WHERE MED­I­CAID EX­PAN­SION MAKES A DIF­FER­ENCE

Small Illi­nois hos­pi­tal ex­pands while Mis­souri coun­ter­parts cut back

Modern Healthcare - - NEWS - By Beth Kutscher

Franklin Hos­pi­tal is a short drive from the Public Square in Ben­ton, Ill., a city cen­ter that’s an­chored by dollar stores and cav­ernous an­tique malls. A ban­ner on the beige fa­cil­ity boasts the hos­pi­tal is cel­e­brat­ing its 60th an­niver­sary. Ben­ton, a ru­ral town of 7,300 peo­ple, is in the heart of South­ern Illi­nois’ eco­nom­i­cally de­clin­ing coalmin­ing belt.

In­side, the not-for-profit, crit­i­cal-ac­cess hos­pi­tal looks all of its 60 years, from its mot­tled beige and brown linoleum floors to the drop ceil­ings. It has teetered on the brink of fi­nan­cial fail­ure for the past 15 years. Sur­vival rather than aes­thetics has been the pri­or­ity.

“The hos­pi­tal has had very lit­tle done to it in the 60 years it’s been in ex­is­tence,” said CEO Her­vey Davis, who came to the hos­pi­tal 13 years ago when it was fac­ing im­mi­nent clo­sure.

That’s about to change, largely be­cause 25-bed Franklin Hos­pi­tal is in one of the 25 states that ex­panded Med­i­caid el­i­gi­bil­ity in 2014, the first year such ex­pan­sion was possi- ble. For Franklin, the cov­er­age ex­pan­sion has halved the per­cent­age of rev­enue tied to the unin­sured, and its over­all fi­nan­cial pic­ture looks more se­cure. In the emer­gency room, for in­stance, it has seen 600 fewer “no pay” pa­tients and 428 more Med­i­caid pa­tients com­pared with 2013. Crit­i­cal-ac­cess hos­pi­tals in Illi­nois have re­ceived Med­i­caid rate in­creases for out­pa­tient ser­vices, fur­ther mag­ni­fy­ing the ben­e­fit of the state’s Med­i­caid ex­pan­sion.

All of this has al­lowed Franklin’s lead­ers to plan an $8 mil­lion re­mod­el­ing project. But they also want to in­tro­duce a nu­clear medicine pro­gram and re­tail phar­macy. The hos­pi­tal will be able to treat more com­plex pa­tients in­stead of send­ing them to other hos­pi­tals.

At a time when many ru­ral hos­pi­tals across the coun­try are on life sup­port, the Af­ford­able Care Act’s con­tro­ver­sial Med­i­caid ex­pan­sion has re­sus­ci­tated hos­pi­tals, in­clud­ing Franklin. But across the state line in Mis­souri, where Repub­li­can law­mak­ers have re­fused to ex­pand Med­i­caid, hos­pi­tals such as Perry County Me­mo­rial Hos­pi­tal in Per­ryville are not see­ing a com­pa­ra­ble fi­nan­cial boost.

In 2012, the U.S. Supreme Court left it up to each of the states to de­cide whether to ex­pand Med­i­caid el­i­gi­bil­ity. As of now, 29 states plus the Dis­trict of Columbia have ex­tended

their pro­grams to adults with in­comes up to 138% of the fed­eral poverty level. The other 21 states, mostly GOP-led, ei­ther have re­jected the ex­pan­sion or are fiercely de­bat­ing it.

Mod­ern Health­care is con­duct­ing a year­long anal­y­sis of fis­cal 2014 fi­nances for hos­pi­tals across the coun­try to de­ter­mine how the ACA’s Med­i­caid ex­pan­sion af­fected rev­enue and op­er­at­ing mar­gins. This project is sup­ported by a fel­low­ship from the As­so­ci­a­tion of Health Care Jour­nal­ists and the Com­mon­wealth Fund.

The anal­y­sis, based on ex­am­in­ing fi­nances for 466 not-for­profit hos­pi­tals in 2013 and 309 in 2014, found that hos­pi­tals in both Med­i­caid ex­pan­sion and non-ex­pan­sion states im­proved their op­er­at­ing per­for­mance, even as the trends were some­what more pos­i­tive in the for­mer group. Their rev­enue grew faster and their op­er­at­ing mar­gins im­proved at a bet­ter clip.

