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2 0 1 3-2 0 1 4 Health Care Finance in Texas A Patchwork of Payers and Priorities In the United States, health care is paid for by a combination of public and private sources. Its methods of financing and reimbursing providers are complex, often involving a thirdparty payer. Money to purchase health care services comes from employers and employees; individuals; and local, state and federal taxes. This document provides insight into how the patchwork of payers and providers that comprise the health care system works and how health care is financed. Most Texans are covered by a public or private health care plan, but Texas has the highest uninsured rate in the nation with more than 24 percent of the population lacking coverage. While federal and state laws guarantee access to emergency care for everyone regardless of their ability to pay, the law does not address how to pay for the health care services provided to the uninsured or under-insured. Contrary to what some believe, there is no free or uncompensated care. Someone pays for it. A portion of the cost is shifted to those with insurance, and a portion is subsidized by the provider. Local taxpayers also subsidize care to those without coverage. Having health care coverage is important for a number of reasons. First, individuals with health coverage usually receive important preventive and primary care, which leads to better outcomes at lower costs. Covered individuals have better health than those without access to these services. Additionally, health insurance spreads the financial risk of health care costs among a pool of people, some of whom will use services more and others less. Just like homeowner s or renter s insurance spreads the risk of loss in a natural disaster, health insurers pool premiums to fund an individual s health care services. Everyone benefits when everyone participates. 1 h e a lt h c a r e f i n a n c e i n T E x a s

h e a l t h c a r e f i n a n c e i n t e x a s : A p a t c h w o r k o f p a y e r s a n d p r i o r i t i e s Private Health Coverage About 45 percent of all Texans are covered through a group policy (usually employer-sponsored) and about four percent have an individual policy. More than 24 percent of Texans are uninsured. Only 47 percent of all Texas employers offered health insurance coverage in 2011. In contrast to the 90 percent of large employers that offer health insurance coverage, only 28 percent of small businesses with 50 or fewer employees do. The higher the individual s income, the more likely he/ she is to have health insurance. In 2011, the average costs of Texas employersponsored health coverage were $5,198 for single coverage and $14,903 for family coverage. To control costs, employers have increased the amount of the premium contributed by employees, and many employers require employees to pay a higher percentage of the premium for family coverage. Employers have increased enrollees annual deductibles, copayments and coinsurance to help curb costs. Estimates are that $1,800 of a family s private annual health care insurance premium in Texas is attributable to cost-shifting by health care providers to cover health care provided to uninsured and under-insured individuals. Inadequate funding of government programs like Medicaid results in large payment shortfalls for hospitals, physicians and other health care providers, all of whom pass on a portion of their unpaid costs to those with private insurance, in effect a hidden tax. Public Health Coverage Federal Health Programs Federal government programs reimburse providers for health care services delivered to individuals covered by: n Medicare; n the Veterans Administration; n the military (active and retired); and n the federal government employee insurance program. Medicaid and the Children s Health Insurance Program are financed jointly by the federal and state governments. In Texas, the federal government currently pays $0.58 for every $0.42 cents the state spends on Medicaid and $0.70 for every $0.30 the state spends on CHIP. Texas Population Current: Insured and Uninsured by Affordable Care Act (ACA) Subsidy Type KEY Medicaid Expansion Adults 138% Federal Poverty Level (FPL) or below Medicaid Eligible but Unenrolled Children 200% (FPL) or below; TANF Adults Subsidy Eligible Children 201%-400% FPL Adults ages 0-64, 139%-400% FPL includes Lawful Permanent Residents (LPRs) No Subsidy Children and Adults above 400% FPL, Including LPRs, Adults ages 65+ Current: Insured and Uninsured Uninsured by Act Subsidy Type Undocumented Children and Adults Note: Due to rounding, percents may not total one hundred percent. Source: U.S., Census Bureau. March 2011 Current Population Survey (CPS). Prepared by: Texas Health and Human Services Commission, July 2012. 2

