Kentucky hospitals see $1 billion increase with Kynect and Medicaid expansion, but financial headaches are not cured
By Josh Shepherd
Over a year and half into Medicaid expansion and the launch of Kynect, the state’s health insurance exchange program, Kentucky is among the nation’s leaders in reducing its uninsured population.
As a result of providing more services to more people throughout the commonwealth, however, Kentucky hospitals are reporting healthy improvement in their revenues.
Many state healthcare systems are “experiencing an overall improvement in their financial positions” in the last 18 months, Mike Rust, CEO of the Kentucky Hospital Association, reports. Much of the credit, he said, goes to the state’s efforts to implement the health insurance mandates of the Patient Protection and Affordable Care Act (ACA). Performance varies among the institutions, but, from a broad perspective, revenues are up and some by significant margins.
There are notable exceptions, said Elizabeth Cobb, KHA vice president of health policy and a member of the board of directors for the Kentucky Rural Health Association (KRHA). Some rural hospitals are still struggling to keep their doors open, Cobb said, despite increasing numbers of payers and a reduction in uncompensated care statewide.
Nevertheless, Kentucky is well ahead of its neighbor states in realizing many of the ACA’s early goals.
Audrey Tayse Haynes, secretary of the Cabinet for Health and Family Services, takes great pride in the various reports that show Kentucky leads its region, and even the country as a whole, in reducing the numbers of the uninsured in its population.
Nationally the numbers of uninsured dropped to about 12.9 percent of the population in December 2014, a report published the first quarter of 2015 by The Foundation for a Healthy Kentucky showed. In that same period, Kentucky’s uninsured stood at an estimated 9.8 percent, a 10.6 percentage point drop in the uninsured from 2013, according to a Gallup-Healthways survey.
There are many more encouraging statistics from the last year and half, Haynes said. According to CHFS estimates, improvements in the number of uninsured people in the commonwealth have introduced about $2.2 billion in new revenue into the healthcare industry, $1 billion of which has been shared among the state’s hospitals.
“That’s money going directly into the healthcare system, not to the recipients” she pointed out. ACA influence is credited also with the creation of 11,900 new jobs in the professional healthcare and social work sectors, Haynes said.
But a year and half is still a very short period of time. While on the surface Kentucky hospitals are doing better financially, analysis of hospital revenues reveals the Medicaid expansion engendered a major payer-mix shift, which paints a different and much more complex portrait of the financial health of Kentucky’s systems.
Sheila Currans, CEO of Harrison Memorial Hospital in Cynthiana, and Carl Herde, chief financial officer for the Baptist Health system, acknowledge that Kentucky’s efforts to reduce the ranks of the uninsured has made positive strides, but the rapid increase in the state’s Medicaid rolls pose a new set of challenges to hospitals across Kentucky.
“When it’s said that revenues are up, it’s a relative term,” Herde said. “We are seeing more patients, doing more services and certainly our charges are up. But we are also experiencing a significant shift in our payer mix. If you are caring for the same or more patients but not getting the same (amount of revenue) as you used to get for services, it creates an operational challenge.”
Medicaid expansion grows faster than expected
A critical variable in assessing hospital revenues, Currans said, is the payer mix, which in the simplest terms is the ratio of patients with commercial insurance coverage, Medicaid/Medicare or other forms of government reimbursement, and those few who still self-pay.
“The payer mix in our service area (the Harrison County region) is naturally going to be different from what hospitals in Louisville, Paducah or other Kentucky communities may see. Payer mix is directly associated with community’s specific demographics,” she said.
Since the Medicaid expansion, Currans and Herde have noted a significant shift in their systems’ payer mix.
“Though (Harrison Memorial’s) population is mostly Medicare/Medicaid, we used to have a higher percentage of commercial insurance than we’ve seen lately. There has been a clear shift in our payer mix to more Medicaid patients,” Currans said.
Taking into consideration that Medicaid reimburses between 70 percent and 80 percent of charges, the facility anticipates some cuts in revenues even if its total patient volume is up.
While hospitals may be seeing more patients and performing more services, Cobb said, “it’s important to remember that Medicaid doesn’t cover 100 percent of the costs of care.”
The KHA has noted an inverse relationship between the steep reduction in Kentucky’s uninsured in the last year and a half and the increase in Medicaid rolls, she said. And there is a larger impact on rural hospitals whose Medicaid/Medicare patient populations are proportionately larger than those in urban hospitals.
Herde, an administrator tasked with oversight of Baptist Health’s “bottom line,” said he is not seeing much difference between rural and urban hospitals among the facilities he monitors across the state. There is a slightly better margin with commercial insurance than with Medicaid.
“For a small percentage of our insured patients, we had a margin (previously) that we now don’t have,” Herde said.
The cabinet publishes a weekly tally of the total numbers of Medicaid recipients as reported from the six Managed Care Organizations (MCOs) the state contracts with to manage the program to insure those near or below the poverty income level. The report Aug. 17 listed just over 1.27 million recipients, or about 25 percent of the commonwealth’s population, Haynes said. That includes about 500,000 children under age 18 and people with permanent disabilities.
The first Medicaid expansion enrollment period welcomed about 310,000 additional individuals, Haynes said. Counts have fluctuated since, but the overall increase in recipients has averaged around 400,000. Additionally, the state estimates another 110,000 enrolled in commercial health insurance plans through Kynect. About 75 percent of those were among the previously uninsured, she said.
“When the state began enrolling people into medical coverage, the Medicaid numbers did exceed our initial expectations, but the numbers have been stable since,” Haynes said.
Eastern Kentucky, which had been noted for having the highest number of uninsured, is the area of the state with the most new enrollments in both Medicaid and commercial insurance, she said.
