State’s ‘Safety Net’ Hospitals Face Deep Cuts

The Bush administration said Tuesday it is closing a regulatory loophole that has enabled California to get billions of dollars in federal funds to help operate hospitals that serve large numbers of poor, uninsured residents.

California could lose more than $300 million a year from the $1 billion in federal money flowing annually to its 73 “safety net” hospitals, officials said. The cuts will be gradual, probably starting in three years and reaching their full effect at the end of the decade.

The proposed reductions come as the state struggles with a deepening recession and a growing budget deficit. California’s safety net hospitals already are having trouble meeting their mission of caring for large numbers of people who lack health insurance. And their financial burden will rise as laid-off workers lose their coverage.

Fred Leaf, acting director of the Los Angeles County Department of Health Services, told county supervisors that the move would cost the county about $18 million in its first year and could build to $125 million a year by the end of the decade--the cost of running two hospitals. The agency is already scrambling to patch a looming $884-million hole caused by other federal cuts.

“With our financial condition, that’s very, very serious,” Leaf said Tuesday.

Statewide, the possible loss of more than $300 million annually is a “huge hit,” said Jan Emerson, spokeswoman for the California Health Care Assn., which represents 470 hospitals. “We are deeply disappointed.”

The Bush administration said it was seeking to close the loophole to plug a leak from the federal Treasury that has grown as more states learn of this source of extra federal funds.

Medicaid (known as Medi-Cal in California) is jointly financed by the states and the federal government. States apply to Washington for the federal share of the costs of treating their Medicaid patients.

The reimbursement rules, reflecting an effort by the U.S. government to help hospitals that serve large numbers of poor people, allowed the states to get Washington to pay more than half of the cost of treating Medicaid patients.

The states could pass the excess on to their Medicaid hospitals. Or they could simply pocket the difference for other uses.

California became the first state to figure out how to make the Medicaid reimbursement formula work to its advantage. It has used its extra money for public institutions, such as County-USC Medical Center, that serve large numbers of indigent people.

The money also goes to children’s hospitals, which offer complex and costly services at minimal charge to the patients. And private hospitals get some of the money because they have low-income patients who cannot afford to pay their bills.

But other states are gradually catching on to the trick. Some have retained the windfall from Washington for other budgetary purposes.

Tom Scully, who as administrator for the federal Center for Medicare and Medicaid Services runs the giant health programs for the poor and the elderly, said 14 states have applications pending. He said the loophole amounted to an “indefensible public policy,” especially when the money was diverted to purposes unrelated to health care.

“We know that some states have come to rely on these funds over a period of years,” said Health and Human Services Secretary Tommy G. Thompson. “Other states have recently discovered this mechanism and want to use it to refinance their state budgets.”

Under the rule proposed by the administration Tuesday, states will still be able to base their reimbursement claims on Medicare rates. But no longer will they be able to ask for 150% of Medicare payment rates; the ceiling will be gradually reduced to 100%.

Scully said the gradual reduction in the subsidy, taking place over a decade, will give California hospitals time to adjust.

The state used the reimbursement procedure “to build up its public health system,” he said. “They got a spectacular deal no other state has. We do not want to pull the rug out from under them.”

Members of California’s congressional delegation, as well as the hospital managers, vehemently disagree. And they promise a fight against the proposed rule, which will be open for public comment Friday for 30 days. Administration officials hope to make the final rule effective in February.

“I regret this change is being made; it will be very harmful to public hospitals and to children’s hospitals,” said Rep. Henry A. Waxman (D-Los Angeles). Rep. Anna G. Eshoo (D-Atherton) called the proposed rule “a slap in the face to California’s emergency health care infrastructure.”

Republicans agreed. “I’m very disappointed,” said Rep. David Dreier (R-San Dimas), chairman of the California House Republicans. “The bipartisan delegation will continue to fight for fairer treatment for California.”

Rep. Sam Farr of Carmel, leader of the state’s House Democrats, said, “They have just made it harder for states who play by the rules to serve the health and medical needs of their communities.”

Hospital officials insist their institutions cannot do their work if they lose this source of funding.

“Our already strained safety-net health care infrastructure simply cannot survive a loss of this magnitude and still maintain the level of critical services the public expects and deserves,” said Denise K. Martin, president and chief executive of the California Assn. of Public Hospitals and Health Systems.

Los Angeles County officials and representatives of private hospitals that primarily serve the poor say the rule change could force some hospitals to close.

“We’re devastated by this rule coming out,” said Catherine Douglass, the president of an association of private California hospitals that serve low-income areas. She predicted that some private emergency departments or hospitals may shut down.

“When you’re hit with closures, then the entire safety net infrastructure begins to unravel,” Douglass said. “Particularly in Los Angeles County, where hospitals are so interconnected.”

Unions also expressed alarm. “We see this as a disaster,” said Bart Diener, assistant general manager of the union representing most Los Angeles County health workers, the Service Employees International Union Local 660. “This is a time when our public health system is already fraying, and it needs to be strengthened rather than torn down.”

The estimated eventual fiscal hit on Los Angeles County of $125 million is roughly the cost of operating two of the county’s six public hospitals: Harbor-UCLA Medical Center outside Torrance and Olive View-UCLA Medical Center in Sylmar.

*

Rosenblatt reported from Washington and Riccardi from Los Angeles.