for benefits to be maintained. Historically, the Texas Legislature has failed to fund the full projected Medicaid caseload, resulting in a shortfall that Who Is Enrolled in Medicaid? must be funded in the next biennium. Because of lower-than-anticipated revenue collection and the impact of the national economic crisis Non-disabled children are the largest percentage of the Medicaid population. More than 75 percent of the people T e x a s on the H o state, s p when i t a the l Texas A s Legislature s o c i a convened t i o n in receiving Medicaid are under age 20. In 2010, while nondisabled children made up the majority of all Medicaid enrollees (about 66 percent), they accounted for only a relatively small portion (about one-third) of Texas Medicaid January 2011, members were looking for additional ways to contain costs and create budget certainty. Some 32 percent of the state budget is spent on health and With health care consuming 17.9 percent of the Gross Domestic Product in 2010, both the federal and state governments have tried to slow the growth of their health care costs, reduce the amounts they spend and achieve budget certainty. Recognizing that the cost of caring for uninsured individuals is a significant driver of increasing health care costs, the U.S. Congress passed the Patient Protection and Affordable Care Act in 2010. Among the goals of the PPACA are: expanding coverage, reducing costs through efficiency and quality improvement, and making private health insurance more affordable and accessible. Creating state and federal health insurance exchanges is intended to make the market more competitive, and subsidies will help working families afford coverage. The personal mandate creates an incentive for individuals to buy insurance, and tax credits and penalties provide incentives for businesses to offer coverage to employees. States have the opportunity to expand Medicaid coverage to additional low-income families. While Congress is expected to continue to change the federal program and its full implementation is uncertain, states have the opportunity to obtain additional federal funds beginning in 2014 to expand Medicaid. The Texas Health and Human Services Commission estimates that 1.1 million Texans would gain Medicaid coverage if eligibility in Texas is expanded as authorized by PPACA. Medicaid expansion would cut the state s uninsured population in half. Another 2 million Texans are estimated to gain coverage through the insurance exchanges. 2 2 0 12-1 3 T E X A S M E d i c A i d Texas Medicaid Beneficiaries and Expenditures State FY2011 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Texas Medicaid Beneficiaries and Expenditures State Fiscal Year 2010 Non - Disabled Children 66% Non - Disabled Adults 9% Aged & Disability Related 25% 0% Caseload Cost Source: HHS Financial Services, 2010 Medicaid Expenditures, including Acute Care, Vendor Drug, and Long-Term Care. Costs and caseload for all Medicaid payments for full beneficiaries and non-full beneficiaries (Women s Health Waiver, Emergency Services for Non - Citizens, Medicare payments) are included. Children include all Poverty-Level Children, including TANF. Disability Related Children are in the Disability-Related group, not in the Children group. population, the disabled and elderly consumed 58 percent of resources. In SFY 2011, Medicaid was 26 percent of the Texas budget. Federal health reform allows states to expand Medicaid eligibility to individuals at or below 133 percent of federal poverty. From 2014 through 2016, the federal government will pay 100 percent of the cost of services these newly-eligible individuals receive. Higher administrative costs, identification and enrollment of previously-eligible Medicaid recipients and mandatory increases in reimbursement to primary care providers would cost Texas $1.3 billion during those three years, but Medicaid expansion would bring in $24 billion in federal matching funds. Over a 10-year period, THHSC estimates that the expenditure of $16 billion in state general revenue would yield approximately $85 billion in federal funds, delivering a return-oninvestment of almost 5:1. Non - Disabled Children 32% 33% Non- Disabled Adults 9% 10% Aged & Disability Related 58% 1-4 Joint Federal-State Programs Medicaid Almost all Texas Medicaid recipients are children, the elderly, pregnant women and the disabled. At 66 percent, children are the largest segment of the Medicaid population, but they consumed only 33 percent of the resources in state fiscal year 2011. Despite accounting for 25 percent of the Medicaid Expanding Medicaid coverage also would decrease cost-shifting to local taxpayers and the private insurance market. Children s Health Insurance Program CHIP covers children in families with incomes up to 200 percent of poverty or who have too many assets to qualify for Medicaid but cannot afford to buy private insurance. The CHIP Perinatal program 3

