Medicaid reforms leave NY's safety-net hospitals in critical condition

Brooklyn’s Brookdale University Hospital and Medical Center is on life support.

In the past two years alone, Gov. Andrew Cuomo’s administration has spent well over $600 million propping up safety-net hospitals around the state. More than half of that total has gone to four community hospitals serving low-income populations in Brooklyn: Brookdale, Interfaith Medical Center, Kingsbrook Jewish Medical Center and Wyckoff Heights Medical Center. And of the millions in bailout dollars that have flowed to those four hospitals, Brookdale has taken in more than half.

Like many of the 28 struggling hospitals on the state’s recently released “watch list,” Brookdale has eked by for years thanks to repeated government bailouts. In 2014 alone, the hospital received $158.6 million in state grants. Its working capital deficiency for the year, the most recent for which financial filings are available, was $113.6 million.

That same year, Brookdale was awarded $78 million through a capital grant program, created under the 2004 Health Care Efficiency and Affordability Law for New Yorkers, to help providers restructure their operations. The 530-bed Brownsville facility, which had run a $166 million working capital deficiency the previous year, used the grant to repay previous obligations to the Health Care Restructuring Pool, a loan program established under the 1996 Health Care Reform Act. From 1999 to June of last year, Brookdale received $160 million in commitments through the fund, more than any other institution.

Other taxpayer-funded programs that have provided cash assistance to faltering hospitals include the state’s Vital Access Provider Assurance Program and, via a federal Medicaid waiver, the Interim Access Assurance Fund and the Value-Based Payment Quality Incentive Program. The state has additionally allocated tens of millions of dollars toward debt service obligations arising from a bond program dating back to the 1980s, and Brookdale, Interfaith and Wyckoff Heights have all been delinquent on their payments in recent years. 

Cuomo’s current budget proposal includes another $449 million in funding for struggling hospitals through the Vital Access Provider Assurance Program and Value-Based Payment Quality Incentive Program. 

The state Department of Health declined to provide City & State with any details regarding its long-term strategy for stabilizing the hospital system, but said it intended to finalize a plan in the near future.

Since 1990, more than 50 New York hospitals have either closed or been taken over – and significantly downsized – by larger networks. Like many of those that have closed, the hospitals under the greatest financial pressure tend to be small or medium in size and serve predominantly low-income populations. In the wake of recent state and federal reforms, many are struggling to adapt to a reimbursement landscape in which payment is increasingly tethered to performance – and market clout is more critical than ever.

“A community hospital that is a stand-alone hospital does not have sufficient market share to negotiate good rates with the insurance companies,” Kevin Finnegan, the outgoing political director of 1199 SEIU, the state’s largest health care workers union, told City & State last year. “Overall, Medicaid and Medicare payments have been dropping for most hospital stays. Hospitals lose money on Medicaid, and mostly on Medicare as well.”

The importance of leverage for a provider is not limited to negotiating rates for commercially insured patients. With the expansion of managed Medicaid, in New York and around the country, hospitals increasingly have to negotiate Medicaid reimbursements with private entities as well. Under managed care, the state pays health plans a fixed rate per beneficiary; the insurer, in turn, assumes responsibility for all of that individual’s medical care, negotiating its own rates with providers. 

“Rates depend upon the contractual relationship that a hospital has with the health plan, and that would depend on the relative strength of the hospital in a particular market,” said Teresa Coughlin, a senior fellow in the Health Policy Center at the Urban Institute.

Managed Medicaid is a tool states use to try to increase predictability and gain control over health care spending. That the program’s contractors assume the risk for the cost of care provides incentives to reduce expenditures related to unnecessary hospitalizations, health officials claim, while improving population health through greater attention to preventive care. But while fewer hospital admissions can reduce costs (and hospital revenues), some research has suggested that savings generated through managed Medicaid can result from lower reimbursements to providers, more than any efficiency gains.

Unlike Medicaid fee-for-service reimbursements, rates negotiated between providers and managed care organizations are not publicly disclosed, but according to a state Health Department document, in 2012 health plans paid Brooklyn hospitals approximately $3,500 less, on average, per Medicaid discharge than under fee-for-service.

“If you are a hospital and already gasping for air because Medicaid was paying you ‘X,’ now the managed Medicaid people come and say we are going to pay you $3,500 less per discharge. And they can get away with it because none of this stuff is public,” said Fred Hyde, a clinical professor at Columbia University’s Mailman School of Public Health and independent consultant whose clients include public employee unions.

