Louisiana Hospital Association The Budget Challenge of Healthcare 1

Healthcare Economic Engine The healthcare sector in Louisiana represents almost 15% of total payroll in the state, totaling approximately $8.33 billion. Hospitals employ 99,351with a payroll of $4.4 billion, which accounts for 55% of payroll within the healthcare sector.

Economic Impact of LA Hospitals Hospitals average about $469 million in building construction each year, leading to the creation of more than 8,042 new jobs yearly in sectors other than healthcare. The overall economic activity that is supported by hospital expenditures leads to $487 million in state tax collections and $325 million in local tax collections.

Economic Impact of LA Hospitals Overall hospital expenditures are estimated to be $8.8 billion; and overall business transactions as measured by business sales, including the direct hospital expenditures, are $18.6 billion. The number of jobs related to hospital expenditures is 182,586. The healthcare industry in Louisiana employs more than 269,184 people, over 16.3 percent of the total workforce and approximately 15.3 percent of the state’s total private payroll.

Healthcare Economic Engine Each job in a hospital supports almost one additional job. Every dollar spent by a hospital supports $1.14 of additional business activity.

Economic Impact of Hospitals in the Lafayette Area In the most recent cost report year 2009, 16 Lafayette region hospitals had: FTEs 4,430 Total Salaries $181.9 million Total Operating Expenses $830.8 million Net Patient Revenue $667.9 million Average Hourly Wage $21 - $27 (Some hospitals had not reported salary information)

Healthcare Coverage in Louisiana 1.7 million have commercial health insurance 1.2 million rely on Medicaid 653,000 rely on Medicare 813,000 have no insurance coverage 7

Louisiana Hospital Operating Margins 57% of hospitals surveyed had total operating margins of less than 1%. 43% of hospitals surveyed had negative total operating margins. Source: LHA 2009 Annual Survey 8 8

Medicaid Enrollment History State FY Enrolled SFY 1997-1998 730,898 SFY 2003-2004 1,067,188 SFY 1998-1999 717,813 SFY 2004-2005 1,113,410 SFY 1999-2000 726,734 SFY 2005-2006 1,142,280 SFY 2000-2001 846,646 SFY 2006-2007 1,154,533 SFY 2001-2002 930,154 SFY 2007-2008 1,174,215 SFY 2002-2003 1,010,201 Estimated Today 1.23 million Source - DHH Medicaid Annual Reports SFYs 1997-98 thru 2007-08 9

Total Medicaid Hospital Service Lafayette Region & State Community Hospitals 81% Rural Hospitals 5% State Hospital 13% Statewide Totals Community Hospitals 70% Rural Hospitals 8% State Hospital 22%

Reimbursement In Louisiana: Medicaid payments to community hospitals (non-state, non-rural) are $153 million below the cost of the care provided. (In Lafayette Region alone, $28+ million) In addition, these same community hospitals provided over $186 million in net un-reimbursed costs to uninsured patients.¹ ¹Net un-reimbursed costs equal gross costs less patient payments before uncompensated care payments. Source: DHH/ Myers and Stauffer Analysis

Medicaid Inpatient Hospital Payments Compared to Medical Care Inflation 1997 2.6% Medicaid rate increase 2001 $25 million appropriated for 2.5% Medicaid rate increase 2006 $38 million appropriated for 3.8% Medicaid rate increase 2007 $33 million appropriated for 4.75% Medicaid rate increase 2009 3.5% mid-year reduction in February and 6.3% IP / 5.65% OP reduction in August (approximate $90 million total impact to hospitals including outlier reductions) 2010 5% mid-year reduction in February (approximately $50 million impact to hospitals) and 4.6% estimated reduction passed in recent state budget (estimated impact of $46 million at present pending additional data) Medical Care CPI projected for 2009 and 2010 using average of the three previous years; Medicaid Enrollment Increases for 1995 and 1996 based on average of three subsequent years; Medicaid Enrollment Increases for 2009 and 2010 based on average of three previous years 12 12 12

Patient Protection and Affordable Care Act - March 23, 2010 13 13

Health Reform Becomes Law The Patient Protection and Affordable Care Act (PPACA) was signed into law March 23. It was amended by the Health Care & Education Affordability Reconciliation Act, which was signed into law March 30. Together, the legislation: Provides coverage to 32 million uninsured people by 2019. Costs an estimated $940 billion over 10 years (2010-2019). 14

