unilaterally to expand Medicaid.

Coy and Michael Kelly a spokesman for Virginia's Attorney General Mark Herring, would not confirm or deny if reports that McAuliffe was considering a go-it-alone strategy were true. They said only that the best way to expand coverage was by working in conjunction with the legislature.

Follow Virgil Dickson on Twitter: @MHvdickson

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