The financial risk of Charity Hospital ‘privatization’

The reason advanced by the Jindal Administration for privatizing Louisiana’s charity hospitals is that a private hospital like Lafayette General or Ochsner, for example, can manage a hospital more efficiently, and therefore cheaper, than the state.

That’s why I was taken aback when the chairman of the private entity taking over the Shreveport state hospital testified before the Joint Legislative Committee on the Budget that the private contractor’s costs to run the Shreveport facility will be the same as the state’s. Where, then, will the Jindal Administration’s promised annual savings of $150 million come from if not from achieving operational efficiencies?

Dig deeper into the details and it becomes apparent that the planned “savings” won’t result from lower costs but from getting more money from the federal government through an accounting change. This won’t make the charity hospitals or Louisiana’s Medicaid program, which pays for the hospitals, more efficient. It will just make them more expensive, fueled by additional federal (American taxpayer) money.

Here’s how the new financial strategy will work. Medicaid, which is government health insurance for the poor, is a federal-state program. The states run it but the feds put up most of the money. In Louisiana, for every $1 in state taxpayer money we contribute, the feds contribute $2. The more money we put up, the more money the federal government contributes.

Under the Charity Hospital privatization, the state will “lease” the charity hospitals to private hospitals, which then will be responsible for treating our low-income and uninsured citizens. The state will pay the private hospitals to do this with large amounts of federal money from our Medicaid program. The private hospitals will then return some of those federal dollars to the state as “lease payments.” The federal dollars paid to the state as “lease payments” now become new state dollars, which the state can use to draw down even more federal money.

This accounting maneuver is undeniably clever. The question is whether it is legal. It must be approved by the federal Centers for Medicare and Medicaid Services (CMS).

Louisiana’s track record with CMS is not good. CMS has previously rejected similar financing strategies designed to leverage federal money. In the early 1990s, for example, Louisiana and other states adopted financing strategies such as “provider taxes,” “provider donations,” and “intergovernmental transfers,” designed to launder federal Medicaid funds into state funds in order to draw down more federal funds. CMS and Congress spurned them all. (The Medicaid Disproportionate Share Hospital Payment Pro­gram: Background and Issues, The Urban Insti­tute, No. A-14, October 1997).

In fact, Louisiana was more aggressive than most states in trying to leverage federal dollars. Our health care budget grew from $1.6 billion in 1988 to $4.48 billion in 1993. 90% was federal funds. The amount of money actually contributed by the state during this period declined from $595 million to $462 million. (Washington Post, 1/31/94, A9).

When CMS and Con­gress stepped in to stop what then Congress­man Bob Livingston called Louisiana’s “abuse” of Medicaid financing, and, in Livingston’s words, the “unjustified and unwarranted benefits” came to an end (The Advocate, 2/6/97, 1A), newly-elected Gov. Mike Foster was faced with a $1 billion deficit in the health care budget. To clean up the mess, Foster appointed Piyush Jindal as DHH Secretary, who sought special relief from Congress. As The Advocate newspaper editorialized, “Louisi­ana pleaded guilty as charged, threw itself on the mercy of the court and got off easy,” because “the state for years ran a scam using ‘loopholes and accounting gimmicks’ to justify fantastic increases in federal payments.” (The Advocate, 4/29/96).

Perhaps this time is different. Perhaps CMS will view the new “lease payments” being used to obtain additional federal money more favorably than the strategies CMS has rejected in the past.

One thing’s for certain, though. We need to find out. The state should seek CMS review of its new strategy immediately-not “soon” as DHH has promised-but now. Until then, our entire state health care delivery system for over 2 million of our people is at financial risk.

– John Kennedy
La. State Treasurer

This article originally published in the October 21, 2013 print edition of The Louisiana Weekly newspaper.