h e a l t h c a r e f i n a n c e i n t e x a s : A p a t c h w o r k o f p a y e r s a n d p r i o r i t i e s KEY Medicaid Eligible but Unenrolled Children 200% (FPL) or below; adults 138% FPL and below Subsidy Eligible Children 201%-400% FPL Adults ages 0-64, 139%-400% FPL includes Lawful Permanent Residents (LPRs) No Subsidy Children and Adults above 400% FPL, including LPRs, adults ages 65+ Undocumented Children and Adults Texas Population Under Act With Full Medicaid Expansion: Insured and Uninsured by ACA Subsidy Type Under Act: Insured and Uninsured Note: Due to rounding, percents may not total one hundred percent. Source: U.S., Census Bureau. March 2011 Current Population Survey (CPS). Prepared by: Texas Health and Human Services Commission, July 2012. provides prenatal and post-partum care to pregnant women with incomes of 200 percent of poverty or lower who are ineligible for Medicaid. CHIP provides fewer benefits than Medicaid and has costsharing requirements. by $25 million. The Legislature also reduced funding Under Act: Uninsured by Act to substance Subsidy Type abuse prevention/ intervention/ treatment programs by approximately $23 million. According to the Kaiser Family Foundation, Texas is 51st in the nation for per capita mental health spending. The national per capita average is $123; Texas has a per capita average of $38. In addition to the lack of funding for behavioral health services, Texas has a shortage of inpatient beds, especially state psychiatric hospital beds, for the number of individuals needing care. 4 State-Funded Programs In addition to Medicaid and CHIP, the state funds a patchwork of delivery systems and coverage programs. State revenue pays for direct service delivery to provide behavioral health services, as well as for health care coverage, primarily for state employees and retirees. When combined with Medicaid and CHIP, these expenses represent a significant portion of the state budget and present funding challenges for the Legislature. Mental Health Texas has a publicly-funded system of mental health and chemical dependency services for individuals who meet clinical and income criteria. However, these programs historically have been under-funded, and the need for services far outpaces the supply of providers. Some 65-70 percent of Texans with mental health issues fail to receive treatment primarily due to lack of access to mental health services/providers. Yet in 2011, the Texas Legislature reduced mental health funding Local Mental Health Authorities/NorthSTAR In addition to funding inpatient hospital services, the state funds community behavioral health services through local mental health authorities (LMHAs) throughout most of the state. Some 39 LMHAs contract with the Texas Department of State Health Services to provide or fund community mental health services for a designated geographic area in the remainder of the state. As funding is scarce, the state has created priority populations to determine which individuals are eligible for publicly-funded behavioral health services. Almost 53,000 adults received community mental health services each month during state fiscal year 2011. During that same time period, 13,600 children received community mental health services. Thousands of people are eligible for services but remain on waiting lists, and more are under-served, meaning that they need more intensive services. In the Dallas area, behavioral health services are provided to the uninsured and Medicaid enrollees through a behavioral health organization in a

T e x a s H o s p i t a l A s s o c i a t i o n program call NorthSTAR. The program served more than 71,000 people in SFY 2011 but is budgeted to serve only 60,500 in SFY 2012 and beyond. The state also funds residential and outpatient crisis services, and the number of people who can be served with the available funds has decreased over time. State Mental Hospitals The state operates nine mental health hospitals and owns one inpatient residential treatment facility for adolescents. This system provides inpatient hospitalization and general psychiatric services for individuals with severe mental illness who require intensive treatment. Appropriations for these hospitals for the 2012 13 biennium totaled $783.4 million. Community Mental Health Hospitals Community mental health hospitals support inpatient services at five psychiatric hospitals operated in conjunction with a teaching hospital and major university medical school. Funds are allocated to the community hospitals through performance contracts with local mental health authorities. Biennial appropriations for 2012-13 totaled $107.4 million in general revenue. State-Owned Hospitals The state s Texas Center for Infectious Disease has 75 beds and primarily treats tuberculosis and related infectious and contagious diseases. TCID s $9.7 million annual operating budget is funded by state revenue. Texas has four university health science systems, and within them are nine health-related institutions, three of which provide inpatient and outpatient care at a hospital operated by the institution. The University of Texas Medical Branch in Galveston, the M.D. Anderson Cancer Center in Houston and the University of Texas Health Science Center at Tyler received $6.86 billion in general revenue for hospital operations for the 2012-13 biennium. ERS/TRS The state funds group health insurance for active and retired state and higher education employees and their dependents. Several different agencies administer the programs: the Employees Retirement System, the Teacher Retirement System, and the University of Texas and Texas A&M Systems. For the 2012-2013 biennium, the Legislature appropriated $4.1 billion for health insurance, representing 2.4 percent