Pay Cut: Budget Problems Force Medicaid Physician Fee Reduction

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Legislative Affairs Feature - April 2010

Tex Med. 2010;106(4):51-58.

By  Ken Ortolon
Senior Editor

Cuts in payments to physicians who treat patients on Medicaid and in the Children's Health Insurance Program (CHIP) appear likely, as state leaders grapple with potential multibillion-dollar budget deficits this year and next.

On Feb. 10, state Health and Human Services (HHSC) Executive Commissioner Tom Suehs released a budget-cutting proposal in which physicians who treat Medicaid and CHIP patients would see at least a 1-percent cut in their payments. An additional 1-percent rate reduction also would apply to Medicaid long-term care residential and acute care services for adults. Medicaid HMOs would see an additional $13.6 million reduction. The cuts would not affect Medicaid community care, foster care, or adoption subsidies.

His proposal followed an appearance before the Texas Medical Association Council on Socioeconomics in January, where he said it would be almost impossible to meet a budget-reduction target requested by state leaders without physician and provider fee cuts. That request was prompted by the fact that lawmakers almost certainly will face a budget shortfall of at least $11 billion when they convene in January. Plus, declines in sales tax and other revenues this biennium mean the current budget may also come up short.

HHSC spokesperson Stephanie Goodman says officials must consider cutting Medicaid payments to physicians because Medicaid accounts for about 75 percent of the state's health and human services budget.

"If it's 75 percent of our budget, it would be really difficult to leave it out of our options," she said. "If you leave Medicaid provider rates untouched, then the only option we have left is much deeper cuts in things like mental health services, protective services, things that are generally funded from a higher proportion of state funding."

Dallas dermatologist Dan McCoy, MD, chair of TMA's Council on Legislation, says there is "a huge concern" over the reductions' possible impact on Medicaid.

"Medicaid historically has not been funded at the levels that are necessary to ensure access to patients who actually need it," Dr. McCoy said. "And, because of the economic woes in the state, there's going to be an expansion of demand for Medicaid services."

According to the TMA 2008 physician survey, Medicaid physician payment increases in 2007 prompted more physicians to accept new Medicaid patients. Those gains are likely to be lost if cuts in payment are made.

Longview pediatrician Skip Brown, MD, chair of the Council on Socioeconomics, says physician fee cuts will drive more doctors out of Medicaid and CHIP.

"I'm sure of it," Dr. Brown said. "I'm a pediatrician and I see Medicaid and have always seen it in my practice. But I can tell you that prior to the fee increases we got in 2007 as a result of the Frew settlement, one of the things that I seriously considered was cutting back on the amount of Medicaid because of the really horrible reimbursement."

Commissioner Suehs acknowledged at the Council on Socioeconomics meeting that cutting physician fees could risk reopening the Frew v. Hawkins lawsuit, in which plaintiffs successfully argued there were deficiencies in the state's Medicaid program for children.

But some observers believe the state may have some wiggle room to cut fees without drawing new action from the plaintiffs because the 25-percent funding increase for children's Medicaid services, along with other improvements enacted in 2007, went beyond the Frew settlement requirements.

Addressing Uncertainty

While the budget outlook for 2011 is dire, there also is concern that declining tax revenues and growing Medicaid rolls could leave the state with a deficit in the current biennium. Legislative leaders already are addressing a potential shortfall in current revenues.

In January, Gov. Rick Perry, Lt. Gov. David Dewhurst, and House Speaker Joe Straus asked the heads of all state agencies - including appellate courts, universities, health-related institutions, and even the House and Senate - to develop plans to trim their current budgets by up to 5 percent. While agencies were asked to identify potential areas in which spending could be reduced, they actually have not been ordered to carry out those cuts yet.

"Due to the uncertainty of the state's short-term economic future, as well as potentially substantial long-term costs associated with the passage of federal legislation currently being debated in Washington, D.C., we are asking each state agency to thoroughly review all planned expenditures for the remainder of the biennium," the officials said in a letter to agency heads.

