Cash-strapped Minnesota hospitals scramble for $1B in Medicaid money

The race is on for Minnesota to net as much as $1 billion in federal Medicaid support and help some of the state’s vulnerable hospitals stay open.

Soon, that opportunity could close. For good.

Minnesota lawmakers greenlit the effort last week when they finalized the state budget. That gave the Department of Human Services (DHS) permission to pursue a directed-payment program that would boost federal payments to hospitals without raising costs on patients or the state.

Trouble is, they left hospital and DHS leaders with only three weeks to apply for the program before Congress’ self-imposed July 4 deadline to approve a federal budget. The House version of that budget prohibits new directed-payment programs; the Senate and Trump administration are considering cuts that could make these programs less valuable.

“We do have to get it in on time,” said Joe Schindler, vice president of finance policy for the Minnesota Hospital Association. It’s “last-best option” for a struggling industry, he added.

“Hospitals are desperate, at this point,” he said.

Minnesota is late in its pursuit of directed payments. More than 40 states have added them in the past decade to help hospitals gain more money from Medicaid. A combination of federal and state tax dollars finance that health plan for 71 million disabled and low-income Americans.

Minnesota created a directed-payment program three years ago for Hennepin Healthcare, shoring up revenues for the urban trauma center that treats a high volume of uninsured and impoverished patients. Schindler said hospitals didn’t lobby for a statewide version until now because they hoped Minnesota would simply boost Medicaid payment rates and prevent the need for this complex financing mechanism.

The rapid growth of directed-payment programs made them an appealing target this year when President Donald Trump sought to eliminate more than $600 billion from Medicaid to partially offset his tax cuts and other spending priorities.

One conservative thinktank likened directed payments to government-sanctioned money-laundering, because hospitals pay special state taxes that trigger more lucrative federal reimbursements in return.

Such labels miss the point, said Charles Esler, Hennepin Healthcare’s finance vice president. Medicaid typically pays about 60 to 70 cents on the dollar for the actual cost of health care. Esler said directed-payments merely close that gap.

He said the health care system was “in a survival mode at the time” when it gained approval for directed payments.

“We would have been left making difficult choices on services and people and everything else,” Esler said. “So that additional money effectively kept us where we are at today.”

Hennepin Healthcare is one of 31 Minnesota hospitals considered in financial distress because it lost money on operations in four of the past eight years.

North Memorial Health in Robbinsdale similarly operates an urban trauma center and has lost money on operations in some recent years. North’s chief executive recently warned the hospital could close without directed payments.

The share of Minnesotans enrolled in Medicaid has increased in the past decade from 15% to 20%. Hospitals have benefitted, on one hand, because this has reduced the number of uninsured Minnesotans who can’t pay their bills. But many of the patients have transitioned to Medicaid from private insurance, which pays for care at much higher rates.

Minnesota provides Medicaid through a government-run, fee-for-service option, which historically pays below the cost of care as well as through managed-care plans run by health insurance companies.

The idea for directed payments emerged a decade ago, when the federal government allowed Medicaid-managed care plans to pay hospitals at commercial rates. Those are typically well above the cost of care.

States seized on the opportunity, increasing the reimbursement rates through managed care plans but then collecting special taxes from hospitals to cover their share of the costs. The increased state payments obliged the federal government to make elevated Medicaid payments, which in turn resulted in more money flowing back to hospitals.

If Minnesota hospitals under a directed-payment program paid about $800 million, that would trigger about $1.8 billion in heightened reimbursements for medical care, a net gain of about $1 billion.

The idea faced hurdles at the Legislature, in part because it was part of a larger health budget bill with other spending measures Republican lawmakers opposed.

During House debate, Rep. Danny Nadeau, R-Rogers, urged his colleagues to lend their support.

“If you don’t vote for anything else in this bill, vote for this one,” he said, noting United Hospital in St. Paul stood to gain some $33 million more annually from Medicaid, and even Ridgeview’s smaller hospital in Le Sueur could make $400,000.

Only a few Republicans voted for the overall bill, but they were enough to help it pass on a 73-58 vote.

Even some hospital leaders had concerns about the program. Some hospitals are in such financial distress, they will struggle to use their cash on hand to make the state tax payments and then wait a month or more for the larger federal returns.

State approval is only step one. Schindler said Minnesota’s directed-payments program will be conservative, modeled after applications Iowa and Nebraska made to the federal government.

“Nobody should walk away from this thinking this is some big financial win,” he said, “other than to get us closer to [covering our] cost.”

It takes months for the federal government to approve these requests. Nebraska applied a year ago and is still waiting. Even if Minnesota applies in time, the federal government could change the rules.

The Trump administration is seeking to lower the upper reimbursement level of Medicaid managed-care programs in a way that would reduce directed payments to hospitals.

Hospitals face federal scrutiny if they pay more than 6% of their patient revenues in state taxes to leverage higher federal reimbursements. The Senate’s version of the federal budget would lower that cap over time to 3.5% for states, including Minnesota, with expanded Medicaid programs.

That would result in lower directed payments to hospitals as well.