The CMS acknowledges that the criteria for Medicare disproportionate-share adjustments is based on a complex statutory formula, according to the agencys Web site. The formula is based on the number of patients covered by Medicare Supplemental Security Income and Medicaid. Very simply, if Medicaid patients make up more than 15% of a hospitals payer mix, it qualifies for the supplement. An alternate method qualifies a hospital with more than 100 beds that can prove that more than 30% of its total net inpatient revenue comes from state and local government sources for indigent care other than Medicare or Medicaid. The formula is such that by combining under one provider number with a hospital that serves a large number of indigent patients, a hospital serving a low number of low-income patients that would otherwise not qualify can sometimes boost the numerator in the equation.
As a psychiatric hospital, Caritas Peace Center, now 206-bed Our Lady of Peace, did not qualify for disproportionate-share supplements. Even if it had, it would not have made much difference as the hospital treats very few Medicare patients, and the supplement is an add-on to Medicare reimbursement. All free-standing psychiatric hospitals were buckling under severe cuts in managed care in the early 90s, said Mark Carter, senior vice president and chief administrative officer for Jewish Hospital and St. Marys HealthCare, which was created by the merger of Caritas Health Services and Jewish Hospital HealthCare Services in November 2005 (Oct. 10, 2005, p. 14). (With the merger, the Peace Center became Our Lady of Peace, and Caritas Medical Center became Sts. Mary & Elizabeth Hospital, now with 473 staffed beds.)
Besides treating a large number of Medicaid patients, the psychiatric hospital was working under contract with the state government and was considered the last stop for difficult juvenile delinquents. It was the sisters mission. They couldnt abandon it, Carter said.
At the sponsors direction, the two hospitals reluctantly began merging in 1994, struggling to get the cultures to blend, Reh said. There were management changes at the medical center. By the time the two Caritas hospitals were prepared to officially meld as one, the psychiatric hospital contributed 70% of the Medicaid or state-sponsored days necessary to qualify for disproportionate-share payments, he said. Those days were helped in part by the long lengths of stay of many of the psychiatric hospitals patientssome patients staying nearly 30 days, Reh said. Meanwhile, the medical center did not treat many Medicaid patientsless than 10% of its overall payer mixbecause of the large teaching hospital in town, he said.
As a result, just prior to the consolidation in 2001 under one provider number, the psychiatric hospital reported 22,221 Medicaid days while the medical center reported a mere 356 days, according to Medicare cost report data culled by CostReportData.com. Meanwhile, the medical center reported 33,583 Medicare days while no such data are available for the psychiatric hospital. In 2002, however, the first year in which disproportionate-share supplements show up in the combined hospitals cost reports, the two combined received $10 million in disproportionate-share monies, about 20% of the $49 million the hospitals received that year in Medicare reimbursement.
By 2005, the last available year in which complete data were available, the two hospitals collectively took in approximately $13.5 million in disproportionate-share supplements on total Medicare reimbursement of $52.5 million. Disproportionate share monies had thus grown from representing none of the hospitals total Medicare reimbursement in 1998 to representing 26% of their Medicare reimbursement in 2005. In the fiscal year ended June 30, 2005, the consolidated hospital and its organizationsincluding a home health agency, a physician group and a foundationearned $7.3 million on $205 million in revenue, according to its audited financial statements.
Hospital officials say the added disproportionate-share payments certainly accounted for the improved financial showing, but other factors helped. In addition, nearly $8 million of the losses in 2001 were because of the sale of assets and an operating loss at its fitness center. By the end of 2001, Caritas was relying on working capital subsidies from its sponsor to survive, Reh said.
Carter said the disproportionate-share supplement was one of the reasons and an important one for the two hospitals combining under one provider number. Regardless of disproportionate share, out of necessity we had to do something to stem the losses that were occurring in both institutions at that time, Reh said. It became a mission question for us as a Catholic provider. We knew no one else would step up and do what we were doing for this population.
Snow, the lawyer who leads reimbursement seminars, said there are both defensive and offensive strategies for maximizing Medicare reimbursement. Some hospital clients with psychiatric units have in fact explored the option of unexcluding that unit, making it part of the hospital in order to have Medicaid patients in the psychiatric unit counting in the disproportionate-share formula, Snow said. Hospitals may be paid better under Medicare DRGs when excluded psychiatric units are brought into the fold rather than under the regular psychiatric prospective payment system, which offers no such adjustmentjust as it was for the Caritas acute-care hospital.
Mark Covall, executive director of the National Association of Psychiatric Health Systems, said there are currently about 1,300 psychiatric units, generally with anywhere from 10 to 20 beds within hospitals, that are considered distinct units and paid under the PPS. The association represents free-standing units that are paid under the PPS, but Covall said some hospitals are looking at the potential of absorbing their distinct psychiatric units to take advantage of the disproportionate-share supplement. CMS officials, however, reportedly looked at the situation and said disproportionate-share did not appear to be driving any psychiatric units to convert to nondistinct units. In general, psychiatric hospitals are doing better today than they have in the past 10 or 15 years, he noted (April 4, 2005, p. 6).
