The looming fiscal cliff for Texas hospitals

The law of unintended consequences is that the actions of people — and especially of government — always have effects that are unanticipated or unforeseen. Rarely can all outcomes be known and anticipated in advance.

Lawmakers who will form the 85th Texas Legislature, however, are in the unusual circumstance of knowing beforehand the future effects of their actions on at least one issue: health care financing.

When the federal government agreed to a temporary extension of the state’s Medicaid 1115 Transformation Waiver through the end of December 2017, it clearly stipulated what needs to occur in a new waiver agreement and the outcome if it does not. According to the federal government, Texas must solve two specific problems related to its uncompensated health care costs. And the consequence of failing to solve these problems is a very steep fiscal cliff for Texas hospitals because vital supplemental payment funding disappears.

The first problem to solve is the Medicaid shortfall. Texas’ Medicaid reimbursement rates fall far short of covering the actual costs of providing health care services to Medicaid enrollees. For most Texas hospitals, Medicaid reimbursement covers only 58 percent of actual costs.

The second problem is the large number of residents without health insurance. Texas has the largest number and proportion of uninsured residents in the nation. More than 5 million Texans — 19.1 percent of the state’s population — are uninsured. About 1 million of these residents could be insured as part of a Texas plan to leverage available federal funding to enroll low-wage, working Texans in the private health insurance marketplace.

Currently, supplemental payments through the 1115 waiver fill some of the budget hole that the Medicaid shortfall and uninsured costs creates for Texas hospitals. Together, these payments provide about $6.2 billion a year for Texas hospitals and other health care providers.

But after December 2017, the federal government will no longer allow federal funds to be used to make up the deficits resulting from the Medicaid shortfall and the costs of providing health care to some of the uninsured.

In its communications with the state on the 1115 waiver, the federal government has been clear. The state must proactively solve its uncompensated care problem by increasing reimbursement rates and reducing the number of uninsured.

Absent a new waiver agreement that addresses these problems, supplemental payments will be slashed. Specifically, uncompensated care pool payments will be reduced by as much as 61 percent from $3.1 billion to $1.2 billion, and Delivery System Reform Incentive Program pool payments will be completely phased out over four years.

It is no exaggeration to say that if $5 billion vanishes almost overnight from the health care system, the impact for Texas hospitals, patients and communities will be cataclysmic. Hospitals will have no choice but to reduce or eliminate services, and the first to be cut likely will be those services that keep people out of the hospital through community-based primary care, social supports and integrated behavioral health care.

The consequences of not increasing Medicaid reimbursement rates and reducing the number of uninsured are not theoretical. They are real, and the impact on Texas hospitals, patients and communities will be as well. The good news is the Legislature knows ahead of time what it needs to do, and it can act to avoid the looming fiscal cliff.

John M. Hawkins, Texas Hospital Association

John M. Hawkins is senior vice president for advocacy and public policy at the Texas Hospital Association