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Hospital lawsuits challenge Medicaid system in court

Five days before the November 1990 election, the Illinois Hospital Association delivered an early inaugural present to the new governor. The gift: a pair of lawsuits alleging that the state runs its Medicaid program improperly by grossly underfunding it. The gift was sent C.O.D., with a potentially huge price tag. Resolution in favor of the hospitals could add more than $300 million a year to Gov. Jim Edgar's fiscal woes.

The hospital association, along with Saint Anthony Hospital and Illinois Masonic Medical Center, both in Chicago, and Memorial Hospital of Carbondale, wants state and federal courts to junk just about every aspect of the system, from the amount paid, to the speed with which bills are paid, to the way the administering agency goes about running the program.

After years of chronic complaints and unsuccessful attempts to effect change through the executive and legislative branches, the hospital industry changed its tack. On November 1 it turned to the judicial branch, filing suits in Cook County Circuit Court and U.S. District Court in Chicago. The hospital industry is not alone in seeking change via the courts. The Illinois nursing home industry has filed suit alleging that the rates for services it provides to the state are legally inadequate, and more than 50 school districts have banded together to sue the state on the grounds that its system of funding elementary and secondary education violates the Illinois Constitution (see preceding article).

The bottom line is more money, although the hospital association insists its members are not simply seeking more than the $1 billion they already get each year from the state for treating welfare patients. Rather, they want fairness and equity from the state, which they regard as a deadbeat customer taking too long to pay too little for services provided by hospitals.

Several factors influenced the decision to turn to the courts:

In June 1990 the U.S. Supreme Court ruled in a Virginia case that hospitals and their trade associations have the legal right to sue over the payment issue. (Federal courts in Colorado, Michigan and Pennsylvania have struck down state payment systems, and Michigan settled a case last year by agreeing to increase rates.)

In Illinois the state's Medicaid appropriation for fiscal year 1991 falls short of even what its defenders say is needed to cover claims.

Both gubernatorial candidates campaigned against higher taxes and for improved education. Industry lobbyists concluded that with the state's financial situation deteriorating and little likelihood for increased taxes, only education might get more money.

In sum, hospital association president Kenneth C. Robbins says, getting more Medicaid money appeared unlikely "unless we have a court putting a gun at the head of state government."

Timing was critical. Wanting to avoid an action that would put it immediately at odds with the new administration, Robbins says the hospital association filed its cases before the November election. "We knew there would be a new governor. We didn't know whether it would be [Neil F.] Hartigan or Edgar. We hoped that the scar tissue of the last 14 years of dealing with [James R.] Thompson is not going to be repeated with whoever the new governor is. We thought it would be inappropriate to greet this new governor in January with a handshake and a lawsuit."

Underlying everything was the hospital association's frustration with the Medicaid system, feelings demonstrated by the language in a press release last year declaring that' 'the underfunded Medicaid program played a villainous role" in hospital closings.

The first complaint is low payments. The association says the state pays on average only 79 cents for every $1 it costs to serve Medicaid patients, with nine of 10 hospitals receiving less than it costs them to treat those patients. The federal government, which picks up half the cost of the program and sets many of its rules, requires rates that are "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities. . . ."The state says the provision has been waived for Illinois because of the state's unique cost-saving system for contracting with hospitals for care. The association says the federal Department of Health and Human Services is not authorized to waive the requirement for reasonable and adequate payments. The entire contracting system, known as ICARE, is contentious (see box).

22/February 199I/Illinois Issues

The state "hasn't the foggiest idea what an efficient and economic facility is, what the costs are that are experienced by these hospitals, and what the rates [should be]," says Mark D. Deaton, general counsel to the hospital association. "The rates that the state sets are driven purely by the budget, and they've manipulated the system over the years to meet the budget target, and so therefore they have failed to satisfy the federal requirement of having a cost-related system."

Another complaint is the delay in payments. The state sometimes takes months to pay its bills when its general funds are low in available cash or when insufficient money is appropriated to cover a year's worth of Medicaid services so more money can be appropriated for other things. Providers still care for the state's Medicaid recipients, their bills pile up in Springfield, and providers are forced to borrow money to pay their suppliers and employees.

This fiscal year, barring a supplemental appropriation, Medicaid appropriations may be exhausted sometime in April. The exact point is uncertain. It could be early if a severe winter causes more illness and a poor economy forces more people to seek health care under Medicaid. Absent such factors, the funds could last longer but not until July 1, when the new fiscal year begins and a new appropriation would allow payment of the backlog.

