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Pending Medicare reimbursement rate cut impacts UMMS bid for St. Joseph

Talks between state and federal health officials about changing hospital reimbursement rates under Maryland’s unique Medicare waiver have emerged as a central factor in the University of Maryland Medical System’s ongoing bid to acquire the struggling St. Joseph Medical Center.

The federal waiver allows a state commission to set a uniform payment rate for every hospital in the state so long as average hospital costs grow more slowly in Maryland than they do nationwide. But with growth in Maryland dangerously close to matching the national growth rate, the commission is considering a steep reduction in a key Medicare reimbursement rate that was factored heavily into the initial offer for St. Joseph from UMMS.

Officials with the state Department of Health and Mental Hygiene and the Health Services Cost Review Commission, which sets the rates for all Maryland hospitals, declined to comment on the status of waiver negotiations or their impact on UMMS’ potential acquisition of Towson-based St. Joseph.

But sources who requested anonymity because they are not authorized to discuss details of the hospital negotiations confirmed that uncertainty surrounding the waiver has become a sticking point in UMMS’ bid, which was expected to close in late August.

“Rapidly changing circumstances relating to the review of the Medicare waiver have produced the need to hit the pause button. That’s what’s been going on for the last couple of weeks,” said one person with knowledge of the negotiations.

Talks are continuing, however, several sources said, and the chances of a deal are still very much alive.

“We continue to make progress,” said Mary Ann Hodes, a marketing strategist at St. Joseph, although she declined to comment on details of the negotiations.

The UMMS business plan for St. Joseph depends heavily on increasing patient admissions. which have declined sharply following a series of lawsuits.

But sources familiar with the federal-state negotiations over the Medicare waiver say that one option under serious discussion would reduce the hospital reimbursement rate for new patient volume. Currently, hospitals are reimbursed 85 cents on the dollar, but that rate could be cut to 60 cents, sources say.

Mary Lynn Carver, senior vice president and spokeswoman for UMMC, declined to comment on details of the ongoing negotiations.

“The University of Maryland Medical System is continuing to work diligently on the acquisition of St. Joseph Medical Center and we look forward to SJMC joining the UMMS family soon,” said Mary Lynn Carver, senior vice president and spokeswoman for UMMC.

A spokesman for the Maryland Hospital Association, which lobbies for hospitals and health systems before legislative and regulatory bodies such as the cost review commission, did not respond to a request for comment.

Maryland’s Medicare waiver dates to the late 1970s. The state-run system exempts Maryland from the federal Medicare and Medicaid reimbursement rates to which hospitals in the rest of the nation are subjected. In other states, Medicare and Medicaid pay less money to hospitals, per patient visit.

The rate-setting body also dictates that rates are uniform across Maryland hospitals. For example, a visit to Union Hospital in Cecil County costs the same as an identical visit to The Johns Hopkins Hospital in Baltimore.

But the waiver only stays in place if the average cost of hospital visits in Maryland stays below the average cost nationwide. To calculate cost growth, data is analyzed going back to 1981.

As of June 30, 2011, Medicare payments per patient visit have grown 362 percent nationwide, but just 342 percent in Maryland, according to cost review commission data.

That margin means that if costs stayed flat nationwide, Maryland’s costs could grow 4.5 percent without exceeding the national average.

But Patrick Redmon, executive director of the Health Services Cost Review Commission, said his staff is projecting that margin to shrink to less than 1 percent in the current fiscal year.

“That gives us a razor-thin margin,” Redmon said.

With a greater emphasis on preventative care, which reduces the number of one-day hospital stays, hospitals have inadvertently driven up the average cost of a hospital visit in Maryland, Redmon said. Multi-day inpatient stays, though less frequent, are more expensive. With fewer one-day, outpatient visits — cheap, by comparison — the state’s cost-per-visit average rises.

Redmon, an economist in his second stint as the commission’s executive director, said that while emphasizing preventive care to reduce patient volume is the right thing to do from a medical perspective, “from a waiver test perspective, it’s exactly the wrong thing to do.”

And, from a business perspective, reducing overall hospital visits doesn’t exactly make sense either, he said.

“It’s not typically profitable to keep patients out of the hospital,” Redmon said.

That’s where the complication arises for UMMS’ deal to buy St. Joseph, sources say. The suburban Baltimore County hospital has seen its profits and patient admissions plummet in the wake of a hundreds of lawsuits filed against the medical center and its former head of cardiology, Dr. Mark Midei.

Former patients charged that Dr. Midei implanted unnecessary cardiac stents during surgeries. The allegations ultimately forced the doctor to resign. His medical license was revoked in 2011 by the Maryland Board of Physicians.

The crisis reduced revenue at the hospital and caused a steep decline in patient admissions.

The reimbursement rate is not the only issue being discussed in the acquisition talks. UMMS has had to agree to honor the Catholic identity and religious heritage of St. Joseph, which is owned by Colorado-based Catholic Health Initiatives.

Cardinal Edwin O’Brien, former head of the Archdiocese of Baltimore, said he was “disappointed” in the UMMS deal when it was announced in March.

“The hospital and its staff of outstanding doctors, nurses, physicians and other healthcare workers, have a special connection to the Catholic community in the Archdiocese, as well as to countless others, and I pray these ties will not be severed by today’s decision,” Cardinal O’Brien said in a statement at that time.

Officials at both hospitals have said that the Catholic health care philosophies and directives would continue to be honored at St. Joseph if the deal is completed.

The hospital’s legal liabilities surrounding Midei also must be taken into account.

St. Joseph agreed to pay a $22 million settlement last November. Federal officials said that over a decade, the hospital had paid illegal kickbacks to a group co-founded by Midei, MidAtlantic Cardiovascular Associates, and separately billed federal benefit programs for the medically unnecessary stents.

The hospital was founded by the Sisters of St. Francis of Philadelphia in 1864 as St. Joseph German Hospital.