Two hospitals in Memphis, Tenn., have become TennCare poster children for hospital trade associations, which say the controversial Medicaid managed-care system is putting an unfair financial squeeze on hospitals.
The Regional Medical Center at Memphis, better known as "the Med," is the case study used by the National Association of Public Hospitals, while Le Bonheur Children's Medical Center has become the messenger of choice for the National Association of Children's Hospitals and Related Institutions (See related story, p. 30).
Both associations are holding up their respective hospitals as examples of the bad things that can happen to hospitals under overly frugal Medicaid managed-care systems, which are popping up in many reform-minded states across the country (Jan. 23, p. 30).
TennCare replaced Tennessee's traditional Medicaid program on Jan. 1, 1994. Under the program, former Medicaid recipients and previously uninsured poor residents are enrolled in one of 12 private managed-care plans.
The state pays the plans a fixed rate per enrollee, and the plans then subcontract with individual providers on a discounted fee-for-service basis. Enrollees generally are required to receive care from their particular provider network, but providers can join more than one plan.
TennCare's total budget in the fiscal year that started July 1, 1994, is about $3 billion. It's projected to increase a little more than 5% to about $3.1 billion the following fiscal year.
As of February, about 1.3 million people were enrolled in TennCare. Two-thirds were former Medicaid recipients, while one-third previously had no insurance.
Although the new system is limiting growth in state Medicaid expenditures and improving access for previously uninsured people, TennCare is not living up to its promise of paying providers fairly, state provider groups say.
In February, the Tennessee Hospital Association released a report that said TennCare paid hospitals only 44 cents for every dollar spent on patient care during the first six months of the program (Feb. 6, p. 15).
That figure included hospitals' charity-care expenses, which TennCare was supposed to eliminate. Absent those costs, TennCare paid hospitals 67 cents on the dollar from Jan. 1, 1994, through June 30, 1994, the THA said.
More damaging to the Med in Memphis, however, is TennCare's elimination of two special add-on payments to hospitals' reimbursement rates, according to Burt Waller, the hospital's president and chief executive officer.
One add-on was for Medicaid's share of hospitals' graduate medical education costs. The other represented extra payments to hospitals that treated a disproportionate share of Medicaid recipients.
Both hit the Med hard, Waller said, eliminating $42 million in annual payments to the hospital. That represents 25% of the hospital's budgeted revenues this year, he said.
The Med is a quasi-public hospital, owned by the county but operated by a not-for-profit corporation. The county provides an annual tax subsidy to the hospital of about $25 million.
In 1993-one year before TennCare went into effect-the Med turned a $3 million profit on total revenues of about $242.2 million, according to HCIA, a Baltimore-based healthcare information company.
But, according to a March 1 press release from the National Association of Public Hospitals, TennCare threatens the Med's "very existence."
"Ironically, TennCare was proposed to replace the Medicaid program because the state felt that Medicaid threatened Tennessee's healthcare system and the financial stability of the entire state government," NAPH President Larry Gage said in the release. "Now, 14 months later, TennCare is producing those same catastrophic results."
"I'm not embarrassed to be used as a case study or poster child by the NAPH," Waller said. "I wish we weren't in this crisis."
In payer mix, the Regional Medical Center at Memphis is the state's largest Medicaid and indigent-care hospital, according to the NAPH and Waller, and, consequently, any major change in Medi-caid payment policies is going to affect the hospital more than other hospitals.
About 80% of the hospital's inpatient and outpatient volume is composed of Medicaid patients or charity cases.
The loss of extra Medicaid payments for graduate medical education and high Medicaid patient volume coupled with regular Medicaid payments of about 40 cents on the dollar has forced the Med to cut staff and services.
The hospital has eliminated 220 full-time-equivalent employee positions and intends to cut another 200 FTEs within the next three months. The two reductions represent 17% of the hospital's work force.
The hospital also has or intends to downsize or eliminate a number of programs. For example, it stopped performing most cardiac procedures.
The work force and service reductions are expected to shave $28 million to $30 million off the hospital's annual operating budget, Waller said.
"We have no private payers to shift these costs to," he said.
The Med is a member of the NAPH, and the pair have been in close contract throughout the TennCare experience, said Christine Capito Burch, the NAPH's executive director.
"TennCare is starving providers in the state," Burch said. "Our concern is that we'll see similar results in other states."