Robbins argues that postponing payment of Medicaid bills is unjust. "I notice that they're not holding up the governor's paycheck, and you can bet they're paying their telephone bill, and I'll bet they're putting gas in their vehicles. I'm tired of this notion that when money is a problem, some people are more equal than others in the eyes of the state." Part of the legal challenge asserts that the long wait violates the agreement the state has signed with all hospitals. The agreement requires the Illinois Department of Public Aid to process claims within 30 days.

Even within state government, few are willing to praise the Medicaid program, although administrators in the Department of Public Aid defend their performance as doing the best they can with the available resources. They say hospitals themselves are responsible for most of their problems. For example, when queried for background before an interview with a public aid official, an agency spokesman recommended three articles. One, entitled "Hospital, Heal Thyself," supports the department's contention that hospitals are responsible for most of their woes. The subtitle proclaims that "Poor management is a chief cause of the current fiscal crisis." Another recommended article, "Medicaid mandate fever unabated," pins much of the blame on the federal government for expanding eligibility for benefits and on more use of expensive procedures, such as the care for prematurely born babies. Only the third, a newspaper account, was somewhat critical of Medicaid.

Robert W. Wright, deputy director of the Department of Public Aid under Thompson, says the Medicaid program is an easy target because it is big and run by the government. He considers it unfair to label it the hospitals' No.1 problem. "I don't think it's fair for us to take the rap for the financial condition that Illinois hospitals are in. There are a lot of other


Incentive for saving?

Hospitals bill themselves as caring institutions, but the hospital industry does not care for ICARE. In fact, hospitals so dislike the Illinois Competitive Access and Reimbursement Equity program they want the General Assembly to scrap it.

The program, which covers the most metropolitan two-thirds of the state's hospitals, is designed to harness competitive forces of the marketplace and combine those forces with the state's clout as a big buyer of health services. The objective is to save money. Auditor General Robert G. Cronson reports that the program has met that goal. In March 1990 Cronson's office concluded that "the program has slowed the increase in hospital costs and has saved the State money."

Yet even Sen. Howard W. Carroll (D-l, Chicago), one of the sponsors of the legislation that created ICARE, says it may have been too successful. He thinks the state may have gone too far in extracting financial savings from the hospitals.

Kenneth C. Robbins, president of the Illinois Hospital Association, says that is just what has happened, but he also has a broader complaint. The cost-control mechanism, in his view, makes little sense. "The ICARE contracting program has got to go," Robbins says. "It has got to be replaced with a different, better system."

The state-federal Medicaid program pays for services on a perdiem basis. Robbins says most costs occur early in a patient's hospital stay, and a hospital loses money on those days, recouping the loss on later days. The effect, he says, is to encourage hospitals to keep patients as long as possible to try to make up for the money-losing early days of care.

The federal Medicare health program for the elderly employs exactly the opposite system. Under what is known as prospective payment, the government pays hospitals based on the patient's illness. The incentive is to heal the beneficiary quickly, as cost effectively as possible, with the hospital making money on some cases and losing it on others.

Robbins wants a Medicare-style reimbursement system for Medicaid. "It lines all the incentives up in the same direction," Robbins says. "You gear yourself to deal with, to exploit, those incentives."

There is a big problem: cost. One of the few areas of agreement between the hospital association and the Illinois Department of Public Aid is that implementing such a scheme would require substantially more money. Robert W. Wright, deputy director of public aid, says discussions about a year ago of a hospital association proposal came up with an estimate of $250 million.

Cost aside, Wright says implementing such a system is probably the most sensible change if Medicaid is to be fundamentally altered.

In August 1989, when Susan S. Suter was public aid director, the agency produced a draft report that called for scrapping ICARE. Nothing happened. Under Kathleen Kustra's directorship at the end of the Thompson administration, Wright says the agency "continued to look at possible revisions in the way ICARE works. . . . That was a preliminary report and that was a longer term recommendation."

Even if all parties had agreed on a plan, he says it would have been "logistically difficult" to overhaul the system in the last year of any governor's administration.

Anthony Man

February 1991/IIIinois Issues/23

[reasons].'' Chief among them, Wright says, are too many empty beds and too few patients, which translates into low occupancy. "Excess capacity drives up the costs," he says. Robbins says hospitals may officially be operating a certain number of beds, but in many cases there is no staff for the officially rated capacity, making the cost minimal.