The letter directed HHSC to reduce expenses without cutting benefits or eligibility levels in Medicaid, CHIP, or foster care programs. TMA officials worry that any Medicaid or CHIP payment cuts would affect access to care anyway.

The commissioner proposes $303.5 million reductions in the budgets of HHSC, the Texas Department of State Health Services (DSHS), the Department of Assistive and Rehabilitative Services, the Department of Family and Protective Services, and the Department of Aging and Disability Services. That total included the provider cuts.

DSHS is the hardest hit, losing almost $140 million. That includes temporarily freezing hiring, reducing payments for indigent care provided by The University of Texas Medical Branch in Galveston (UTMB) by more than $7 million, and cutting almost $1.8 million from regional DSHS offices. Also proposed is a $200,000 cut in a diabetes prevention pilot project and a $3.5 million reduction in the Children With Special Health Care Needs program. The UTMB indigent care cut is based on an assumption that UTMB will provide less indigent care during the biennium because of damage from Hurricane Ike.

Ms. Goodman says HHSC officials are particularly concerned about the budget cuts' impact on DSHS.

She says DSHS "probably is the agency that has the most challenges because it has a higher proportion of state funding. Medicaid and CHIP, on the other hand, get a significant portion of their funds from federal matching revenue. That [DSHS] is probably the area where I think we're most worried about how we truly mitigate any affect on clients."

TMA leaders also point out that any cuts in state general revenue funding for Medicaid also will result in the loss of the federal matching funds, which magnifies the cut, as those are dollars no longer coming to Texas.

At a Feb. 11 hearing on the proposed cuts, Commissioner Suehs said HHSC officials focused on maintaining current services, minimizing direct impact on clients, preserving as much as possible any preventive programs because those are cost effective in the long run, and preserving cost-effective, community-based programs.

Despite that, Anne Dunkelberg, associate director of the Center for Public Policy Priorities, expressed concern that the provider rate reductions would hurt Medicaid patients' access to care.

And, the state does not need to lose Medicaid providers at a time when enrollment is swelling. Lisa Carruth, HHSC's director of system forecasting, told a Feb. 12 meeting of TMA's Select Committee on Medicaid, CHIP, and the Uninsured that Medicaid enrollment has been growing at double-digit rates each month since September. Monthly enrollment this year has averaged 3.25 million, compared with just 2.9 million in the first six months of fiscal 2009, Ms. Carruth says.

Is That Rainy Day Here?

The prospect of reducing payments to physicians and other health care professionals illustrates the problem lawmakers will have when they convene next January. Legislators caught a break in 2009. They faced a multibillion-dollar budget shortfall that year as well and it looked like they would have to raid the state's Rainy Day Fund, cut spending, raise taxes, or do all three to balance the budget.

Instead, a combination of nearly $12 billion in one-time funds, including several billion in federal stimulus money, saved the day and allowed lawmakers to avoid painful spending cuts or unpopular tax hikes.

Unfortunately, political observers say lawmakers will not be as lucky in 2011. Depending on whose projections you look at, the legislature could be staring at another budget shortfall of between $11 billion and $19 billion next year. And it won't have those extra stimulus dollars to help bridge the gap this time around.

Furthermore, it appears the Rainy Day Fund won't have enough cash on hand to cover even the best-case shortfall scenario. Even if it does, the state can't spend the money unless two-thirds of the legislature approves.

The Rainy Day Fund, officially known as the Economic Stabilization Fund, is composed of excess oil and gas tax revenues and half of any unencumbered balance left in the General Revenue Fund at the end of a biennium. Voters ratified creating the fund in 1988.

Analysts call the budget problems facing lawmakers in 2011 a "structural shortfall" because it actually was built into the budget. In 2009, to balance the budget, lawmakers used more than $12 billion in one-time funds that they knew would not be available in 2011, says Dale Craymer, president of the Austin-based Texas Taxpayers and Research Association.

