1. Dan Stultz, M.D., FACP, FACHE President/CEO Texas Hospital Association Texas State University HCA Students-Annual Conference October 21, 2011 The 2011 Legislative Session in Review Highlights and Issues of Importance to Hospitals

2. 2012-2013 State Budget  House and Senate both filed initial versions of budget that assume no new revenue  Projected $72B in available revenue to fund an estimated $99B in current services  Shortfall approximately $27B –Current services impacted by Medicaid caseload growth, public school enrollment, etc. –Loss of Federal stimulus funding  Historically dire budget situation – 2003 shortfall was “only” $10B resulting in significant cuts 2

3. Factors driving the shortfall  Structural deficit – business margins tax  Sales tax projections down over biennium –Sales taxes are 56% of state revenue  Teacher and state employee retirement and health care costs have skyrocketed  Increased demand for services as state population grows, ages  Loss of enhanced FMAP under federal stimulus act 3

4. Factors driving the shortfall (cont.)  Missed projections for Medicaid caseload, service utilization in 2010-2011 4

5. No Political Will to Address Revenue  Nov. 4, 2010 elections –101/150 Republicans in House –Tea Party effect on “no new revenue”, no RDF  Rainy Day Fund only used for current biennial shortfalls  Focus on temporary “non-tax revenue”  Payment deferrals  Unwillingness to modify margins tax  Focus on “administrative efficiency:” –Higher and public education –Medicaid 5

6. Spreading the Pain?  $4 billion cut from public schools  $4.8 billion unfunded in Medicaid  $1 billion cut to higher education, including financial aid and institutional funding  $2.2 billion ”smoke and mirrors” deferred payments to the Foundation School Program  $0 appropriated from $6.6 billion Rainy Day Fund for the current biennium 6

7. Budget Overview - Medicaid  Substantial $4.8B under-funding of program –Expected to be made up thru supplemental appropriation in 2013 (Rainy Day Fund)  True spending reductions –Cost-containment initiatives –Medicaid managed care expansion statewide  Gray area –Cost-containment for federal “flexibility” 7

8. Budget – Hospital Impact  8% rate cut for hospitals (added to 2% cut in 2010-11)  No rate cut for doctors (had 2% cut in 2010-11)  Statewide Hospital SDA ($30 M savings - $20M mitigation)  Expansion of Medicaid managed care ($272 M in savings)  Potentially punitive UPL riders replaced with enhanced HHSC data collection requirements 8

9. Cost Containment Riders in Budget  Rider 61 requires HHSC to achieve $450m GR funds through: (of 30 items) –Payment reform and quality based payments –Increasing neonatal intensive care management –More appropriate ER rates for non-emergent care –Maximizing copays in Medicaid –Improving birth outcomes by reducing birth trauma and elective inductions –Increasing fraud, waste and abuse detection 9

10. Cost Containment Riders in Budget  Rider 59 requires HHSC to save $700m GR funds by pursuing a waiver from CMS to allow Medicaid flexibility including : –Greater flexibility in standards and levels of eligibility –Better designed benefit packages to meet demographic needs of Texas –Use of co-pays –Consolidation of funding streams for transparency and accountability –Assumed responsibility by the Feds of 100% of the health care costs of unauthorized immigrants. 10

11. Concerns with Hospital Payment System  Impact of rebasing / SDA system that pays similar hospitals differently  Unequal ways to access supplemental payments (reimbursement = 61% of costs)  “Inability” of state to adequately fund program  Limited interest in provider tax  “Transparency” of local UPL programs  Need to protect of UPL under Medicaid managed care expansion 11

12. Nursing & Trauma Funding  Nursing Shortage Reduction Fund = $30 M total for the biennium – will allow nursing schools to maintain increased enrollment  Nursing education received $5-6 million from tobacco settlement funds  Provides for $57.5 million per year in funding for designated trauma facilities, which is a 23 percent reduction from the $75 million per year originally appropriated for the current biennium. 12

13. Next Steps  Keep an eye on D.C. - Deficit reduction = cuts to hospitals - “Medicaid reform”  Continued discussions about hospital payment reform - UPL waiver - Provider tax  Develop coalitions to address state’s structural revenue deficit 13

14. THA Mission THA brings value to Texas hospitals by leading change that enhances access to safe, affordable, quality health care. 14

15. Key Implications and Questions for Hospitals That Are Troublesome 1)Delivery System Reform or Payment Reform 2)Is it or isn’t it reform? Feels “stalled”. 3)Managing in transition; budgeting in change. 4)Acquisition and consolidation of hospitals and systems will continue. 5)New models of care delivery 6)Physician alignment strategy - issues 7)Can we pay the physicians in a way that incentivizes the right behavior and care, that “gets them in the game?” 15

16. Key Implications and Questions for Hospitals Payment System Reform  UPL Waiver – monitoring, input; the need for the government to work this out with us.  The Provider Tax issue and the need for an in-depth analysis  State DSH Program  Federal Payment Cuts  The Future of Medicaid and Medicare – are they sustainable?  Bundling of Payments and Other “Ideas” to Reduce the Costs or to Reduce the Reimbursement to Providers 16

17. Key Implications and Questions for Hospitals The Elephants In The Room:  There are unnecessary and duplicative costs in the system.  There is high variation in all parts of the country and all parts of the state.  We know the physicians are key, but no one (very few) has changed the payment system to control costs.  UPL in Texas is a publically, not well known, huge financing vehicle that keeps hospitals above water. Tremendous anxiety over this issue is in the state now. 17

18. Overview: Market Changes  Realignment of capital investments  Constrained reimbursement levels from state and federal pressure  Passive payers transitioning to active purchasers  Market consolidation  Growth in physician employment – at what rate?  Workforce shortages  Careful watch by financial groups, banks, markets 18

19. Mandatory Medicare Quality P4P Initiatives – Still Coming Inpatient Readmissions Implemented October 1, 2012 (FFY 2013) Reduces Medicare reimbursement by $7 billion / 10 years nationwide Inpatient Value- Based Purchasing Implemented October 1, 2012 (FFY 2013) Budget neutral; redistributive within PPS system Health Care- Acquired Conditions Implemented October 1, 2014 (FFY 2015) Reduces Medicare inpatient hospital reimbursement by $ 1.4 billion / 10 years nationwide EHR Meaningful Use (ARRA) Medicare payment penalties assessed against eligible hospitals and physicians that fail to be meaningful users by October 1, 2014 (FFY 2015) 19 FFY 2013 FFY 2015

20. The Future For You  Manpower Needs  Response to Care/Evidence Based  Physician Comp Formulas that Incentivizes the Right Behavior  It has to change  Get rid of the elephants in the room 20

21. Dan Stultz dstultz@tha.org 512-465-1012 Questions?