Hospital Association Raises Objections to New Provider Tax

The hospitals are also upset over Senate Bill 204, which passed the House yesterday and gives the Oregon Health Authority the ability to lower outpatient rates based on Medicare payment methodologies

June 3, 2011 -- Legislators have reached a decision on increasing the hospital tax to ward off deep cuts to the Oregon Health Plan, but the Oregon Association of Hospitals and Health Systems insists the new tax will negatively impact them. Their leaders even protested to Governor Kitzhaber, but were rebuffed.

Starting in July, the state’s 26 largest hospitals will start paying a 4 percent provider tax on their net revenue, which represents a 1.68 percent increase from the current tax. Those dollars, matched with federal matching funds, are expected to generate another $660 million over the next two years, and decrease the proposed cuts to hospitals and other healthcare providers from 19 percent to 11.5 percent.
A memorandum of understanding, signed in 2009 between the hospital association and legislators – along with the passage that year of House Bill 2116 – gave lawmakers authority to continue the tax through 2013 – without the need for a 3/5ths majority vote.
“When people look at the hospital provider tax, they sometimes miss the key point,” said Sen. Alan Bates (D-Ashland). “This is not a tax. It doesn’t cost them a penny. We’re making them completely harmless. For every dollar the hospitals get assessed, they get it right back. We just use the hospital tax to get the federal match. The real underlying problem is the economy, and there’s not enough general fund generated for programs that the state runs. K12, which is flat funded, won’t be getting any extra money. Every other part of state government, with the exception of parks and recreation, is going to have 5 to 10 percent cuts. It’s a real problem.”
Bates, along with three colleagues -- Sen. Betsy Johnson (D-Scappoose), Rep. Tina Kotek (D-Portland) and Rep. Tim Freeman (R-Roseburg) -- began meeting in earnest with Andy Davidson, president and CEO of the hospital association, and Kevin Earls, its senior vice president, several weeks ago.
Those meetings were extremely tense, said Bates. “Their negotiators were not forthcoming and not respectful of this institution, which didn’t help the situation. Arrogance and sarcasm don’t get you anywhere. Never in my 10 or 11 years here have I seen that kind of behavior.”
When the negotiations got under way, the association officials insisted they receive the entire bucket of federal matching funds, said Bates. Under that scenario, the hospitals would have seen their cuts reduced to nearly zero next biennium, leaving physicians and other medical groups to absorb the 19 percent reduction.  
“Rather than argue about who gets the money, the association should have been arguing with the governor about extending the tax another five or six years given our financial situation,” said Bates who credited his colleagues with doing a sterling job in hammering out the details. “Our real job is to protect Oregonians – not who wins and loses -- and be statesmen about it.”
The hospitals will receive every tax dollar they pay into the fund -- plus more, Bates said. Under the new agreement, they’ll be reimbursed for all non-emergency care for the OHP Standard population; their disproportionate payments have been taken care of -- where hospitals with higher Medicaid caseloads receive additional federal dollars -- and they can increase the 4 percent provider tax and keep all of the federal matching dollars.
“The tax that we’re raising is in the safe zone,” Kotek said. “If they want to find additional tax resources, it’s unclear if they’ve reached the Medicaid upper payment limit. But if they decide to go ahead, the hospitals could have all the money and reduce their rate cut even further.”
This conflict isn’t about a new hospital provider tax, said Andy Van Pelt, director of communications for the hospital association, but, rather, how those federal matching dollars will be allocated for the state’s Medicaid program. Rather than only supporting the OHP Standard population, the tax will now be used to temper cuts for services to all OHP enrollees.
“The proposal to use the hospital tax in this way is a significant departure from the original agreement that led hospitals to agree to tax themselves in 2004 in order to fund the OHP Standard exclusively,” he said.
During the negotiations, the association was hoping to see a “clear plan to get providers through the full biennium’s cuts,” Van Pelt added. “The hospital tax won’t even allow us to resolve the entire year one cuts: year two will be far worse as in addition to the 19 percent cuts on the table, there will be additional reductions of approximately $550 million (state funds and federal matching funds) on top of the 19 percent often discussed in 2013.”
According to Van Pelt, his board felt it was problematic and shortsighted not to have had a larger legislative conversation about the depth of the second-year cuts.
“Our board simply didn’t want to repeat the mistakes of the past by agreeing to a short term fix that wouldn’t address the cuts that are yet to come later in this biennium and future biennia,” Van Pelt said.

