A Funding Crisis Within a Pandemic


By Kim Carmichael

Medicaid supplemental payment programs finally received federal approval in late March, but the future of Texas’ health care safety net remains far from certain as funding mechanisms for those programs are subject to further review and the 1115 waiver faces a potentially permanent rescission. The timing could not be worse, as health care providers grapple with the ongoing COVID-19 pandemic and related challenges.

In a state as large and diverse as Texas, millions of people depend on the state’s health care safety net to address their health care needs – from routine services to chronic disease management to behavioral health care. Hospitals provide health care to anyone seeking treatment, regardless of their ability to pay, but often receive reimbursements far below the cost of providing care.

Last fall, crucial financing programs that raise Medicaid reimbursement rates closer to cost expired and newly proposed ones only received federal approval in late March, nearly seven months after they were originally slated to begin. The federal government now plans to audit the programs’ financing methods. The future of the Medicaid 1115 waiver also hangs in the balance after federal authorities rescinded Texas’ 10-year extension of the program in April 2021.

The months long absence of desperately needed funding and continued lack of clarity over the future of supplemental payment programs caused profound financial stress for hospitals responding to a continued public health emergency and countless pandemic-related challenges. The relief of recent approvals may be short-lived, as the programs must be renewed annually and are set to expire again in September.

Medicaid base reimbursement rates for Texas hospitals vary considerably by facility but typically fall well below the cost of care, only covering 65%-70% of cost on average. Hospitals’ annual Medicaid shortfall runs multiple billions of dollars. Statewide Medicaid enrollment grew 27% during the pandemic to around 5 million Texans, with an additional 5 million Texans having no form of health coverage.

Texas health care providers are left to rely heavily on supplemental dollars to offset the costs of providing care to these populations. Rate enhancements that expired without replacement in September 2021 have cost hospitals at least $7 million dollars per day. Additional performance-based incentive payments have also expired, increasing the total supplemental payment amount unavailable to hospitals in 2022.

Meanwhile, the ongoing pandemic has strained hospital resources and compounded a pervasive nursing shortage, as nurse staffing agencies fill vacancies at often two to three times pre-pandemic rates. Extraordinary COVID-19 related expenses and the possible disruption of supplemental funding down the road would have catastrophic consequences for health care access in Texas, including hospital closures and decreased essential service lines.

The Texas Hospital Association has been leading a determined advocacy effort to ensure the lasting financial stability of our state’s hospitals and health care providers. “It was foundational for the Texas safety net to receive immediate approval of proposed directed payment programs, as well as a permanent reinstatement of the 1115 waiver,” said Jennifer Banda, senior vice president of advocacy and public policy at THA. “Beyond that, our state’s entire health care system would benefit from meaningful Medicaid expansion and hospital reimbursements closer to the cost of services.”

Care Dependent on 1115 Waiver

In early 2021, Texas was granted a 10-year extension on its Medicaid 1115 waiver, however, that extension was rescinded last April under a new federal administration. The state immediately filed suit in May over the recission, and on Aug. 20, 2021, a federal district judge issued a temporary injunction on enforcement of the recission. Since then, the Texas Health and Human Services Commission and Centers for Medicare & Medicaid Services have resumed extensive negotiations over the waiver and related payment programs.

The waiver’s uncompensated care (UC) pool and managed care authority remain in effect through Sept. 30, 2022, and continue beyond that as long as the temporary injunction remains in effect. A permanent recission, though, jeopardizes about $32 billion in new funding.

All 1115 waivers must adhere to federal “budget neutrality” principles, meaning a state cannot spend more money with a waiver than it would without one. The waiver extension granted in January 2021 would have preserved about $11 billion in access to federal funding known as budget neutrality “room,” or savings generated under the existing waiver that the state can bank and carry forward. These savings would have been otherwise lost if a new waiver had been issued.

“This preserved room allowed certainty in the amount Texas could spend going forward to expand existing supplemental payment programs and develop new programs to replace the expiring ones,” Banda said.

If the outcome of pending litigation permanently invalidates the 1115 waiver, between $9 billion and $10 billion in annual payments to hospitals would cease while putting Texas back in danger of facing a budget neutrality cliff.

Additionally, the waiver extension creates a new non-hospital UC pool called the Public Health Providers – Charity Care Pool, providing about $500 million per year to local health departments and community mental health centers to offset uncompensated care costs for providing behavioral health services, immunizations, chronic disease prevention and other services to the uninsured. Thanks to the temporary injunction, the PHP-CCP received final federal approval and launched in 2021 but could be at risk under a permanent rescission.

While awaiting the outcome of pending litigation over the waiver, THA continues to advocate for its continuation to ensure hospitals can serve anyone who needs care regardless of their ability to pay.

Delayed Directed Payment Programs

Last fall, the state’s Uniform Hospital Rate Increase Program (UHRIP) and Delivery System Reform Incentive Program (DSRIP) expired. These two longstanding Medicaid programs had provided more than $5 billion in rate enhancements and performance-based incentive payments to providers caring for Medicaid enrollees and low-income uninsured patients.

Texas proposed three DPPs in March 2021 to replace UHRIP and DSRIP that integrate their successes into Medicaid managed care. The new DPPs were intended to go into effect September 2021 for a seamless transition at the same time as UHRIP and DSRIP expired, but the proposed programs only received federal approval in late March.

