Hospitals, State Settle Medi-Cal Suit

Gov. Gray Davis announced Tuesday that hospitals around California have settled a 10-year-old lawsuit against the state over Medi-Cal payment rates for outpatient care, leading to the first broad increase in rates in 15 years.

Under terms of the agreement, the state Department of Health Services will also pay California hospitals $350 million, a lump sum that will be divided among hospitals according to a formula that has yet to be determined.

That sum is designed to compensate hospitals for a decade in which California’s Medi-Cal reimbursement rates were too low, as determined by a federal appellate court in 1997 .

The rate increase--a hike of 30%, or $78 million--will take effect July 1 and will stand for one year. Then for each of the following three years, rates will be increased 3.3% annually. After that, a new mechanism for determining fair rates will be established.

“This settlement is critical to the survival of some of California’s busiest hospitals and will help keep emergency rooms open,” Davis said in a statement.

“Hospitals that rely on Medi-Cal reimbursement rates are key links in our health system safety net. The increase in reimbursements will ensure that hospitals in our state will have the resources to provide care to all Californians.”

Jan Emerson, a spokeswoman for the California Healthcare Assn., a hospital trade organization, called the settlement a “crucial breakthrough” for the state’s financially beleaguered medical centers.

Until now, she said, they had the worst reimbursement levels in the nation for Medicaid patients. The program is called Medi-Cal in California.

“This has been in litigation for 10 years,” Emerson said. “It’s wonderful to finally see a resolution, and it’s a significant development.”

The settlement does not, however, end the financial turmoil in the state’s hospital industry. Low government reimbursement and slim payments from health plans have squeezed public and private hospitals to the point that nearly two-thirds are losing money on patient care.

“We should be absolutely clear that this is not a panacea,” Emerson said. “The problems are much bigger than this little piece of the pie. . . . It’s not earthshaking amounts of money.”

The agreement covers Medi-Cal outpatients, or those seen in the emergency room, clinics, for laboratory work or other services that do not require that they be admitted.

While many hospital officials were caught off guard by Tuesday’s announcement, some expressed relief at the news.

“For years, hospitals in California have been losing significant dollars in providing care for Medi-Cal outpatients,” said Lori Aldrete, a corporate vice president at Catholic Healthcare West, the largest health care system in the state. “This will not totally compensate us for those costs, but it is a very important step in the right direction, and we greatly appreciate it.”

In 1990, hospitals sued the state, alleging that its method for determining Medi-Cal outpatient rates violated federal law. The hospitals said the Department of Health Services set those rates too low.

In 1997, the 9th Circuit Court of Appeals agreed, saying the state must set rates that are reasonably related to medical costs.

Since that court ruling, the hospitals have been negotiating with state officials over a fair monetary settlement.

Medi-Cal is California’s version of Medicaid, the federal health care program for low-income or disabled people. Medi-Cal is jointly funded by the state and federal governments.

*

Times staff writer Julie Marquis contributed to this story.