As of January, nearly 4.5 million New Yorkers were enrolled in managed Medicaid. Over the past three years that figure has grown by around 1.5 million –and more than doubled since 2008. Eighteen for-profit, nonprofit and government-run managed care organizations currently operate in New York, where Medicaid spending accounted for a quarter of the state’s operating budget when Cuomo took office. To help close a $10 billion budget deficit, his administration launched an aggressive redesign of Medicaid, which saved billions of dollars without removing people from the rolls or significantly reducing benefits, thanks in large part to reimbursement cutbacks to providers and managed care organizations.

The administration, moreover, committed to a global Medicaid spending cap, and since 2011 the average annual growth of Medicaid expenditures has been 1.4 percent, after increasing at an annual rate of 4.3 percent between 2003 and 2010.

“The state Medicaid program is operating under a self-imposed limit on total expenditure increases,” Hyde said. “That is why it’s rushing to distribute financial responsibility to managed care outfits, which are shorting hospitals in order to fit under the cap.”

The gradual phasing out of Medicaid fee-for-service payments is part of a broader shift in the reimbursement landscape – one driven, in large part, by the 2010 Affordable Care Act. Not only have some states ramped up their managed care programs in response to Medicaid expansion, but the federal government has sought to offset some of the cost of expanding coverage through changes to Medicare reimbursement.

“The legislation adds billions of dollars in additional spending to the health care sector, because all these new people are covered, but reimbursement per unit of service is being pressured,” said Martin Arrick, a managing director at Standard & Poor’s Ratings Services.

The ACA called for $716 billion in Medicare savings, a large portion of that to come through the implementation of payment reforms designed to reward “value over volume,” with financial incentives to keep patients healthy through preventive care and early disease detection rather than episodic care following illness. Under value-based payment, providers can be penalized for hospital-acquired conditions, readmissions and failure to satisfy other performance metrics.

Some health policy experts, however, believe such penalties disproportionately affect safety-net providers, whichoften lack the technology and other resources to successfully adapt to the system. Safety-net hospitals, moreover, tend to serve communities with fewer primary care physicians (which could account for some preventable admissions and avoidable emergency room visits) as well as patient populations presenting higher rates of co-morbidities – chronic conditions often compounded by socioeconomic challenges, such as housing insecurity.

“There are a lot of truths floating around,” Arrick said. “One of those is that hospitals are getting paid less in general –at least on an inflation-adjusted basis –but they also have to get more efficient and do a better job.”

While safety-net providers, in theory, stand to gain from the expansion of coverage under the federal law, some could struggle to retain clients who, with new insurance cards in hand, opt for care at more prestigious facilities.

The cutbacks under Medicaid redesign also discourage doctors from participating in the Medicaid program, resulting in scarce primary care options in poor neighborhoods, which in turn drives people to go to the emergency room for more expensive care.

In response to state and federal reforms, providers all along the health care continuum have had to adapt to delivery systems that are transitioning from fragmented hospital-based patterns of care to more integrated outpatient-centric models, with the aim of providing care in the most cost-effective settings. Many safety-net hospitals, however, lack the resources to sustain their day-to-day operations, let alone upgrade physical plants or invest in the equipment and technologies needed to update their business models.

Last year, the Cuomo administration secured a multibillion-dollar federal Medicaid waiver, making good on the promise that brought hospital and labor leaders on board with the cutbacks made under its redesign effort. The waiver will allow the state to reinvest $8 billion in expected federal savings generated from that Medicaid overhaul, with $7.3 billion flowing into the Delivery System Reform Incentive Payment, a restructuring program whose aim is reducing avoidable hospitalizations 25 percent in five years through the formation of integrated provider networks.

In Brooklyn, barriers to health care are often related to race and ethnicity, with disparate outcomes evident in high rates of chronic disease, such as obesity, hypertension and diabetes. With 1 million Medicaid beneficiaries – and 15 percent of borough residents uninsured – local providers are heavily reliant upon state Medicaid policy, particularly centers that serve populations with relatively few private pay patients.

At Brookdale, for instance, Medicaid patients accounted for approximately half of its total discharges in 2014. 

Years of fiscal stress and indebtedness have likely contributed to poor quality ratings among the struggling Brooklyn four. A 2011 Medicaid Redesign Team report found that “Brookdale’s performance was particularly poor, with less than 40 percent of its patients indicating that they would definitely recommend the hospital. Wyckoff Heights and Interfaith also scored poorly – less than 50 percent of their patients reported that ‘they would definitely recommend the hospital.’”

“It was tricky to advocate for hospitals to stay open when people felt that the quality was terrible, or not as good as they wanted it to be,” said Shena Elrington, a health policy expert at the Center for Popular Democracy. “I felt that community members want their hospitals to stay –stay but get better.”