Medicare & Medicaid Payment Cuts – Paying for Reform Nationally, hospital payments will be cut $155 billion over 10 year period beginning in 2010 to help pay for expanding coverage to 32 million. In return for expanded coverage for 32 million uninsured, The American Hospital Association, Catholic Hospital Association, Federation of American Hospitals agreed to $155 billion in reduced spending for Medicare and Medicaid hospital services over 10 years. Medicare update factors For 2010 (beginning April 1) and 2011, the Medicare hospital payment update would be reduced by 0.25% Beginning in 2012, the market basket would be reduced by an estimate of productivity, with added reductions of 0.1% in 2012 and 2013, 0.3% in 2014, 0.2% in 2015 and 2016, and 0.75 % in 2017, 2018 and 2019 In 2020 and beyond, hospital payment updates would be reduced by productivity. The deeper reductions would apply to inpatient hospital, outpatient hospital, inpatient rehabilitation, inpatient psychiatric, and long-term care hospitals. The update reductions would not sunset and would not be protected from going below zero. Medicare DSH Reduces Medicare DSH payments by 75% to eliminate DSH payments that are above the “empirically justified” level, as determined by the Medicare Payment Advisory Commission A portion of the 75% would then be returned to hospitals depending on the amount of uncompensated care they provide. This amount is subject to a trigger, and would be phased down if coverage increases. Medicaid DSH Medicaid DSH reductions are not directly tied to increases in the level of insurance coverage, and the final bill directs the Secretary to develop a methodology for reducing federal DSH allotments to all states in order to achieve the mandated reductions In making DSH reductions, the Secretary is instructed to look at a state’s percentage of reduction in the uninsured, and whether a state targets DSH funds to hospitals with high Medicaid volumes or uncompensated care. 15

State Burdens Under National Health Reform At 133% of Federal Poverty Level, nearly 42% of all Louisiana residents would qualify for Medicaid! 260,000 residents could be added to Medicaid rolls. This alone could cost the state an additional $614 million in state dollars. 16 16

FISCAL YEAR 12 . . . THE “CLIFF YEAR” 17 17

Misunderstanding…. “Why is it so hard for the legislature to cut $1.6 billion out of a $25.5 billion budget. That’s a cut of only 6% and who out there couldn’t manage to cut their budget by 6%?” It is accurate to say that the projected shortfall for FY 12 is $1.6 billion and that the size of the FY 11 budget is $25.5 billion. However, it is not accurate to assume that the shortfall can be cut from the entire state budget for an across-the-board cut of only 6%. The “context” for looking at the shortfall and what is actually available to be cut in the state’s budget is provided in the next series of slides. 18 18

Federal Funds cannot be cut to deal with the shortfall FEDERAL FUNDS 45% $11.5 B If we think of the state budget as a big $25.5 billion pie, with individual slices representing the major funding sources, we can better understand why the entire budget isn’t available to be cut to make up the projected $1.6 billion shortfall. Federal funds finance nearly half of the expenditures in the state’s budget. These funds are primarily for health care in the Medicaid Program but the state also receives federal funds for highways, agriculture, K-12 education, higher education, public safety, and a variety of other programs that provide services to Louisiana citizens. These funds come from Congress with very tight restrictions on how they can be spent and those restrictions preclude the state using any of the federal funds to offset a projected General Fund shortfall. Many federally funded programs require a state match and a number of those programs are “optional” meaning the state does not have to offer those services in order to meet the minimum requirements of the federal legislation that created the Medicaid. Cutting the state match for “optional” programs like pharmacy, long-term personal care, mental health rehabilitation, adult dentures, etc. would help reduce the FY 12 shortfall but could increase costs in the long-term and could increase in the degree of morbidity of diseases that could be controlled by the patients having access to medication. 19

For various reasons, the legislature and in some cases the citizens, have chosen to dedicate certain revenues for specific services. Dedicated funds are not generally considered to be available to offset a shortfall FEDERAL FUNDS 45% $11.5 B The next category of funding is called “dedications.” Funds in this category come from a variety of sources including the gasoline tax, hunting and fishing licenses, and various portions of mineral revenue, gaming revenue, sales tax revenue, and others totaling $4.6 billion in the FY 11 budget. In every case, the legislature and sometimes the citizens at large (through constitutional amendments) have determined that these funds should be earmarked to fund a specific government service. Next slide. DEDICATIONS 18% $4.6 B 20

