Almost four years ago, three of Virginia’s private nonprofit health systems proposed to tax themselves to help pay for hospital indigent care and medical education.

The idea – which the Sentara, Inova and Carilion health systems presented in late 2014 – was to impose an assessment on their hospital revenues that would serve as matching funds to gain an equal amount of federal Medicaid money – or supplemental payments – to subsidize their costs for uncompensated health care and medical education.

That proposal was the unintended seed of a plan that now towers over a state budget battle that will resume Monday. The Virginia Senate returns to special session after a month’s absence to consider a pair of budgets – one for the fiscal year that ends June 30, the other for the two fiscal years starting July 1 – proposed by the House of Delegates.

The House plans would rely both on accepting billions of dollars in federal money to expand Medicaid coverage for hundreds of thousands of uninsured Virginians and a hospital tax to pay the state’s share of the costs, freeing the savings to be spent on other core services.

“This is something the hospitals asked for,” said House Appropriations Chairman Chris Jones, R-Suffolk. “The assessment will cover the state’s cost of the Medicaid expansion population.”

Original intent

That wasn’t the intention of the three private hospital systems. They were looking for a way to pay for costs that Virginia already helps defray at the public academic medical centers run by Virginia Commonwealth University and the University of Virginia.

Nor do the hospitals think a provider assessment is necessary to expand Medicaid, which would produce net savings of more than $110 million to the state in the next two years alone. The costs would begin to exceed the savings after 2022.

But the idea turned into something bigger in late 2015. The Virginia Hospital and Healthcare Association sent a letter to then-Gov. Terry McAuliffe that offered conditional support for a provider assessment on hospital revenues that would generate money to cover the state’s share of the cost of expanding Medicaid under the Affordable Care Act.

Earlier that year, McAuliffe had proposed a provider assessment in his proposed budget, with the stipulation that 35 percent of new revenues be deposited into the Virginia Health Care Fund. The proposal led to a work group that concluded a provider assessment could be used to generate money for health care, including expanded Medicaid coverage and higher hospital reimbursements, but only if it were developed with the industry and “administered with appropriate safeguards.”

“Arriving at this moment did not come easily,” VHHA CEO Sean Connaughton told McAuliffe in the letter on Dec. 1, 2015. “This association has traditionally opposed provider contributions.”

“However, the mounting financial burden of diminished reimbursements, increased uncompensated care, and federal funding cuts necessitate the exploration of even the previously unthinkable,” Connaughton said. “The status quo is unsustainable.”

Changed landscape

The proposal was an attempt to overcome implacable hostility to Medicaid expansion among Republican legislators, especially in the House, but Democrats’ stunning gains in House elections last fall have turned the annual political debate on its head and made the provider assessment a linchpin of the budget fashioned by House Republicans who once opposed it as a way to expand Medicaid.

Senate Majority Leader Tommy Norment, R-James City, last week derided the House budget proposals for relying on “federal revenues the General Assembly has yet to accept and a new tax on hospitals it has yet to enact,” but he and 14 other Republican senators already have voted at least once, some of them twice, for a provider assessment to help pay for expanded Medicaid services.

That proposal was part of legislation Sen. Siobhan Dunnavant, R-Henrico, proposed. It would have expanded eligibility for some Medicaid services and helped disabled Virginians waiting for high-cost Medicaid waiver slots as part of a health care package intended to counteract the push by Gov. Ralph Northam and his allies to expand the program with enhanced federal funding under Obamacare.

Dunnavant ultimately dropped the provider assessment from her legislation and accompanying budget proposal. The House rejected both as the chambers headed toward an impasse over Medicaid expansion in the regular 60-day legislative session that adjourned March 10 without a budget.

Hanger and Wagner

The one Republican senator who voted against her proposed provider assessment was Sen. Emmett Hanger, R-Augusta, who strongly supports expanding Medicaid, but doesn’t like the idea of taxing hospital revenues to pay for it.

“I viewed it as just a tax on health care, which would ultimately fall to the bottom line,” Hanger said in an interview on Thursday.