of the state budget. Insurance Pool The Texas Health Insurance Pool offers coverage to individuals who are not eligible for Medicare, are legal residents of Texas and U.S. citizens, and have been denied coverage by a health insurer due to health reasons or a medical condition. The pool must set rates to fully cover all costs of this coverage, up to twice the average rates charged by insurers for individual health coverage. The pool offers premium assistance to lower-income enrollees at or below 300 percent of poverty. In 2012, 23,417 individuals obtained health care coverage through the pool, and 3,500 enrollees received a premium subsidy. Funding of the premium subsidies comes from penalties that would be paid to hospitals, doctors and other health care providers by health maintenance and preferred provider organizations for failing to pay claims promptly. It is anticipated that once pool participants have access to more affordable coverage provided by the health insurance exchange, the pool will discontinue offering coverage. Healthy Texas Healthy Texas is a statewide program established in 2009 to provide small employers with a more affordable health care coverage option. The program is a modified re-insurance model under which insurers offering coverage to participating small employers are eligible for state reimbursement of 80 percent of the cost of medical claims between $5,000 and $75,000 per qualified 5

h e a l t h c a r e f i n a n c e i n t e x a s : A p a t c h w o r k o f p a y e r s a n d p r i o r i t i e s 6 enrollee per calendar year. The initial $35 million state appropriation in 2009 established the Healthy Texas Stabilization Fund, and TDI receives a limited appropriation each year to administer the program. In 2012, approximately 15,000 individuals received health care coverage through the Healthy Texas Program. Trauma Funding Texas has several dedicated funds that help support the statewide trauma system and offset a portion of uncompensated trauma care costs. Created in 2003, the Driver Responsibility Program is the primary funding stream for the Designated Trauma Facility and EMS Account 5111. The DRP holds bad drivers accountable for their actions by assessing points and surcharges on certain traffic offenses, such as driving under the influence. While the DRP generates approximately $113 million annually for the designated account, the Legislature historically has appropriated only a portion of the money and used the remainder to help balance the state budget. The Legislature appropriated $59 million for each year of the 2012-13 biennium for trauma and used another $26 million per year from the dedicated fund to attract federal Medicaid matching dollars to support trauma care. The Legislature also appropriated four million dollars from the designated trauma account to finance grants to hospitals and their nursing or medical education program partners for fellowships related to trauma care. As of Dec. 31, 2012, the designated account had a balance of approximately $388 million. Some $420 million has been distributed to designated trauma facilities, Trauma Regional Advisory Councils and EMS providers since 2004. However, during this same time period, hospital providers have reported more than two billion dollars in uncompensated trauma costs. The Texas Trauma System plays a major role in the state s response to disasters and emergency preparedness, as well as provides life-saving care to accident victims and in other medical emergencies. Inadequate state trauma funding leads to cost-shifting to private payers and puts a strain on the state s fragile safety net providers. A growing population has increased the demand for emergency services, and resources have not kept pace. Locally-Funded Programs Indigent Health Care The Indigent Health Care and Treatment Program provides services to eligible residents and is administered and primarily funded locally by counties, hospital districts and public hospitals. Texas law requires that these local governments provide health care services to individuals who qualify based on four criteria: place of residence, income (up to 21 percent of the federal poverty level), number of household members and resources. In 2011, counties spent $308 million on indigent health care. Counties that spend more than 8 percent of their general tax levy are eligible for state assistance. In 2011, only 11 counties qualified and received a total of $2.6 million in state assistance. Hospital Districts/Public Hospitals Hospital districts are special-purpose local governmental entities responsible for providing or financing health care to low-income, uninsured residents of the district. Some 95 hospital districts have been created in Texas. Most of these districts encompass an entire county, and many own and operate a hospital. Districts levy a tax to finance health care services for eligible residents and support their hospitals operations, if applicable. Hospital districts and public hospitals are not eligible for state assistance, but many receive Medicaid Disproportionate Share Hospital payments to help offset the costs for services provided to indigent residents.