The legislature allows some agencies to charge a fee to offset some or all of the cost of their operations. These fees are not generally considered to be available to cover a budget shortfall in the General Fund FEDERAL FUNDS 45% $11.5 B The legislature has determined that some services that are not used by the population at large should be paid for by specific group of citizens using the service. This category of funding is called Agency Fees or Self-generated Revenue. A good example of revenue that is classified as such is the tuition that students attending the state’s public universities pay to offset a portion of the cost of their education. Since these funds are tied to specific services they are not considered to be available to help offset the projected shortfall for FY 12. Next slide AGENCY FEES 7% 1.7 B DEDICATIONS 18% $4.6 B 21

The most versatile funding in the budget is the General Fund which can be used to pay for any expense of government GENERAL FUND 30% $7.7 B FEDERAL FUNDS 45% $11.5 B The final category of funding that makes up the state operating budget is the State General Fund which, true to its name, is where those taxes that are designed to support the “general” expenditures of government are placed. Expenditures financed by this category of funding are programs like K-12 education, higher education, health care, economic development, correctional services, social services, state-wide elected officials such as the Governor’s Office, the Attorney General, the Secretary of State, etc. AGENCY FEES 7% $1.7 B DEDICATIONS 18% $4.6 B 22

Because there are restrictions on the use of the other sources of funding in the budget, the General Fund is where most of the cuts will have to be made to deal with the $1.6 billion shortfall GENERAL FUND 30% $7.7 Billion After a number of rounds of budget cuts precipitated by similarly difficult financial times in the late 1980’s and early 1990’s, many departments began seeking ways to insulate themselves from such cuts in the future. To accomplish this, they turned to dedicated sources or revenue and agency-generated fees for some or all of their operating revenue. In some instances, the dedications were carved out of funds that would have otherwise gone to the General Fund while in others new fees were enacted by the legislature. Restrictions on the use of Federal, Dedicated, and Agency Generated funds naturally put pressure on the General Fund whenever it is necessary to deal with a budget shortfall. If the cuts needed to deal with the FY 12 shortall could be applied to the entire $7.7 billion General Fund budget, the cut to each department would be only 20%. Unfortunately, there are a number of reasons why this is not possible. Those reasons are outlined on the following slides. Next slide Cutting $1.6 Billion out of this area of state funding would amount to a 20% across-the-board cut 23

“non-discretionary” spending However, there are even restrictions on the General Fund and those restrictions protect $5.1 billion of the total $7.7 billion from cuts. This “uncuttable” part of the budget is referred to as “non-discretionary” spending $2.6 Billion $5.1Billion In budget lingo, there are two categories of General Fund expenditures: One is referred to as “discretionary” meaning there are no legal or contractual impediments to cutting some or all of the expenditures funded in this category. The other category of General Fund expenditures is referred to as “non-discretionary” meaning that there are various reasons (legal, contractual, court order, etc.) why the legislature cannot cut funding to programs funded in this category. The “discretionary” category makes up 10% of the total FY 11 budget while the “non-discretionary” category makes up 20%. Some examples of non-discretionary expenditures are rent paid to private entities for space to house state agencies, appropriated debt service payments, state payments for retiree health care benefits, the Minimum Foundation Program for k-12 education, supplemental pay for sheriff deputies, city policemen, and firemen, Revenue Sharing payments to local governments to offset part of the property tax loss due to the homestead exemption, and per diem payments to sheriffs for housing of state inmates in local jails. These are some of the more costly, politically high profile programs classified as non-discretionary spending, but this category contains many other programs that are as politically sensitive if not financially consequential as the ones listed. 24

This leaves 10% of the total state budget or about $2 This leaves 10% of the total state budget or about $2.6 billion to absorb the $1.6 billion in cuts needed to eliminate the $1.6 billion projected FY 12 shortfall $2.6 Billion NON- DISCRETIONARY Historically, it is the “discretionary” category of General Fund spending that any cuts needed to balance the budget must be made. This means that the projected shortfall of $1.6 billion would have to be cut from the $2.6 billion in this category of funding. FEDERAL AGENCY FEES DEDICATIONS 25

Breakdown of Discretionary General Fund Budget The three major components of the “discretionary” budget are Higher Education 37%, Health Care, 29%, and a generic category called “All Other” that includes some very important programs of government like economic development, public safety, parks and recreation, social services, youth services, and other services that are detailed on a slide that comes up later in the presentation. 26 26