There is speculation the influx of Medicaid patients may include low-income individuals and families formerly covered by commercial insurance through an employer. Migration away from private coverage to Medicaid also skews payer mixes toward the government program. While there has been no study to substantiate the claim, the shift in payer mix has led Currans and Herde to make the assumption that the phenomenon has occurred.
“It seems as though we’re seeing more Medicaid patients in our service areas than have been converted from the ranks of the uninsured,” Herde said.
High-deductible plans and bad debt
A KHA report to CHFS earlier this year showed a dramatic improvement in 2014 in the rate of uncompensated care – for which no payment is received. The influence of Kynect and Medicaid expansion is credited for reducing those charges, which usually are left hanging on balance sheets.
“The KHA’s mission is to work with hospitals and the state to ensure that Kentuckians get access to the care and coverage they need to be a healthier population,” Rust said.
To a significant extent, the direction healthcare has taken in the last year represents positive steps toward realizing that mission. However, although uncompensated care has reached new lows, the incidence of bad-debt accounts for hospitals is actually on the rise.
The ACA’s intent to make healthcare more affordable to a greater number of people is happening, Rust said, but an issue of “under-insured” individuals remains.
This typically involves people who opt for cheaper health insurance plans with high deductibles, which they then can’t pay when they receive care. This mainly affects families with incomes just above the level at which they would qualify for Medicaid.
“In general, there are two types of folks who buy high-deductible insurance plans with cheaper premiums: Young people who imagine they’re in good health and don’t need expensive health coverage,” Herde said, “and those persons who simply can’t afford to pay the premiums of a high-end insurance plan. If that person or family can’t afford high premiums, then they’re not going to able to afford the high deductible either.”
The rise in liability among insured patients is a challenge for hospitals to address, but it’s not insurmountable and is preferable to the financial results of caring for uninsured patients.
“It’s a lot better for both the patient and hospital to try and work out a payment plan to cover a $5,000 deductible than writing off debts of over $100,000 in cases of injury or a catastrophic illness,” Haynes said.
Rust agreed: “At least a portion of that debt is getting paid.”
Although their numbers are down, nearly 10 percent of Kentuckians still, for a variety of reasons, have not signed up with an insurance plan or taken advantage of their Medicaid eligibility.
“In any given month of the last two years, about 2-3 percent of our patients are still essentially self-pay,” Currans said. “We try to offer assistance to get them signed up through the (Kynect) exchange, but patients have to be proactive and ask for that help. So we still have a lingering problem with charges we write off because of our commitment and obligation to provide high-quality care.”
Currans and Herde face write-offs regularly when analyzing their balance sheets, but said they do so with an understanding that delivering quality healthcare is their primary mission.
ER overuse and other fiscal pains
There is some debate about the payer mix shift for hospitals, but not about the ongoing need to reduce the overuse of emergency rooms during off-hours.
One strategy being tested is development of advance triage units to assess, prioritize and treat critical cases. To address non-emergency complaints, Baptist Health has opened medical clinics and urgent treatment centers providing off-hour care. Harrison Memorial is considering adding a clinic adjacent to its ER. Another approach is telehealth solutions, such as KentuckyOne Health system’s introduction of Anywhere Care, which puts patients in touch with a physician or physician extender by phone or online video chat for treatment of common ailments.
The federal government is paying 100 percent of the cost of expanding Medicaid coverage now, but that will decrease to 95 percent in 2017 and fall to 94 percent in 2018, then 93 percent in 2019, then 90 percent thereafter. Looking toward the time when federal coverage of Medicaid costs is passed down to the state, everyone is adopting a wait and see attitude.
Currans and Herde expect that hospitals will continue to be asked to maintain high-level quality care while managing reductions in reimbursement.
Meeting the demand for quality healthcare delivery will always require major expenditures, Herde said. Baptist is currently financing multimillion-dollar expansions and renovations of several facilities, implementing an updated computer networking system, keeping up with federal mandates on Electronic Health Records, and changing its billing systems to the ICD-10 coding protocols required starting in October, which all directly impact hospital revenues. That list doesn’t even include buying and maintaining the latest clinical technology or expected increases in salaries and benefits for staff and employed physicians.
“Looking to our future, and those of other healthcare systems in the state, there are a lot of headwinds,” he said.
“But this is part of our job as administrators – to manage expenses and make the best use of our revenues to maintain and improve high standards of quality healthcare delivery. I’m proud to be associated with an organization that does this job well,” Herde said.
In the past two years, he said, Baptist Health cut about $40 million in costs on supplies, maintenance agreements, contracted services and other operations to run more efficiently.
But hospitals are motivated by greater things than just revenues, Rust said. Their first priority is providing even higher standards of quality healthcare than today.
“We’re seeing hospitals changing their care settings to be more proactive around wellness,” Cobb observed. Rust added that small and large hospitals are also getting benefits from partnering even closer with health departments to reduce re-admissions through follow-ups.
Haynes acknowledges there are challenges ahead, but the direction that Kentucky healthcare has taken in the last year and a half amounts to more positives than negatives for the patient and the provider.
“Hospitals are using this time to analyze their service delivery and business models to take advantage of ACA’s emphasis on improving population health rather than reactively treating illness,” Haynes said.
She believes the program is capable of sustaining itself in the long run and that staying the course long term will result in a healthier Kentucky population and a more vigorous economic engine moving the state’s collective private and public healthcare enterprises forward.
“I think the CHFS is playing an important part in fostering the type of market competition among the state’s health systems that promotes invention and innovation,” Haynes said. “By expanding coverage, we are creating a buyer’s market and introducing more transparency in healthcare delivery.”
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