But now the Shenandoah Valley Republican – who fought off fierce attacks by his own party to win re-election in 2015 – is the pivotal vote, along with Sen. Frank Wagner, R-Virginia Beach, in the battle over the budget in a Senate governed by a shaky 21-19 majority.

Hanger, co-chairman of the Senate Finance Committee with Norment, said he still doesn’t like the provider assessment, but thinks that at least part of the money it would generate should be spent on health care, especially to help people with mental illness and other behavioral disorders.

He also sees the assessment, which would generate about $307 million in the biennium, as a way for the state to help stabilize commercial insurance markets that have become unaffordable for Virginians without subsidies for their monthly premiums because of the political warfare in Washington over the Affordable Care Act.

“With a provider assessment, that would be some advantage,” Hanger said.

Hospitals divided on issue

Virginia’s hospitals are divided over the provider assessment, which they regard a less preferable way to cover costs that state general fund tax revenues should pay. Their official position is they’re willing to consider a tax on hospital revenues in exchange for expanded Medicaid coverage that would help pay for care that is entirely uncompensated now.

However, their position hasn’t changed since Connaughton’s letter that the assessment would be governed by conditions to ensure that the money it generates doesn’t pay for state services other than health care. Hospitals would prefer that the terms of the assessment be enacted in code, not just the budget, and administered by the private sector rather than state government.

“Members of the hospital community have come to the table as partners in the conversations about increasing coverage access, including those involving a provider assessment to finance expansion-related state costs, as long as the safeguards insisted on by hospitals are part of any final arrangement,” VHHA spokesman Julian Walker said in a statement.

The assessment, as proposed originally by McAuliffe in his parting budget in December and again by Northam in the new budget for the special session, would apply to 70 private acute-care hospitals. It would not apply to Children’s Hospital of the King’s Daughters, which doesn’t treat the adults who would be covered by Medicaid expansion, and VCU and UVA also would be exempt as public teaching hospitals.

Hanger wants to reconsider the exemption for VCU and UVA, which together receive about $250 million in state subsidies for indigent care and graduate medical education in the current budget. “I know that would be getting into a touchy area, but it’s a conversation I want to have,” he said.

Varied effect on hospitals

Medicaid expansion also benefits some hospitals and health systems more than others. For example, Valley Health System gets about 30 percent of its revenues from patients in nearby West Virginia, which already has expanded its Medicaid program, so it would benefit less from expansion of Virginia’s program, said President and CEO Mark Merrill, who also is chairman of the VHHA board of directors.

Expanding coverage would help the Winchester-based health system, but Merrill said, “We’re just not getting as big a windfall.”

On the other hand, a provider assessment would apply to all health system revenues, including those from West Virginia. But two of the system’s acute access hospitals – small, rural operations based in Luray and Woodstock – would be exempt from the proposed assessment.

“Even with the assessment, it would be a net positive for our health system if Medicaid was expanded,” Merrill said.

Augusta Health, based in Fishersville, operates in Hanger’s district, and its leaders agree with their senator that a tax on hospital revenues isn’t necessary to expand Medicaid.

“Our preference would be to not have a provider tax,” said the Rev. John C. Peterson, a Presbyterian minister in Staunton who serves as chairman of the health system’s board of directors. “If that’s the only way to do it, it would be something we would consider.”

Peterson sees Medicaid expansion as good for the community because it would benefit “the working poor.”

“They can’t afford health care coverage, they can’t afford medical care, and yet they’re working,” he said.

Medicaid currently reimburses hospitals a little more than 70 percent of their costs, rather than the 78 percent established as a target in state law. The hospitals want any deal on a provider assessment to include a plan to raise the reimbursement rate to the level of Medicare at about 88 percent, but Peterson acknowledged, “70 cents (on the dollar) is more than zero.”

Finding a solution that works for all hospitals is a tall task, said former Secretary of Health and Human Resources Bill Hazel, who oversaw the work group that met in 2015 to talk about provider assessments and supplemental Medicaid payments to hospitals.

“The hospitals are not all in the same place,” said Hazel, a retired orthopedic surgeon. “They never have been.”

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As Va. budget fight resumes, hospitals balance benefits of expanding Medicaid, cost of tax to pay for it