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July 6, 2006








This memo is to inform you of the latest developments regarding some very important changes occurring in the Disproportionate Share Hospital Program (DSH) administered by the Division of Medicaid. This affects not only our state budget but the finances of every hospital in our state.


Changes are necessary because the Centers for Medicare and Medicaid Services (CMS), which administers the Medicaid program at the federal level, has disallowed our current program to use DSH funds as state Medicaid match money. In doing so, CMS declared some $90 million of our annual state match ineligible. We didn’t choose to make changes; CMS is requiring us to change or give up $270 million a year in Medicaid funds.


Beginning in the Clinton Administration, CMS began to challenge states on using certain federal funds as state match money to draw down federal Medicaid funds. Almost every state has been impacted over the last several years. In fact, Mississippi is one of the last states to be required to discontinue this type of financing mechanism.


In our case, the $90 million of DSH funds used as state match resulted in Mississippi’s receiving some $270 million of federal funds. So this part of our program contributed about $360 million a year to total Medicaid spending.


The purpose of the national Disproportionate Share Hospital program is to provide extra financial support to hospitals which provide an unusually high amount of uncompensated indigent care. States can either participate or not. Fourteen years ago Mississippi decided to participate, and a creative state funding formula was put in place with the help of the Mississippi Hospital Association. Last June, the federal government, through CMS, notified the Division that the current state DSH funding formula was no longer allowed after July 1, 2005. The federal government demanded that the state DSH funding formula be changed, and if not changed, then the federal government would no longer provide a federal match for the DSH funds.


Let me emphasize that the federal government is mandating this change. My preference was and is to keep our existing system. I’ve asked for exemptions and delays, but we have finally been forced to discard the old system.


The state funding formula in place until July 1, 2005, relied on public hospitals to provide intergovernmental transfers (IGTs) to meet the state match for the DSH program. The public hospitals transferred the state match to the Division of Medicaid which used those funds to draw down federal funds. With the combined funding, the Division made DSH payments to the DSH-eligible public hospitals. The federal government’s Centers for Medicare and Medicaid Services (CMS) did not object to this practice.


However, for fourteen years, the public hospitals transferred an amount greater than the necessary state match to the Division of Medicaid, and CMS objected to this component of the state funding formula. The spread between what was needed for the DSH program and what was provided by the public hospitals was an extra $90 million, which was used by the state to draw down other non-DSH federal funds for medical service claims. When CMS disallowed this practice on July 1, 2005, the Division of Medicaid lost $90 million of state matching funds.


Although only public hospitals have contributed financially, both public and private hospitals have benefited from the DSH program. Once matched, the DSH funding formula supported $360 million worth of Medicaid medical service payments made to public and private hospitals. The DSH payments also provided extra financial support for a number of small county-owned public hospitals and state hospitals such as the University Medical Center. This extra financial support helped make it possible for many of these hospitals to continue to serve such a high percentage of Medicaid and uninsured patients, relieving a potential financial burden on other hospitals.


Since spring 2004, the Division of Medicaid had briefed members of the Legislature many times about CMS’s desire to stop similar types of funding mechanisms across the country. When it became clear that our financing scheme would be disallowed, developing an alternative funding mechanism to replace the $90 million became a top priority. We don’t want hospital reimbursements to be cut by $360 million.


In coordination with the Division of Medicaid, the Mississippi Hospital Association contracted with a Washington, D.C., law firm to develop an alternative funding mechanism based on so-called Certified Public Expenditures (CPE’s). For many months and throughout the 2006 legislative session, this was anticipated to be the future funding mechanism. However, for one year there was a known gap in time between the disallowed funding mechanism and the anticipated CPE program. As a result, the Legislature provided an additional $90 million of state funding to the Division of Medicaid to replace the $90 million of intergovernmental transfers which were not collected in FY 2006.


However, when the DC law firm made their detailed report to the Mississippi Hospital Association and the Division of Medicaid in April 2006, it became clear CPE’s were not a viable alternative. A few of the reasons for this conclusion include the great unlikelihood that CMS would approve the plan, which would dig an even deeper financial hole for the state Medicaid program; a loss of $35 million to the Division under the CPE plan; increased complexity in provider payment methodologies for both the hospitals and the Division of Medicaid; and the detrimental financial effect of the CPE proposal to the majority of non-state owned public hospitals.


For these reasons, the Division focused on the only viable known option available to them that is to adjust the Gross Revenue Assessment (GRA) on all public and private hospitals, as detailed by the Executive Director of the Division, Bob Robinson, in a June 8, 2006, letter to hospital administrators. This proposal would have increased the GRA on private hospitals but reduced the financial contribution of public hospitals.

Before and after the June 8th letter, the Division of Medicaid, my staff and I worked diligently to research all possible ways to revise the state funding formula. There were several meetings with representatives of individual hospitals and the Mississippi Hospital Association. We consulted with the Chairmen of the House and Senate Public Health Committees, the House Medicaid Committee, and the Chairmen of the House and Senate Appropriations Committees. In addition, I personally petitioned the Secretary of Health and Human Services to give the state more time to address this concern.


Over the past several weeks, I have become increasingly concerned about the potential negative financial impact of the June 8th proposal on private hospitals. Therefore, after consulting with the legislative leaders in this area, I directed the Division to implement a different proposal.


I will recommend to the Mississippi Legislature that it fund a deficit appropriation of $45 million in FY 2007 to make up half of what has been lost because of the federal government’s decision to disallow our previous funding mechanism and to continue this direct state support in future years. The remaining estimated $45 million will be made up by a redistribution of the gross revenue assessment which will equalize Medicaid funding among all public and private hospitals. Private hospitals will pay approximately $27.5 million of the estimated $45 million GRA. This plan will be implemented September 1, 2006, in such a way as to allow full compliance with the Administrative Procedures Act and to allow the collection of approximately $45 million within the fiscal year.


Under this plan, total state assessments on hospitals will be reduced by approximately $45 million compared to the previous system. This proposal will provide significant financial relief to our almost all of our small, county-owned public hospitals and to the University Medical Center. By including private hospitals in the DSH program and increasing hospital reimbursement rates as planned on January 1, 2007, there will be no negative aggregate impact on the private hospitals as a whole, although each individual private hospital’s situation will be different.


I will continue to remain open to other viable alternatives. I have informed the Mississippi Hospital Association that if they wish to pursue CPE’s as a part of the solution, the Division of Medicaid will submit such a plan to CMS for their consideration.


Thank you for your consideration and assistance as we continue to work to resolve this issue.