Health reform threatens funding for Methodist

In the next three years Methodist Hospitals Northlake in Gary faces perhaps the greatest challenge of its 101-year history.

Health care reform is expected to reduce the rolls of uninsured Gary patients and expand health care access to thousands. But by 2014 the city’s only acute care hospital must figure out how to replace millions of dollars in government funding scheduled to disappear.

Because Methodist treats large numbers of uninsured and Medicaid patients, it qualifies to receive federal Medicaid matching money intended to reimburse such safety-net hospitals for the care they provide. Those funds, called disproportionate share hospital payments, are slated to wind down beginning in 2014. DSH funding is one of the pools of money Congress has allocated to finance health insurance expansions under the 2010 Affordable Care Act to cover 32 million uninsured Americans.

In theory, as more uninsured people are covered by health plans, the hospitals that used to treat them for free should receive greater reimbursements and would no longer require that DSH money.

But safety-net hospitals across America are struggling to replace DSH payments, which totaled $11.3 billion nationally in fiscal 2009.

Methodist has depended heavily on DSH funding to subsidize the care it provides to uninsured people. Last year Methodist reported providing $47 million in charity care and received $40 million in DSH funds, according to Methodist financial records and the American Hospital Directory, an online hospital database. Several years ago it received $72 million in DSH funds.

Doug Leonard, president and CEO of the Indiana Hospital Association, said the issue of disproportionate share hospital money remains uncertain.

“It’s the top thing we talk about all the time,” Leonard said. “We continue to work with the Indiana Families and Social Services Administration (the state agency that administers Medicaid). We try to manage competing hospitals’ interests in that money.”

He said when the DSH rules were made in 1985 they made sense. “But increasingly more and more hospitals consider themselves safety-net providers and as we’ve seen large increases in the numbers of uninsured and Medicaid recipients, along with the loss of commercial health insurance, this has become a zero fund game,” he said. “There is only a limited pool of money with more hospitals seeking it.”

Methodist will be ready

Leonard said in addition to Methodist Hospitals and Wishard Hospital in Indianapolis, new hospitals have qualified for DSH, further draining the funding pool.

But he said one component of the new health reform law was politically charged and left unresolved. “There was a very deliberate effort by backers of this law not to cover undocumented immigrants in our communities. We can pretend they (undocumented aliens) are not here, but in fact they are. They have diabetes and chronic conditions, they come to our emergency rooms and they deliver babies. So we’re treating them anyway. And if we’re not going to cover them, then the hospitals treating them need to have DSH.”

Methodist leaders are equally concerned.

“We understand that DSH is going away, but we will claim it as long as it’s there,” said Ian McFadden, Methodist’s president and CEO. “We have been preparing for its departure since we arrived. We never expected Methodist to be solely dependent upon DSH for operations. Our anticipation is that by 2014 we will be able to operate the hospitals without DSH. If we continue to build a quality reputation and grow those patient volumes, then we won’t have to worry about the disappearance of the DSH payments.”

McFadden worries about the transition period between when DSH payments cease and uninsured patients are enrolled in public and private health insurance plans.

“We hope the state and federal governments will offer some subsidy funding for hospitals who accept more low-paying insurance than others. By the time DSH goes away we hope to have a full set of good doctors and policies and procedures in place to see that our outcomes are the best in the area,” said McFadden, noting that Methodist has improved quality and many of its scores are better than the Indiana hospital average.

He said Methodist’s doctors, nurses and staff are embracing some of the other components of health reform, including preparing to participate in some of the federal demonstration projects that seek to improve quality and continuity of care and reducing its hospital readmissions rate, one of the benchmarks by which hospitals will be judged by government and private health plans.

Methodist’s mortality rates for heart failure, heart attack and pneumonia are at or above the national average for American hospitals, according to the federal Hospital Compare database. Its readmission rate for heart attack and pneumonia are comparable to the national average, though readmissions for heart failure patients are higher than the national average.

Must partner with city

McFadden said in spite of Methodist’s challenges, its physicians and staff continue to deliver high quality care. But he said one hospital can’t do it alone.

“How are the citizens going to help with this? There needs to be more focus on preventive health care. We need to form many more partnerships with local schools, churches, universities and industries.”

He said teen obesity and diabetes are big problems in Gary and urged schools and churches to become more proactive and collaborate in teaching people to lead healthier lives.

He also aims to end the migration of patients seeking services outside of Gary.

“It’s one thing if it’s a medical service not offered here, like organ transplants,” he said. “But why would patients go to Chicago or Indianapolis for routine care when, if they stayed local, they would get at least the same, if not a better, experience? Reversing that migration would help tremendously.”

Denise Dillard, Methodist vice president of policy of government and external affairs, said the system has been planning ahead for when the DSH money disappears. “We’re looking at the impact of the loss of that money on capital flow and operations and determine whether we’ll have to consolidate or eliminate services or refocus where care is delivered,” Dillard said.

Dillard said Northwest Indiana in general and Gary in particular have high concentrations of acutely ill senior citizens.

She’s optimistic that previously uninsured residents will now be eligible for health insurance and receive early primary care and not have to postpone it.

Loren Chandler, vice president and chief financial officer of Methodist Hospitals, said the system is relying less on disproportionate share funding, dropping from $40 million in 2009 to $25 million through various process improvements. He said reducing patient length of stay, the period of time a patient remains a hospital inpatient, poses another opportunity for reducing costs. “I think we can cut that by another 15 percent to 20 percent and that will take several more million dollars out.”

Chandler said the hospital can lower its cost per case by reducing emergency room visits, hospital readmissions and by partnering more closely with the local community health center, Community Health Net, redirecting patients to the right level of care. And he said the new IT system offers Methodist a chance to compare itself to competitors.

Methodist is in discussions with local primary care physicians to develop an accountable care organization, one of those federal demonstration programs that encourage hospitals to collaborate with physicians and other health care providers to care for a defined patient population.  

Hospital financial consultant James Unland, president of the Chicago-based Health Capital Group, said Methodist has performed an impressive financial turnaround.  But Unland said the system’s operating income — the money it makes from its core business of caring for patients — is flat. Translation: “This hospital needs to get back a higher percentage of its natural market share,” Unland said. “They need to build patient volume and get back the local business they lost and win back Gary residents who are now leaving the area to find care.”