The replacement DPPs include the Comprehensive Hospital Increase Reimbursement Program (worth $4.7 billion a year), Texas Incentives for Physicians and Professional Services ($600 million a year), and Rural Access to Primary and Preventive Services ($11.2 million a year). These DPPs offset below-cost Medicaid reimbursements while incentivizing improvements in care coordination, quality and access for Medicaid enrollees.

The DPPs described in the waiver extension were key to the DSRIP transition, and expenditure authority for the DPPs is tied to the budget neutrality room afforded under the current waiver extension. Texas and CMS’s budget neutrality agreement would have carried forward existing funds and allowed new spending to improve quality of care and patients’ access to services.

Texas and CMS agreed on nearly all features of the proposed DPPs, except for one method the state uses to finance the non-federal share of Medicaid supplemental payments, called a Local Provider Participation Fund (LPPF). Since 2013, LPPFs have been used without CMS objection to fund each of the state’s hospital supplemental payment programs. However, for months LPPFs were the sole stumbling block to DPP approval. Immediately following CMS’ approval of the DPPs on March 25, the U.S. Health and Human Services Commission notified HHSC of its intent to conduct an audit of Texas’ LPPFs to determine if the arrangements are permissible and in accordance with applicable federal and state requirements.

Twenty-eight regional LPPFs are authorized in state statute and provide roughly $1.5 billion of the non-federal share of proposed hospital DPPs. Their existence also ensures ongoing provider participation in the Texas Medicaid system by allowing private hospitals to continue accessing federal matching funds to offset the cost of providing care to Medicaid enrollees or uninsured patients.

“Texas hospitals’ supplemental payment programs that depend on the use of LPPFs are critical to sustaining care for low-income and uninsured Texans, especially during the ongoing pandemic,” said Anna Stelter, senior director of policy analysis at THA. “Without supplemental Medicaid payments, Texans would be left with a broken health care safety net amid a devastating public health emergency.”

Loss of LPPF-derived supplemental funding would have dire consequences for health care access in Texas. The state could experience hospital closures, particularly in rural areas; decreased essential service lines, including already reduced labor and delivery services and behavioral health; and reduced ability for hospitals to weather pandemic-related financial challenges, like skyrocketing labor costs.

Further, providers will look to offset larger-than-expected Medicaid underpayments from other revenue streams, putting upward pressure on local taxes and commercial health insurance premiums. This scenario amounts to a “hidden tax” on many Texans. “The cost of Medicaid underpayment has to be passed along somewhere, and businesses, employers and insured individuals pay it,” said David Tesmer, chief community and public policy officer at Texas Health Resources.

Advocacy in Action

THA actively advocated for a resolution to the delayed DPPs and continues to push for a reinstatement of the 1115 waiver, while working with federal and state authorities on a permanent solution to heath care providers’ funding challenges.

In a Dec. 1 letter to the Texas congressional delegation, THA president and CEO John Hawkins laid out the impacts of the current impasse and potential repercussions of losing critical supplemental funding. “Hospitals need a short-term resolution that restarts the flow of DPP funds while CMS and Texas negotiate a long-term path forward for Medicaid supplemental payments and the 1115 waiver,” THA’s letter reads. “We respectfully ask you to remind CMS of the urgency with which funds to hospitals must restart to maintain current services, and how the lack of clarity on what future programs CMS is willing to approve is harming hospitals’ ability to plan.”

THA has also worked with several legislative offices to raise awareness of the situation and highlight an immediate need for action. Lawmakers from the Texas congressional delegation and both the Texas House and Senate recently submitted letters to federal agencies calling for a resolution to the DPP approval impasse and a reinstatement of the waiver.

THA and partner associations activated all fronts in pushing for approval of DPPs, including retroactive payment to Sept. 1, 2021, arguing that Texas hospitals would lose rate increases on all services to managed Medicaid enrollees since that date. A prolonged delay in DPP approval created uncertainty as to whether Texas could implement hospital rate increases at all in state fiscal year 2022. THA and member hospitals were pleased that CMS not only approved the proposed DPPs, but did so retroactively to the beginning of state fiscal year 2022.

Medicaid coverage expansion for low-wage working Texans would provide a solution for the current financial strain experienced by hospitals, but only when coupled with a waiver. Out of the 5 million uninsured Texans, only about 1.2 million would be covered if Medicaid was expanded. The remaining 3.8 million uninsured residents would still seek care in hospitals, and hospitals must provide emergency care regardless of ability to pay.

THA is advocating for continuing a strong UC pool to offset providers’ unreimbursed charity care. Texas hospitals have been in regular discussions with HHSC on the need to move forward with the UC pool as prescribed under the terms of the January 2021 waiver extension, which calls for uncompensated care payments of at least $3.9 billion annually over the next 10 years.

An important element in THA’s advocacy efforts for financial stability for Texas hospitals will continue to include a push to raise hospitals’ base Medicaid reimbursement closer to the actual cost of services, as well as federal funding for extraordinary pandemic staffing costs.

Behavioral health care needs have been heightened by the pandemic. THA recently submitted suggested interim charges to legislative offices and HHSC that recommend studying the availability of inpatient behavioral health care, review related uncompensated care costs, and pursue a waiver of the Institutions for Mental Diseases exclusion, which prevents Medicaid reimbursement for acute inpatient psychiatric care for working-age adults.

Regardless of litigation over reinstatement of the 1115 waiver and further review of LPPFs, Texas hospitals are committed to providing the best quality care to all patients. THA encourages thoughtful discussions to ensure the needs of Texas’ growing population will be met.

Kim Carmichael is the Director of Advocacy Communications for the Texas Hospital Association.