Not-for-profit providers in Med­i­caid-ex­pan­sion states saw their op­er­at­ing mar­gins in­crease to 3.2% in 2014 from 2% in 2013, ac­cord­ing to the anal­y­sis of fi­nan­cial state­ments filed for mu­nic­i­pal bond­hold­ers. In non-ex­pan­sion states, op­er­at­ing mar­gins im­proved to 3.1% from 2.2%. The anal­y­sis ex­cluded Cal­i­for­nia hos­pi­tals, which ar­ti­fi­cially lost rev­enue while wait­ing for the CMS to ap­prove an ex­ten­sion to the state’s provider-fee pro­gram.

The larger dif­fer­ence was in rev­enue growth. Hos­pi­tals in ex­pan­sion states saw an av­er­age year-over-year rev­enue in­crease of 7.2% com­pared with 5.6% in non-ex­pan­sion states.

Both groups saw an in­crease in their pro­vi­sion for bad debt. But bad debt grew more in non-ex­pan­sion states— 11.6% com­pared with 8.1% in ex­pan­sion states. “The is­sue is that bad debt in and of it­self is not enough to set th­ese hos­pi­tals apart,” said Daniel Stein­gart, an an­a­lyst at Moody’s In­vestors Ser­vice, which has con­ducted its own anal­y­sis. In Med­i­caid ex­pan­sion states, bad debt rep­re­sented less than 5% of rev­enue in 2013, Moody’s found.

Th­ese re­sults may con­tinue to di­verge, par­tic­u­larly as the fed­eral gov­ern­ment be­gins to cut dis­pro­por­tion­ate-share hos­pi­tal pay­ments to providers that serve the unin­sured, ex­perts say. Or it’s pos­si­ble that hos­pi­tals over­all may be buoyed by de­mo­graphic changes such as more peo­ple aging into Medi­care.

Still, the anal­y­sis found that hos­pi­tals across the coun­try saw a fi­nan­cial im­prove­ment in 2014 no mat­ter where they are lo­cated. All states ex­cept Kansas saw a re­duc­tion in their unin­sured pop­u­la­tion, ac­cord­ing to Fe­bru­ary data from Gallup. The largest de­creases were in states that both ex­panded Med­i­caid and set up a state-based in­sur­ance ex­change un­der the ACA. But even some states that did nei­ther—in­clud­ing Louisiana, Maine and Mon­tana—still cut their unin­sured rate by at least 4.5% (Mon­tana re­cently ap­proved a Med­i­caid ex­pan­sion, but it has not been im­ple­mented yet).

The over­all unin­sured rate across the coun­try fell to 11.9% in the first quar­ter of 2015 af­ter peak­ing at 18% in 2013.

The states that have not ex­panded Med­i­caid may have the most to lose if the U.S. Supreme Court this month in King v. Bur­well strikes down pre­mium sub­si­dies in states us­ing the fed­eral in­sur­ance ex­change. That likely would cause mil­lions of peo­ple to drop their pri­vate

ex­change cov­er­age.

In the hun­dreds of earn­ings re­ports in­cluded in Mod­ern Health­care’s anal­y­sis, a num­ber of other themes also emerged: The econ­omy is im­prov­ing, stronger hos­pi­tals are buy­ing weaker ones and hos­pi­tals are ne­go­ti­at­ing bet­ter rates from com­mer­cial in­sur­ers. Those fac­tors are boost­ing op­er­at­ing mar­gins even with­out the ad­di­tional ben­e­fit from health­care re­form.

“Med­i­caid ex­pan­sion is not the only thing that’s hap­pen­ing,” said Steven Lip­stein, CEO at BJC Health­Care, an 11-hos­pi­tal sys­tem based in St. Louis. Although Mis­souri has not ex­panded Med­i­caid, its unin­sured rate has edged down to 13.5% from 16.1%. All but one of BJC’s hos­pi­tals saw a rev­enue in­crease in 2014; the one that did not re­cently moved its ob­stet­rics depart­ment to a nearby fa­cil­ity.

The sys­tem, like many oth­ers, also has tightly man­aged its costs.

Even with­out Med­i­caid ex­pan­sion, BJC has seen a 10% re­duc­tion in the bucket it calls free care—a com­bi­na­tion of char­ity care, dis­counted care and bad debt. That re­duc­tion could be at least partly at­trib­ut­able to the ex­pan­sion of sub­si­dized pri­vate cov­er­age through the fed­eral ex­change serv­ing Mis­souri, which has en­rolled nearly 254,000 Mis­souri­ans.