Included in those one-time funds were $7 billion from the $787 billion federal stimulus bill, some $6 billion of which the legislature used to cover expected enrollment growth in Medicaid. Lawmakers also had an additional $5.5 billion in cash reserves left over from the previous biennium, money that won't be available in the next budget cycle, Mr. Craymer says.

"The thing that got us into all this was the downturn in the economy," he said. "Texas is in relatively better shape than most states but we were not immune from it. We were going to have a lot of trouble last session with the budget, until the stimulus money came and made everything good again."

With the cash reserves gone and no additional stimulus money on the horizon, lawmakers will be starting 2011 in a deep budget hole. At a hearing in January, Legislative Budget Board Director John O'Brien told the House Ways and Means Committee that the legislature would have to figure out how to pay for an $87 billion general revenue budget with only $76 billion in revenue - an $11 billion gap.

Mr. O'Brien based his projection on an assumption that there would be zero revenue growth and zero spending growth. Rep. Rene Oliveira (D-Brownsville), who chairs the tax-writing Ways and Means Committee, says that is unrealistic because there is a certain amount of growth every biennium in both public and higher education enrollment, and Medicaid enrollment likely will continue to rise due to the economy.

"We add about 175,000 new children to our public school system every two years," Representative Oliveira said. "Obviously, Medicaid is exploding right now as so many people out of work have to turn to Medicaid for their health care needs. It wouldn't be unreasonable to say, based on the growth issues that it's [the shortfall] probably closer to $15 billion."

Others estimate the shortfall could go as high as $19 billion, depending on a number of factors, including continued Medicaid growth and sales and margins tax collections.

As of December, Texas had seven consecutive months of double-digit declines in sales tax revenue, says J.J. Garza, Representative Oliveira's chief of staff. And in February, state Comptroller Susan Combs reported that January sales tax collections (which reflect sales made in the all-important December retail month) were down 14.2 percent over the same period last year .

Meanwhile, TMA officials say the margins tax has underperformed - bringing in between $1 billion to $1.5 billion less per biennium than previously anticipated.

While no additional federal stimulus money is expected, Congress is considering extending the enhanced Medicaid match rate another six months through mid-2011. The House included the extension in its jobs bill, and President Obama has included the extension in his budget request. The Senate also is considering it.

With the enhanced federal funding through the end of 2010, Texas' current federal match rate is nearly 70 percent. Normally it's about 60 percent. 

Digging Out of the Hole

While Mr. Craymer says lawmakers likely will look at tax increases "as a last resort," lawmakers and budget analysts say the legislature almost certainly will have to enact some combination of spending cuts, new revenue, and Rainy Day Fund money to solve the projected dilemma.

The Rainy Day Fund could provide as much as $9 billion if the legislature decides to use it. However, Mr. Craymer and others say lawmakers likely would be averse to draining the entire fund. Representative Oliveira says the legislature might tap the fund for as much as $6 billion or $7 billion, but that may be difficult, considering the number of lawmakers' votes required to use that money.

"There are clearly going to be some members who want to use the Rainy Day Fund very sparingly," Mr. Craymer said.

He says it is unclear whether some of that money might be needed to keep the current two-year budget balanced.

Even if lawmakers do use a significant chunk of the Rainy Day Fund, Representative Oliveira says other revenue sources will be needed.

"When you're that deep in the hole, you're looking at some cuts in government services and other revenue sources if you're going to pass a budget," he said. "Raising taxes right now would, obviously, be very difficult in this economy. So we have to look at other sources."

One potential source is a wide array of tax exemptions. Under a charge from Speaker Straus, the Ways and Means Committee initiated hearings on the various exemptions or tax credits that industries and individuals enjoy from the state sales tax, margins tax, property tax, and other taxes. The initial hearing focused on oil and gas tax exemptions. At hearings in February, the panel examined sales tax exemptions.