Hospital Outpatient Costs Reduced

There’s yet another twist that’s drawn even more ire from the hospital association – Senate Bill 204, which will reduce outpatient rates by using Medicare payment methodologies starting in January. These new rates apply not only to the Oregon Health Plan, but to public employees and school teachers – which together represent nearly 900,000 Oregonians.  
The bill passed the House yesterday with 52 votes in favor.
“Senate Bill 204 is good public policy and will help with cost containment in future years,” said Kotek, who originally drafted the legislation as House Bill 3559, which was defeated. 
The amendments to Senate Bill 204, which start the rate reductions in January rather than October 2012, were “the final straw,” said Van Pelt, adding that the hospitals will end up losing $104 million in outpatient reimbursement.
“By saying that the hospitals get all their tax back, completely ignores the bigger picture—the effect of the cuts on hospitals and all other providers, even after the hospital tax help is applied,” he said. “We project that the hospital loss alone, from these cuts —after the effect of our buying the cuts down by raising our tax -- will exceed $277 million
over the next two years.
“To be clear, this is a bill that has nothing to do with the hospital tax or the cuts proposed in the budget. This is an additional cut to the same hospitals that are financing the cut reductions through the increased hospital tax. We have no problem changing the payment methodology, but at no point in the public process was it made clear that the intent is also to change the payment rate.”

Rural Hospitals Left Out

Bates and his colleagues were also perturbed because the association’s negotiators didn’t include the small rural hospitals – known as Type A and B – among their demands. These hospitals, which live close to the edge, could close if they had to absorb a 19 percent cut.
“The association was willing to throw them under the bus and ignored them during the negotiations,” Bates said. 
The hospital association disagreed.
When the rural hospital cuts were repeatedly discussed, high level government officials told the association that those costs “were an honest error in the budget development process, and that the error would be fixed outside of the tax,” said Van Pelt.
To protect these hospitals, the legislators brought in representatives from the insurance industry -- Dan Field with Kaiser Permanente and Mike Becker with Providence Health Plans.
Since 2009, insurers have paid a 1 percent tax to support the Healthy Kids program. They agreed lawmakers could use the surplus from their tax, about $25 million, to offset the cut to these rural hospitals, and stabilize the payment rates for pediatricians, family physicians and nurse practitioners who care for children. 
“When the insurers sat down with us, they were thoughtful and understood the need,” Bates said. “Now we’ll see what kind of attitude the hospitals have and if they’re supportive and thoughtful and think about bringing costs down and helping people in Oregon. If they continue with the attitude of keep building new buildings and new facilities that nobody can afford, then we’ll have a real problem. Our financial situation isn’t likely to change dramatically, and we’ll have problems. If the hospitals think they can compete with K12 and get more than their share of the general fund, it’s not going to happen.”
Overall, the hospital association feels pretty discouraged about the tenor of the negotiations, and the impact of Senate Bill 204, Van Pelt said.
“We have a history of working collaboratively with the legislature and governor since we created this funding program in 2004 when the state didn’t have funds to support the 110,000 lives then in the OHP standard population. It is because of this collaboration that we have willingly maintained this program.  In 2009, hospitals took over 100 percent funding of the state's share for OHP Standard. We now cover more than 75,000 lives in the Standard program.  On May 29, 2009, we shared the stage with legislators in announcing the adoption of a truly mutual hospital tax deal.  Unfortunately, that collaboration and spirit of ‘doing the right thing’ hasn’t been shared this session. Not having to take a 3/5 majority vote on this probably has a lot to do with a diminished desire for collaboration on the legislature's part.”
He went on to say, “Our current memorandum of understanding is through 2013 and we have honored it since it was signed. Provider tax systems have a short shelf life. With the federal government pulling back, we anticipate these types of programs are only a short-term solution. All of us have to look to 2014 when Oregon will see 150,000 new Medicaid enrollees. No amount of hospital tax funding can support this population. We need to start planning for this now and reduce our dependence on what was supposed to be a ‘temporary’ solution established collaboratively in 2004.”

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Dr. Bates and this reporting appear to have been well-orchestrated by lobbyist and influences of PAC activities - an unfortunate aspect of our political/media process. Health reform will eventually bring/force collaboration and honest common ground.

Hospitals are a necessary segment of the treatment spectrum - no more, no less. Other segments of the system - doctors, for instance - have been 'under the knife,' as it were for some time. Other medical professionals have also seen their reimbursements decline. Probably the only folks in the system who are making out well are -- the insurance folk! Perhaps it is time for us to really rethink our system and the place that each of the segments play. Surely, the insurance industry takes far more than its role, eduation, and/or expertise suggests. And, the hospitals, most of which are organized as tax free (not for profit) have not proven that they should get more. Perhaps this new "tax" might more properly be called "in lieu of;" and, at that low rate is pretty reasonable.