Even within a given state, dif­fer­ent hos­pi­tals are experiencing health­care re­form dif­fer­ently. One thing the ACA’s cov­er­age ex­pan­sion has done is of­fer more provider choices to peo­ple who pre­vi­ously were unin­sured. There’s ev­i­dence in Cal­i­for­nia, for in­stance, that pa­tients who gained cov­er­age are no longer seek­ing care from safety net hos­pi­tals and in­stead use pri­vate providers.

“Just be­cause we’re see­ing a de­crease of un­com­pen­sated care doesn’t mean all hos­pi­tals will ben­e­fit equally,” said Dy­lan Roby, a health pol­icy pro­fes­sor at the Uni­ver­sity of Cal­i­for­nia at Los An­ge­les. “It re­ally be­comes an is­sue of where pa­tients start go­ing once they get cov­er­age.”

Two stud­ies have found that hos­pi­tals in non-ex­pan­sion states saw a larger in­crease in rev­enue from com­mer­cial in­sur­ance last year than hos­pi­tals in ex­pan­sion states saw. That’s likely re­lated to the fact that in non-ex­pan­sion states, ACA pre­mium sub­si­dies to buy pri­vate ex­change cov­er­age were avail­able to adults with in­comes be­tween 100% and 138% of the poverty level. In con­trast, in ex­pan­sion states that in­come group is au­to­mat­i­cally cov­ered through Med­i­caid.

In Mis­souri, most nondis­abled adults aren’t el­i­gi­ble for Med­i­caid. Adults with chil­dren only qual­ify if they have in­comes 18% be­low the fed­eral poverty level, mean­ing the in­come thresh­old for a fam­ily of four last year was $4,365.

Mis­souri, by re­fus­ing to ex­pand Med­i­caid, is los­ing $2.2 bil­lion a year in fed­eral Med­i­caid dol­lars. Faced with the lack of Med­i­caid ex­pan­sion, many Mis­souri hos­pi­tals stay sol­vent by lay­ing off em­ploy­ees, dis­con­tin­u­ing un­prof­itable ser­vices and de­lay­ing new build­ing projects and equip­ment pur­chases, said Herb Kuhn, pres­i­dent of the Mis­souri Hos­pi­tal As­so­ci­a­tion.

Even Mis­souri hos­pi­tal lead­ers whose fa­cil­i­ties are do­ing well fi­nan­cially are acutely con­scious of how the state’s fail­ure to ex­pand Med­i­caid is af­fect­ing their in­dus­try. They are quick to iden­tify other hos­pi­tals that are strug­gling. Two ru­ral fa­cil­i­ties al­ready have shut their doors. “If we don’t fig­ure out a way to move for­ward, we could lose five to 10 more hos­pi­tals in the state,” said Pa­trick Car­ron, CEO of Perry County Me­mo­rial Hos­pi­tal.

Car­ron’s 25-bed hos­pi­tal is bet­ter off than most be­cause of the par­tic­u­lar eco­nomic sit­u­a­tion in Per­ryville, a town of about 8,200 peo­ple. Lo­cated amid rolling hills and farm­land about 80 miles south of St. Louis, Per­ryville has an em­ploy­ment rate be­low 5%, one of the low­est in the state. Food man­u­fac­tur­ing, auto parts, farm­ing and air­craft re­fur­bish­ing pro­vide industrial jobs in the area.

Car­ron’s hos­pi­tal’s op­er­at­ing mar­gin is typ­i­cally in the 6%-8% range, while most of the state’s other crit­i­cal-ac­cess hos­pi­tals are barely break­ing even.

Still, the past year has not been with­out chal­lenges. Bad debt at his hos­pi­tal in­creased 50%, which Car­ron at­trib­uted largely to the pro­lif­er­a­tion of high-de­ductible health plans and peo­ple not be­ing able to af­ford their outof-pocket costs. The hos­pi­tal has put pa­tients on pay­ment plans with five or even 10 years to pay.

Nev­er­the­less, Perry County Me­mo­rial is build­ing. There are cranes work­ing on med­i­cal of­fice space, and the hos­pi­tal re­cently bought a new CT imag­ing sys­tem. But it’s cut­ting costs else­where, in­clud­ing through staffing. Car­ron said his fa­cil­ity needs to ne­go­ti­ate bet­ter rates with in­sur­ers to con­tinue serv­ing its pa­tients.