T e x a s H o s p i t a l A s s o c i a t i o n In addition to hospital districts, two cities, 10 counties and one city-county partnership own hospitals. State law requires hospital districts and public hospitals to maintain the eligibility standards in effect in 1985, and for many of these entities, their eligibility was at 100 percent to 200 percent of poverty. Hospital districts and public hospitals spent more than $1.9 billion on indigent health care in 2011. Impact of Federal Health Reform The Patient Protection and Affordable Care Act passed in 2010 envisions major changes in how health care is delivered and financed. Many stakeholders supported the federal legislation because of its vision of reducing the number of uninsured and reforming health care financing and delivery. Many questions remain about the impact of federal reform on health care providers, employers, insurers, the uninsured and government programs. Private Health Programs PPACA s impact on coverage and premiums is uncertain. Some researchers predict that health care reform could decrease employer-sponsored coverage by 2.5 percent, while others predict that it could increase up to 2.7 percent. Although newly-insured individuals initially may use services more frequently, resulting in a temporary increase in premiums, the reduction in the number of the uninsured (and decline in cost-shifting) and the improved health of the population should moderate or lower premiums over time. It is anticipated that employers continuing to provide health care coverage will look for ways to control their costs and make their employees more sensitive to the cost and utilization of services. Medicaid Expansion The 2012 U.S. Supreme Court ruling on PPACA clarified that state expansion of Medicaid was voluntary, and many states including Texas are reluctant to broaden their programs, fearing greater costs over time. However, hospitals and other providers agreed to $500 billion in payment cuts over 10 years because they anticipated private or Medicaid coverage for millions of individuals who are currently uninsured. Texas hospitals share of these cuts is $18.6 billion over 10 years. These cuts will be enacted regardless of whether Texas expands Medicaid. Challenges to Existing Financing Mechanisms and Opportunities for Reform Many of the reforms approved in the federal legislation in addition to Medicaid changes made by the Texas Legislature in 2011 are challenging existing financing mechanisms, particularly for hospitals. Medicaid The Texas Legislature consistently has underbudgeted for the number of people projected to be enrolled and served in the Texas Medicaid program. In addition, Texas reimburses hospitals, physicians and other health care providers less than the cost of treating Medicaid patients. A portion of the loss is cost-shifted to other payers. Below-cost Medicaid payments have several results: n Inadequate reimbursement has reduced the percentage of physicians who will accept and treat Medicaid patients. n Texas hospitals rely on more local funding to offset the shortfall created by below-cost Medicaid reimbursement and a growing volume of care for uninsured or under-insured individuals. Local taxes increase to meet this need. In 2011, the Texas Legislature approved more than 60 initiatives that were designed to improve outcomes and contain costs in the Texas Medicaid program. These efforts included payment reform, statewide expansion of Medicaid managed care and provider rate reductions. Based on current implementation plans, the Texas Health and Human Services Commission estimates that about 7

h e a l t h c a r e f i n a n c e i n t e x a s : A p a t c h w o r k o f p a y e r s a n d p r i o r i t i e s Medicaid Caseload Supplemental Medicaid Payments To help offset below-cost Medicaid reimbursement by the state and to help fund care for low-income patients not eligible for Medicaid, the federal government created the Disproportionate Share Hospital program to provide additional Medicaid funds to hospitals. A second program, the Upper Payment Limit program, provided additional federal funding to hospitals. Texas expansion of Medicaid managed care statewide in 2011 led to the virtual elimination of the UPL program, as individuals enrolled in Medicaid managed care cannot be used in calculating UPL payments. 8 $2 billion in general revenue ($4.3 billion all funds) of the $3.1 billion savings target is expected to be achieved. Among the reforms that reduced payments to hospitals are the following: n An eight percent across-the-board reduction in Medicaid inpatient and outpatient rates for most hospitals. n Elimination of Medicaid outpatient hospital payments for Medicare and Medicaid dually eligible clients. n Emergency room and imaging payment reductions. n Statewide expansion of Medicaid managed care. n Reduced funding for the Children s Hospital UPL program. The cost-containment initiatives have taken money out of an already unfunded program, and there is uncertainty if they will improve outcomes, change Medicaid client behavior and/or actually reduce costs. For two decades, Texas has been using a growing amount of local tax dollars from eight large public hospitals to draw down federal Medicaid matching funds in the supplemental payment programs. In state fiscal year 2011, public hospital districts and other local government entities provided approximately $1.36 billion in intergovernmental transfers to fund both the Medicaid DSH and nonstate hospital UPL programs. Medicaid 1115 Waiver/Accessing