Representative Oliveira says a preliminary review of some of those exemptions indicates they "may not be as necessary as before or when they were put into place. I think Texans would like us to look at those before we look at raising taxes or doing anything like that."

He also said his committee might examine broadening the sales tax, and he predicts consideration of bills to legalize gambling to raise revenue.

Protecting Medicine's Exemptions

Among the exemptions that could be on the table are those that exclude health care services and prescription drugs from the state sales tax. Another is the exemption from the margins tax that physicians receive for providing charity care or treating Medicaid, CHIP, and Medicare patients.

Mr. Craymer says it is unlikely those exemptions will be touched. "Typically, taxing medical services has always been way down on the list as a political hot potato," he said.

But Representative Oliveira says lawmakers will look at all potential revenue sources even though he personally would like to avoid taxing health care.

"I am taking the position that we should look at everything for purposes of review, but I think there will be some things that are still sacred cows," he said. "What I don't want is a herd of sacred cows."

Dr. McCoy also expects the physicians' margins tax exemption to be at risk.

"Everything is probably on the table to some degree and will have to be defended given the current state of the state's budget," he said.

Mr. Craymer says he doubts lawmakers will go that route, saying they likely will go after more "low-hanging fruit."

"If I were a lobbyist or a practitioner in that industry, I would certainly take it very seriously as a risk, although I think it's a low risk," he said. "But I think you clearly have to accept it's going to get talked about. Every industry is going to have the opportunity to make their case for why they should retain their exemption."

Ken Ortolon can be reached by telephone at (800) 880-1300, ext. 1392, or (512) 370-1392; by fax at (512) 370-1629; or by e-mail at  Ken Ortolon .


Medical Schools Prepare for Budget Cuts

Texas medical schools were working in February to come up with ways to cut their budgets by as much as 5 percent.

Medical school administrators say they believe they can do so with little or no effect on their educational mission, but there could be some impact on clinical programs and research.

The state medical schools and health science centers were included in a call by state leaders in January for all agencies to devise plans to reduce current biennium expenditures due to uncertainty in the state's short-term economic future. Medical schools, other higher education institutions, and other state agencies were to submit those plans to the Legislative Budget Board by Feb. 15.

Steven Berk, MD, dean of the Texas Tech University School of Medicine and vice president for medical affairs for the Texas Tech University Health Sciences Center, expected the call for budget cuts.

"We've had a long time to think about this because we've known that other public medical schools have had to cut their budgets 10 percent, even 25 percent over the last few years," Dr. Berk said.

The request for agencies to put forward plans to trim spending came as sales tax and other tax collections in Texas lagged behind the projected total. However, it was unclear in mid-February whether any of those plans would have to be implemented. State Comptroller Susan Combs said that while sales tax receipts were about $1 billion below projections so far, she believes consumer confidence will rebound in late spring and help balance the state budget.

If cuts do become necessary, Dr. Berk says Texas Tech likely will freeze or eliminate vacant positions, scale back on new clinical and research programs, and possibly restrict some travel. Some cuts could be accomplished by putting a hold on use of some discretionary funds that go for building new research programs, he says.

Scott Ransom, DO, president of the University of North Texas (UNT) Health Science Center, says a 5-percent reduction in his budget would amount to about $5 million. He said the UNT System would submit a plan that includes "prudent and efficient reductions, especially of all administrative expenses, purchases, and travel."

In an e-mail published by the Galveston County Daily News , David Callender, MD, president of The University of Texas Medical Branch (UTMB), said his institution believes "we can accommodate the state's request by continuing to grow our revenues and carefully managing our costs rather than by cutting positions."

Dr. Callender also expects to receive as much as $7.4 million from the UT System to help cover those budget cuts. A 5-percent reduction in general revenue would amount to roughly $31.4 million for UTMB, but the medical school gets only 24 percent of its $1.5 billion budget from state general revenue funds. The rest comes from clinical services, research grants, tuitions, and other sources.

State officials have said a 5-percent reduction in spending by all agencies for the biennium would save roughly $1 billion.

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