A total of five Brooklyn hospitals have closed since 2003, including St. Mary’s, which was less than two miles from Brookdale.

Part of the underlying challenge for providers is that many of Brooklyn’s most lucrative patients – the commercially insured, those in need of highly specialized procedures – have historically migrated to medical centers in Manhattan.

But what if Manhattan, instead, were to cross the river, bringing its reputation and revenues to Brooklyn?

Given the current reimbursement environment, some see few alternatives to cross-borough coupling. “Community hospitals need to be aligning themselves with larger systems,” Finnegan said.

“The state wants to see big, prosperous institutions pick up more of the poor people,” Hyde said. “Big, prosperous institutions can offset the losses from caring for the poor by caring for commercially insured patients.” 

While large networks historically avoided the borough, more recently Brooklyn’s payer mix has become more attractive.

Northwell Health, formerly North Shore-LIJ, recently entered into a partnership with Maimonides, while NYU Langone partnered with Lutheran Medical Center. The facilities, however, are not among those requiring regular bailouts to stay afloat. 

“The bigger systems that we’re rating are reaching into Brooklyn,” Arrick said. “It’s a big population mass, and they want in, but they also are somewhat protective of their own financial position.”

The Greater New York Hospital Association recently called on the state to provide $2.5 billion in funding over the next five years to enable the larger hospital networks to absorb struggling community hospitals. GNYHA President Ken Raske said his plan would forestall future closures and eliminate the need for repeated government bailouts by allowing the larger systems to “adopt and adapt” struggling safety-net hospitals to “the new health care world.”

“We’ve seen time and time again major systems kick the tires on a distressed hospital, only to walk away because it had serious implications on the financial corpus of the health care system, so this plan is intended to neutralize the impact for those health care systems to go forward and assist those very needy communities throughout New York,” Raske told City & State.

Others question the wisdom of injecting additional billions of taxpayer dollars into the hospital sector. “Taking that level of money and allocating it to hospitals that already receive a significant amount of state dollars is just not the best use of our limited health care resources,” said Leslie Moran, senior vice president of the New York Health Plan Association. “We have enormous amounts of spending currently on hospitals.”

Moran cited the $8 billion Medicaid waiver, as well as still-unspent allocations of $700 million for capital projects in Brooklyn and $1.2 billion capital restructuring – along with continued government support through other programs – as evidence that the hospital sector is already awash in public dollars. NYHPA has also argued that consolidation within the sector leads to higher premiums and an overall rise in costs. 

“Once you have that type of consolidation (among the large systems), it puts a lot of price pressure on their contracting with insurers, which again drives up costs,” Moran said.

According to Raske, absent a long-term solution to the problem, additional community hospital closures would have the same effect as consolidation.

In an interview in November, 1199’s Finnegan told City & State that large networks “rely on the state for a million different things, and the state can leverage that reliance to get them to help out in different parts of the city. And perhaps the state hasn’t done enough of that, but they should, in my view. You can have an efficient community hospital that may lose some money on its own, but it can also be a feeder to the larger hospital system.”

But there are limitations, some believe, to how much pressure the state can exert. “Each decade there are fewer community hospitals, and prestigious teaching hospitals have more leverage,” said Alan Sager, director of Boston University’s School of Public Health.

“If you haven’t got a stick,” Sager added, “you have to use a carrot. And what’s the carrot? More money. You spend money to save money.”

The state budget this fiscal year included $700 million in capital funding for Brooklyn’s health care system, and there have been suggestions that a large portion of the pot could be applied to the construction of a new hospital. Though official plans are yet to be announced, the possibility of a replacement Brookdale facility has been bandied about. 

Last year, Brookdale’s occupancy rate was just 51 percent, and as recently as 2010 none of Brooklyn’s most financially strained hospitals had a utilization rate above 66 percent. In his executive budget last year, Cuomo stated that the $700 million would stabilize and improve Brooklyn’s health care system in part by reducing “unnecessary inpatient beds.” Nonetheless, some question the merits of downsizing, arguing that the cost of maintaining unstaffed beds is relatively low and that Brooklyn is already below the national average in beds per thousand residents. Without addressing the underlying issue of funding, could building a new facility amount to throwing good money after bad? And could such an investment be counted on to leave borough residents more medically secure?

Even leaving aside the potential long-term cost of constructing a new facility, skeptics point out that shedding beds and consolidating capacity is itself no guarantee of savings. 

“Some people like to imagine that we can close hospitals, catch the savings in a bucket and move it over to primary care,” Sager said. “But has hospital care in New York City gotten more affordable in the wake of all these closures? Less expensive hospitals close and more expensive ones stay open. Where do you get a cheap appendectomy?”