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Hospitals can’t pass along cost of Medicare cuts

Maryland’s hospitals will bear the full brunt of the 2 percent Medicare cuts mandated by sequestration, state regulators decided Wednesday, despite passionate warnings from providers that the move would trigger layoffs and service reductions at hospitals across the state.

The Health Services Cost Review Commission, which determines the rates hospitals are paid for providing care, voted against a short-term rate increase, which would have offset hospitals’ loss of Medicare revenue and shifted the financial burden of sequestration to insurance companies.

Hospital representatives argued that raising rates is necessary in order to pad their dangerously thin operating margins and ensure access to care. State officials agreed with insurers, however, that an increase wasn’t essential and would have interfered with the state’s unique Medicare waiver system.

“We are extremely disappointed that the commission would ignore a statewide appeal from Maryland’s hospitals for short-term relief,” Maryland Hospital Association President Carmela Coyle said after the vote. “It’s very unfortunate, and it’s unbelievable. What you heard today were hospitals coming to say, ‘We are having the most serious financial difficulties that we’ve experienced in the history of rate-setting in Maryland,’ and the decision was to kick the can down the road.”

The commission’s decision only applies to the fourth quarter of fiscal year 2013, which ends June 30. Regulators will reconvene in July to set rates for fiscal year 2014 and revisit the question of how to deal with sequestration. When setting those rates, they will consider hospitals’ financial straits, as well as any hardship faced during this three-month period, they said.

Maryland’s hospitals will lose about $21 million to $24 million in funds due to the 2 percent cuts to Medicare as part of the $85 billion sequester.

The commission’s decision came after nearly four hours of discussion at a standing-room-only meeting on Wednesday at the commission offices, where almost 20 hospital representatives testified that their institutions are already in tremendous financial distress and that without a rate increase, their ability to treat patients would continue to diminish, as would their margins.

Most hospital representatives said they are primarily concerned about their operating margins, which have been well below the commission’s target of 2.75 percent. As a group, the hospitals’ operating margin was 0.8 percent for the first eight months of this fiscal year, but 42 percent of hospitals are in the red.

But the vote’s outcome wasn’t a complete surprise.

Last week, after considering several options for dealing with sequestration, commission staff recommended that the panel not increase rates. The commission then sought additional input before making a final decision, and the MHA — and most of the 46 hospitals it represents — flooded the commission with letters requesting regulators take a different route.

One of three options considered by the commission would have treated hospitals’ lost revenue due to missed Medicare reimbursements as a one-time “unusual expense.” Rates would have increased 0.16 percent for the fourth quarter — enough to fully compensate hospitals — placing the burden entirely on payers. A second option would have raised rates 0.08 percent, splitting the burden equally between payers and hospitals.

Coyle said she doesn’t know why no attention was given to the split-burden option, which was not discussed at all during the meeting.

CareFirst Inc., the largest insurer in Maryland, and other insurers lauded the decision, saying it’s the only plan of the three that would have protected Maryland’s unique — and somewhat delicate — Medicare waiver, an agreement with the federal government allowing the state to set its own hospital rates, as long as average admission costs rise no faster than in other states.

The state Department of Health and Mental Hygiene, which also endorsed the commission staff’s recommendation not to raise rates, recently began the process of reworking the criteria of that “waiver test,” which was created in the 1970s and doesn’t produce the proper incentives for cutting costs, many people say.

Still, officials very much want to preserve the unique system, and the commission worried that deflecting these Medicare cuts away from hospitals would have sent the message that officials aren’t committed to keeping health-care costs low, thereby hurting their chances of reforming the waiver.

Coyle, however, said she doubts a rate increase would have affected the pending waiver application.

Hospitals said they are still reeling from the minimal rate increase they received last year, when rates rose 0.3 percent despite an estimated inflation bump of 2.11 percent. Several representatives said they’re worried that with reduced revenue, operating margins will shrink further, forcing them to lay off employees, cut support services and forgo capital improvement.

Several hospital representatives testified that they worry about downgrades from bond agencies, which they said would hurt their ability to access capital that would enable them to invest in new technology.

“I am really enormously concerned here,” Robert A. Chrencik, president and CEO of the University of Maryland Medical System, told the commission. “… This will have a very, very serious impact on access to capital. It will play through bond ratings and our ability to access those markets. There are significant job cuts literally on the very near-term horizon. … Community services are one of the first things to be impacted — these are non-rate-funded services that get provided by hospitals as a safety net to their various communities … and ultimately access to care.”