Medicaid Dilemma: How to Transform Safety Net Hospitals

January 06, 2021

UPDATE: In the final hours of the lame duck session on January 13, the Illinois General Assembly passed legislation providing for spending up to $150 million annually through fiscal year 2027 to modernize safety net hospitals. Senate Bill 1510, as amended, is similar to the transformation funding proposal described below by the State’s Medicaid agency. A new provision would allow for the creation of a category of safety net institutions that would be eligible for priority funding.

Last May the Illinois General Assembly unanimously approved sweeping legislation to renew the State’s multi-billion dollar hospital assessment program, an important source of Medicaid funding. But lawmakers could not agree on a relatively small piece of the total package: a $150 million pool of cash designed to encourage the modernization of safety net hospitals.

Now State Medicaid officials and hospital executives are pushing for a resolution of the issue during the legislature’s lame duck session that begins on January 8. The Illinois Department of Healthcare and Family Services (HFS) issued its own proposal for allocating the money in November. If the controversy is not resolved, the $150 million could be diverted from the Medicaid program and used to help close the State’s gaping budget deficit.

Transforming safety net hospitals, which generally serve low income and uninsured patients, is a politically fraught issue. There are concerns about the potential closure of longstanding community institutions and loss of jobs in economically disadvantaged areas. The current debate comes amid the COVID-19 pandemic, which has had a disproportionate impact on people of color. The negotiations have also been clouded by developments at Mercy Hospital & Medical Center, a safety net on Chicago’s South Side whose planned closure in 2021 was recently rejected by a State board.

It remains to be seen whether transformation funding will be taken up during the lame duck session. Legislation on the subject has not yet surfaced, but a healthcare bill introduced on January 5 would ban hospital closures through the end of 2023 and give priority to safety nets in the distribution of hospital assessment funds. The bill is part of the Illinois Legislative Black Caucus’ agenda for racial and social equity, which is expected to be the focus of lame duck deliberations.

The need for transformation stems from trends in healthcare that have left many safety net hospitals with empty beds and financial losses. The industry-wide shift to outpatient care has led to fewer hospitalizations. Meanwhile, the expansion of Medicaid eligibility under the Affordable Care Act (ACA) has caused many of the safety nets’ covered patients to seek care outside their neighborhoods at better-resourced hospitals. At the same time, state data show that most safety nets provided less charity care in 2018 than they did prior to the ACA. According to the HFS proposal, healthcare in neglected communities could be improved by focusing on preventive care and services to manage mental illness and substance use disorder and chronic diseases such as asthma and diabetes.

Because safety net hospitals rely heavily on Medicaid funding, transformation efforts have centered on the hospital assessment program. Illinois is among 43 states with these complex financing mechanisms, which are designed to bring in additional federal dollars. Under assessment programs, states make enhanced hospital payments funded by hospital taxes and federal reimbursements. As a group, hospitals recoup most of their tax payments along with the additional federal money.

For example, the new law authorizing Illinois’ renewed assessment program—which runs from July 1, 2020 through December 31, 2022—requires hospitals to pay about $1.69 billion per year into a special State fund, according to HFS officials. In return, hospitals receive about $3.98 billion annually, including $2.45 billion in federal dollars that pass through the same State account. Actual taxes and payments will vary depending on patient volumes. The State keeps $375 million of the hospital taxes for other Medicaid purposes. The net benefit to the State budget is partially offset by certain general operating expenditures, including $60 million to fund the $150 million transformation pool, but the State will also benefit from a temporary increase in federal reimbursement rates due to the pandemic.

Illinois and other states have generally used hospital assessment programs to offset low Medicaid payments for services and to support safety net hospitals. The programs have provided financial stability to shaky institutions because they are typically lump sum payments that are not tied to services for individual Medicaid enrollees and are not affected by declining patient volume. However, federal regulations in 2016 required that many of these payments be phased out by 2027 and replaced by payments tied to Medicaid claims.

As a result, the Illinois hospital assessment program approved by the General Assembly in 2018 had more of the payments based on services, in line with federal requirements. To ease the financial pain for safety nets and certain other institutions, the new assessment program included a $263 million transformation pool, of which $150 million went to safety nets. Beginning on July 1, 2020, when the program had to be renewed, the pool was to be used to provide financial assistance to hospitals in transforming their services and care models to better meet community needs.

The 2018 legislation created a bipartisan Hospital Transformation Review Committee to establish rules for allocating transformation funds. The Transformation Committee held public meetings between August 2018 and March 2019 to hear from industry stakeholders but was unable to agree on how to distribute the money. The Association of Safety-Net Community Hospitals argued that its members should not lose any existing funding. SEIU Healthcare Illinois, which represents safety net workers, opposed any loss of jobs or services and wanted the entire $263 million to go to safety nets and rural critical access hospitals. Other institutions and organizations proposed various changes in service delivery and hospital reimbursement to improve healthcare. After the Transformation Committee disbanded, the task of guiding transformation fell to the legislature’s Medicaid working group, which has worked behind the scenes in meetings that are not open to the public.

Only one concrete transformation plan emerged: a proposal in January 2020 by four South Side hospitals—Mercy, St. Bernard, Advocate Trinity and South Shore—to create a new healthcare system. The South Side plan required a total investment of $1.1 billion, including $520 million over five years from the transformation pool, to build one to two new hospitals and three to six outpatient centers to replace four existing hospital facilities. According to Mercy, the existing facilities were less than 52% occupied, 58% of patients left the service area to receive care and patients lacked access to services to maintain health, identify early stages of disease and manage chronic diseases.

However, the South Side plan did not win legislative support for reasons that remain unclear due to the non-public deliberations of the Medicaid working group. Black Caucus members reportedly did not support the proposal, which lacked specifics on which hospitals would be closed and which communities would benefit from the new facilities. The merger proposal subsequently fell apart, and Mercy announced plans to close the hospital and open a new outpatient center with urgent care services.

The hospital assessment legislation approved during the General Assembly’s pandemic-abbreviated session in May created a new $150 million annual funding pool for transformation purposes but offered no details on its allocation. The previous $263 million pool was incorporated into base payments in the assessment program. The new money may not be used until the General Assembly agrees on a spending plan. Transformation funding was expected to be addressed during the legislature’s planned fall session beginning on November 17, but the session was cancelled due to a surge in COVID-19 cases.

On November 13, HFS issued a revised version of a transformation framework that had been presented to lawmakers in the spring. The agency’s proposal uses the $150 million pool to fund healthcare pilot programs in targeted distressed communities to improve access to care and reduce hospitalizations. The pilots require collaboration with community organizations to address social determinants of health, such as housing and transportation. Grants would range from $10 million to $30 million, with the largest amounts going to partnerships that include safety net hospitals. To make the money go further, the HFS proposal calls for coordination with other sources of funding, including donations from businesses and philanthropic organizations and the $200 million designated for hospital and healthcare transformation in the State’s Rebuild Illinois capital plan.

The initial HFS proposal called for selecting projects through a competitive process involving scoring by the agency. The current framework has a “collaborative, big table process," in which projects are prioritized based on community input. The Illinois Hospital Association, while generally supportive of the HFS plan, has expressed concern about the proposed selection process and about the possibility that funding a large number of projects might dilute the impact of the transformation pool.

In the meantime, a new South Side transformation effort emerged in October, led by the University of Chicago’s health system and two of the hospitals in the previous South Side transformation plan, St. Bernard and Advocate Trinity. The three hospitals are working with federally qualified health centers (FQHCs) and community groups to develop a preventive care network to help patients manage chronic conditions. The project is seeking funding from the State’s transformation pool.