For Mis­souri hos­pi­tals strong enough to is­sue bonds, op­er­at­ing mar­gins im­proved to 2.9% for their fis­cal 2014 from 0.9% the pre­vi­ous year.

Across the bor­der in Illi­nois, the av­er­age op­er­at­ing mar­gin for hos­pi­tals in the anal­y­sis rose slightly to 3.4% from 3.3%. But some of the state’s most vul­ner­a­ble hos­pi­tals say they’re ac­tu­ally see­ing a more sub­stan­tial boost from the ACA’s Med­i­caid ex­pan­sion.

As coal-min­ing jobs dried up in South­ern Illi­nois, the un­em­ploy­ment rate in Ben­ton climbed above 9%. The state gov­ern­ment is a ma­jor em­ployer now, and many peo­ple work at one of the area’s state parks or prisons.

The road from Ben­ton to the nearby town of Christo­pher is dot­ted with pawn shops, gun shops and con­ve­nience stores ad­ver­tis­ing video poker and slots. Christo­pher’s health clinic oc­cu­pies a new build­ing, one of the largest in the town.

Com­mu­nity health cen­ters in the area have ex­panded “tremen­dously,” said Kim Mitroka, CEO of the Christo­pher Ru­ral Health Plan­ning Corp., which op­er­ates a dozen com­mu­nity health cen­ters through­out the state and has added three clinic lo­ca­tions over the past three years that have brought in 18,000 ad­di­tional pa­tients. “We had a tough year last year. We did much bet­ter this year and I think a lot of it has to do with the (Med­i­caid) ex­pan­sion.”

She es­ti­mated that her or­ga­ni­za­tion’s Med­i­caid pa­tients have in­creased 25%; al­most all were pre­vi­ously unin­sured. Med­i­caid pa­tients now ac­count for 40% of its to­tal pa­tients, and its op­er­at­ing sur­plus has in­creased 10% to $22 mil­lion.

Franklin Hos­pi­tal hadn’t made a dime in 25 years, CEO Davis said. He ar­rived there in 2002, five weeks be­fore it was sched­uled for clo­sure; the hos­pi­tal was hold­ing on with a week’s worth of cash. Over the pre­vi­ous five years, it had lost $12 mil­lion. For three months af­ter Davis’ ar­rival, the hos­pi­tal shut down all ser­vices ex­cept its emer­gency depart­ment. It bor­rowed $4 mil­lion from the U.S. De­part-- ment of Agri­cul­ture.

Re­mark­ably, it didn’t go un­der. In­stead, it be­gan to break even. And its fi­nan­cial con­di­tion re­mained at that mar­ginal sta­tus for the next decade.

Now, Franklin’s fi­nances are sig­nif­i­cantly stronger. For fis­cal 2015, it ex­pects to re­port $41.6 mil­lion in rev­enue com­pared with $32.8 mil­lion the prior year. It may book net in­come close to $1.3 mil­lion com­pared with $1 mil­lion in fis­cal 2014. With its stronger fi­nances, the hos­pi­tal ap­plied for and re­ceived grants from the state and the USDA to fund its re­mod­el­ing projects.

Davis rat­tles off the hos­pi­tal’s goals while sit­ting at a round ta­ble in his of­fice. Be­cause Franklin has an av­er­age pa­tient cen­sus of only five, the hos­pi­tal uses its ex­cess food ser­vice ca­pac­ity to pre­pare daily meals for 35 se­nior cit­i­zens, for which it re­ceives fund­ing from the county. Un­der the ren­o­va­tion plan, the cafe­te­ria will be down­sized to make room for a re­tail phar­macy.

“Right now, the hos­pi­tal is do­ing bet­ter than it ever has,” Davis said. “We like Med­i­caid pa­tients here.”

“IF WE DON’T FIG­URE OUT A WAY TO MOVE FOR­WARD, WE COULD LOSE FIVE TO 10 MORE HOS­PI­TALS IN THE STATE.”

Pa­trick Car­ron, CEO of Perry County Me­mo­rial Hos­pi­tal in Per­ryville, Mo.

PHO­TOS BY MICHAEL A. MAR­COTTE

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