Federal Funds In 2011, the state secured a Healthcare Transformation and Quality Improvement Program Medicaid 1115 waiver that is intended both to replace the UPL program through a new Uncompensated Care Pool payment system and incentivize collaborative change in how services are delivered to Medicaid enrollees and the uninsured through new projects. Achievement of certain goals will trigger incentive payments from a Delivery System Reform Incentive Payment Pool. The result has been mandatory regional healthcare partnerships that have created new alliances. While the goals of improving quality and efficiency and reducing costs are appropriate, the changes have disrupted the delivery system and the flow of supplemental funding. Many of the incentive projects require up-front investments by hospitals and other participating providers with no guarantee of receiving payments unless certain metrics are

T e x a s H o s p i t a l A s s o c i a t i o n achieved. The waiver has been a significant change on top of the other payment reductions and reforms being shouldered by hospitals. In state fiscal year 2013, the amount of state general revenue and local government transfers necessary to fund fully the DSH, Uncompensated Care and Delivery System Reform Incentive Payment programs is expected to more than double the fiscal year 2011 amount. Public hospitals and other local governmental entities do not have the local revenues needed to completely fund each of these programs. Each local entity has an obligation to its taxpayers to prioritize funding initiatives for its jurisdiction. The large public hospitals that traditionally have funded the Medicaid DSH program must ensure that they have the revenues available to fully fund Uncompensated Care and Delivery System Reform Incentive Program payments for their hospitals under the waiver before they can commit funding for other hospitals. Additionally, federal law prohibits private hospitals from directly funding these programs. Thus, the ability to draw down available federal funds in the future is uncertain. Bottom Line: What State Lawmakers Need to Know A broad range of issues face Texas Legislators as they consider health care policy and financing in 2013. While the Legislature has no jurisdiction over federal health care programs and a limited ability to influence private health care plans, Texas lawmakers will decide how to administer and fund the various state health care programs. Their budget decisions and whether Texas expands Medicaid and draws down available federal funds will have far-reaching impact on all Texans, including health care providers. Changes in reimbursement as a result of the Medicaid Transformation Waiver and further reductions in payments due to cost-containment measures created more uncertainty for providers. In each of the past five sessions, the Legislature has made significant changes to the Medicaid program and provider reimbursement. With the time lag in implementation of changes and retroactive payments and financial reconciliation, hospitals struggle to plan and budget. Reimbursement should be more predictable, and rates should more appropriately reflect actual costs. A more robust and adequately-funded Medicaid program would reduce the cost-shift to other payers, improve access to preventive and primary care, and reduce costs and improve outcomes over time. Stability in Medicaid for more than one biennium would allow the Legislature to determine if policy changes are effective. The state must provide additional funding for the Medicaid program to get the additional federal revenue available to Texas. State general revenue may be the only alternative to bring in Texas appropriate share of federal dollars and to fund critical supplemental DSH payments to the state s safety net hospitals. In addition to providing state revenue to fund Medicaid payments, the Legislature should allow local hospital districts and counties to impose an assessment on hospitals in their area to help fund Medicaid DSH, and the 1115 demonstration waiver. The Texas Legislature should help alleviate the burden of the uninsured on insured Texans and local taxpayers by taking all necessary steps to maximize the amount of federal funding coming to Texas. Reducing the state s uninsured population would help decrease health care costs long-term and eliminate a significant portion of the costshifting to other payers. While the state s bottom line may look strong, the health care infrastructure is deteriorating. Shortages of physicians, nurses and allied health professionals are growing. Hospitals have fewer resources to invest in their facilities and equipment, borrowing costs are increasing and their debt load is growing. 9