Wright cites other cost pressures on hospitals. They want the latest in technology. The federal Medicare program for the elderly has cut its hospital budget. Major insurance companies are less willing to pay what the hospitals automatically charge. At the same time, there is a national problem of uninsured people. "All of those things contribute to wherever an individual hospital finds itself financially, and I think to lay that entire blame at the foot of the Medicaid program is just improper and unfair and ignores some of the success, or some of the contributions, that we have made." While Wright says he is unable to discuss specifics of the lawsuit, he concedes that it is legitimate to ascribe some blame to Medicaid for the hospitals' problems. "You can't say that in no way we have no impact. Not even in our strongest press defense would we ever seriously suggest that."

He is also reluctant to consider directly whether the payment rates are adequate: "I think there are hospitals where the rates are sufficient and there are hospitals where an argument could be made for higher rates. I'm not willing to say that the total within the system is not sufficient. I think there are places where care can be redirected, so that I don't know that the total amount available is inadequate."

Making it tough to assess the competing claims are the different figures used by different interests. The state says it pays 87 cents for every $1 it costs to treat Medicaid patients; the hospital association claims the state covers 79 percent. The difference partly depends on what costs are counted in the base. The state considers only what are called allowable costs, those considered legitimate under Medicaid. Consequently, it views its payments as covering a larger percentage of the costs.

Regardless of the exact percentage, Robbins says overall state Medicaid spending is less, in real dollars adjusted for inflation, than it was 10 years ago: "They have drained money out at a time when medical care . . . inflation has been higher than the CPI [consumer price index]. So the real cost of providing medical services over that period of time rose and the real dollars they spent declined."

Paying 100 percent of costs, even under the state's definition, would be expensive. Wright says he does not have figures, but an August 1989 internal draft of a report prepared when Susan S. Suter was director of public aid estimated an additional $990 million annual price tag for reimbursing institutions at 100 percent of cost and individual providers, such as doctors, at 85 percent.

Robbins says the reimbursement battle is not an obscure war between government and a special interest group. Everyone is affected. He contends that hospitals are forced out of business by low payments. Those hospitals that remain open do so by charging higher rates to paying customers to cover their losses on the government patients, a phenomenon known as cost shifting. "For every dollar the state underpays the hospital for providing Medicaid services, the person down the street picks up his share of that dollar." Most people do not see the effects because their health care bills are paid by insurance companies, often with the cost paid by employers. "There is an indirect effect on all people, but a real effect. It's just that it's hidden from them." Robbins says fixing the Medicaid system would save money on the hospital bills of everyone in the state. George Maroney, administrator of plaintiff hospital Memorial of Carbondale, likens cost shifting to shoplifting. "The merchant charges everybody more because some people area shoplifting or are bad debts. The only reason why we are not having major financial problems in this hospital is simply because we are shifting the cost we are shifting the dollars we are not receiving from the state to the private payers."

The problem is exacerbated by the 1980s emphasis on controlling health care costs. Insurance companies and the businesses that pay for their employees' health insurance balked at paying any more than the costs of providing service for the people they cover. Consequently, hospitals find it harder to shift costs to make overall receipts match or exceed expenditures. Ultimately, when cost shifting cannot make up the difference, Robbins says Medicaid shortfalls force hospitals to close. He attributes half the 22 closings of Illinois hospitals during the last five years to Medicaid. The problem of low-paying Medicaid patients then moves to another hospital.

Sen. Judy Baar Topinka (R-22, Riverside), ranking Republican on the Senate Public Health, Welfare and Corrections Committee, is not always an ally of the hospital industry, but she says it has a legitimate complaint. "We have shoved to them, private entities, the job of handling our poor and indigent." Topinka says the legislature has failed by ignoring the government's obligation to pay its bills in favor of the "1,000 things the state has done that are more glamorous, more politically appealing than Medicaid."

The hospital industry now has shifted its complaint from the legislative and executive branches to the judiciary, hoping the courts will force state government to fund Medicaid more equitably. Wright, the Illinois public aid deputy, sees another motive. He suggests that the hospital industry can only get the kind of big money resolution most to its liking by going to the courts.

William L. Kempiners served in the legislature from 1973 until he became director of public health in 1979, a position he held for slightly longer than four years. He says a state that has promised more than it can deliver must eventually "bite the bullet and say some things are higher priorities." Kempiners is now executive director of the Illinois Health Care Association, a nursing home trade group with its own suits pending against Medicaid, making his priority more money for nursing homes. "You either raise taxes or you establish your priorities and eliminate services," he says. "You can't be everything to everybody forever. The time has come for the state to decide what its priorities are."

Anthony Man is Statehouse bureau chief for the four Lee Enterprises newspapers in Illinois. He frequently writes about health care policy and economics.

24/Feburary 1991/Illinois Issues

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