Still, I think there will be situations where that makes some sense, Covall said. I personally think though that if you can operate with a distinct psychiatric unit, you should be able to operate better
but it depends on the payer mix of the unit. A lot have a large Medicaid payment that would be a major help in disproportionate-share calculation. I think its going to be very specific to local hospitals and conditions, but I dont think we will have a national trend.
Consolidating under one provider number is not a silver bullet for increasing disproportionate-share monies; in some instances, though probably far fewer, spinning off hospitals might maximize the payments, Snow said. The CMS criteria for consolidating under one provider number are not easy to meet, so consolidation frequently has a larger purpose, he added. But if two hospitals together have a substantially higher proportion of Medicaid patients than they would alone, that is often one of the most significant (reasons for consolidating) if not the most significant, he said.
Some clients say they want to do this just because it is more efficient, so they will do it regardless of payment. We have had others who do it primarily for the reimbursement impact, Snow said. I cant say there has been a huge movement to do this, but we certainly in our practice have seen it a fair amount.
CMS officials said there is nothing in the regulations that would preclude hospitals from consolidating under one provider number, but they also are not aware of any loopholes. Still, the possibility that hospitals might be exploiting the system will not be taken lightly by the CMS, a spokeswoman said, recalling the loophole in the Medicare outlier payment program that was exposed in 2002.
When that strategy came to the attention of the CMS, the regulations were revised so hospitals can no longer engage in this abusive practice and government authorities have been pursuing legal action against a number of hospitals, the CMS spokeswoman said. Tenet is still recovering from the financial fallout it sustained for the alleged misdeed. The company ultimately settled a federal lawsuit in June 2006 for $900 million.
Although what was being done by Tenet and other hospitals to maximize outlier payments was not illegal, it was abusive and worked to the detriment of hospitals, the CMS spokeswoman said. If we became aware of similar abusive actions, we would take the necessary action to stop it.
Some hospitals are apparently reluctant to discuss their strategies for maximizing Medicare reimbursement.
For example in 2001 in Gainesville, Ga., the same year 418-bed Northeast Georgia Medical Center acquired 119-bed Lanier Park Hospital from HCA for $40 million, Northeast Georgia received $1.9 million, or 3.5% of its $54.3 million in total Medicare reimbursement from disproportionate-share supplements, according to the analysis of Medicare disproportionate-share data provided by CostReportData.com. By 2005, the supplement grew to $9.3 million, or 11% of its $84 million in total Medicare reimbursement.
A Northeast Georgia spokeswoman said officials at the system declined to comment.
Another Louisville system, Norton Healthcare, apparently also was able to boost its disproportionate-share payments by consolidating under one provider number after purchasing hospitals from for-profit HCA. In 1998, Norton bought four hospitals from what was then called Columbia/HCA Healthcare Corp. for $232 million. At the time, Norton had suffered two years of operating losses. That same year, Norton and three of those hospitals332-bed Norton Suburban Hospital, 278-bed Norton Audubon Hospital and 126-bed Norton Southwest Hospitalfiled separate Medicare cost reports, according to CostReportData.com data. In 1998, the four hospitals received $10 million in disproportionate-share payments although Norton Southwest did not receive any. The following year, the four Norton hospitals, reporting under one provider number, received $9 million in disproportionate-share supplements, or approximately 7.8% of its total $115.8 million in Medicare reimbursement.
But by 2005, as the consolidated Norton Hospital, the system received $22.2 million in disproportionate-share payments, or 11.2% of its total $197.7 million in Medicare reimbursement. From 1999 to 2005, Norton received a total of $122 million in disproportionate-share moniesmore than half of what it paid for the four HCA hospitals.
Michael Gough, Nortons chief financial officer, declined to be interviewed, but in a written statement he said operating under a single Medicare provider number for the past six years certainly is more efficient. Norton has been able to reduce the gap between what it costs us to treat Medicare patients and the reimbursement we actually receive. However, the incremental difference by operating under a single Medicare provider number, as it relates to the payments, has had a negligible effect on our total Medicare revenues over the past six years, he said. In general, Medicare reimbursement, including the disproportionate-share supplement, does not cover Nortons costs for treating Medicare patients, he added.
Like the former Caritas hospitals in Louisville, some hospitals systems are very candid about the impact consolidating under one provider number has had on the bottom line. Bringing the former Yonkers (N.Y.) General Hospital into the fold of St. Johns Riverside Hospital, also in Yonkers, was symbiotic, said James Foy,
St. Johns president and chief executive officer. Yonkers General contributed a large number of Medicaid patients to the marriage, but St. Johns Riverside treated a large number of Medicare patients, making a consolidation financially worthwhile since the disproportionate-share supplement is only paid for Medicare patients. Indeed, one thing that killed Yonkers General was that they had few Medicare patients, Foy said. We changed that after it merged.