h e a l t h c a r e f i n a n c e i n t e x a s : A p a t c h w o r k o f p a y e r s a n d p r i o r i t i e s Uncertainty and instability in public health care programs ultimately jeopardize access to health care services for all Texans. A healthy, educated population is essential to a bright, prosperous future. Staying the course charted in 2011 and failing to maximize federal funding are unwise policy decisions and ultimately have a harmful effect on every Texan. Recommendations The Texas Hospital Association and its more than 475 member hospitals/health systems urge the Texas Legislature to: Increase Medicaid reimbursement for hospital services. In 2012, Medicaid paid most hospitals slightly more than 50 percent of their audited, allowed costs for inpatient services. In 2013, the rate will drop below 50 percent. Outpatient rates are at less than 75 percent of audited allowed costs. Hospitals cannot continue to deliver care at these rates. Uncompensated care costs from the high number of uninsured and Medicaid underfunding are shifted to the private market and taxpayers. Appropriate state general revenue to obtain federal matching dollars to fund the Medicaid Disproportionate Share Hospital program. This supplemental funding stream is critical to the state s safety net hospitals. The Medicaid 1115 Transformation Waiver places greater pressure on the eight large hospital districts local funds that have been used to obtain federal matching funds for DSH. State funds must be found to preserve this supplemental payment program and reduce the burden of financing hospital districts. Authorize a local tax to support Medicaid DSH and the 1115 Transformation Waiver. Under the Medicaid 1115 Transformation Waiver, $29 billion is available to Medicaid providers. However, local public hospital districts and counties that traditionally have funded Medicaid supplemental payment programs do not have sufficient funding to draw down all of the available federal dollars under Medicaid DSH and the waiver. Permitting local hospital districts and counties to impose an assessment on hospitals in their area to help fund Medicaid DSH and the waiver would be an additional funding stream to draw down available federal dollars. 10 Fund the Medicaid expansion to maximize federal tax dollars. The Patient Protection and Affordable Care Act envisions an expansion of Medicaid to reduce the number of uninsured. Because of this, hospitals and other providers agreed to $500 billion in payment cuts over 10 years. The share of these cuts facing Texas hospitals is $18.6 billion. These cuts will remain in place regardless of Texas decision to expand Medicaid. If Texas expands Medicaid, the state can get a return of almost 5:1 in federal funds and reduce its uninsured population by half. In four years, the state would be required to pay its share of the expansion, which never grows to more than 10 percent. Since the state can re-evaluate its decision to participate in the Medicaid expansion on a biennial basis, Texas should expand Medicaid now to maximize federal funds. Increase funding for mental health services. Due to state budget cuts in 2011 to state mental hospitals and local mental health centers, many people with mental health and substance abuse issues routinely are routed to hospital emergency departments or jails, both inappropriate places to receive mental health services. More appropriate funding for mental health will prevent inappropriate incarcerations and costly ER visits. Better reimbursement of private mental health hospitals, psychiatrists and psychologists is needed to secure more providers. Additionally, there is a shortage of inpatient civil state hospital beds and residential treatment options. Funding also is needed to support an outpatient treatment system that would help individuals with mental and substance abuse issues adhere to medication management, a less costly alternative to crisis intervention and

T e x a s H o s p i t a l A s s o c i a t i o n hospitalization. Medicaid also should integrate physical and behavioral health performance incentives so that patients receive the best care and have better outcomes. Appropriate designated trauma funds as intended. Since 2004, the Designated Trauma Facility and EMS Account has provided important financial resources to support the Texas Trauma System. A portion of the state traffic fines collected through the Driver Responsibility Program goes into the account to help offset uncompensated trauma care at designated trauma hospitals and to support EMS and Trauma Regional Advisory Councils. The account which has about $388 million that has not been appropriated is used to help balance the state s budget. Truth-in-budgeting dictates that this money should be used as intended to support the statewide trauma system, including its trauma registry. Initiatives that support uncompensated trauma care funding like the Driver Responsibility Program and red light cameras should be maintained. Questions should be addressed to John Hawkins, senior vice president of advocacy and public policy, at jhawkins@tha.org or 512/465-1505. According to Texas Government Code 305.027, portions of this material may be considered legislative advertising. Authorization for its publication is made by John Hawkins, Texas Hospital Association, 1108 Lavaca, Suite 700, Austin, Texas 78701-2180. Increase reimbursement for Medicaid physician services. Almost one-half of the state s physicians will not accept any Medicaid patients because the program s reimbursement rates are so low. The state has directed managed care organizations to promote prevention and primary care, but without adequate networks of participating physicians, it is difficult for Medicaid recipients to access primary care. Long waits for appointments and lack of adequate alternatives drive many Medicaid recipients to hospital emergency departments to access care that could be delivered more cheaply elsewhere. Although the state now is penalizing hospitals and doctors for treating non-emergency Medicaid patients in the ED, this does not resolve the problem. Paying doctors more appropriately will increase their willingness to treat Medicaid patients in offices and clinics the right places to deliver preventive and primary care. 11

1108 Lavaca, Suite 700 Austin, Texas 78701-2180 www.tha.org