Brewer's Arizona Medicaid Cuts May Slam Hospitals as Patients Lose Funding

When 62-year-old John Schoenhoft’s abnormal heartbeat landed him in a Cottonwood, Arizona, hospital for three days in August, he had no insurance, his hours as a home health caregiver had been cut and his wife was out of work.

Taxpayers picked up his $30,000 bill under Arizona’s Medicaid system. Whether it would cover a future occurrence will depend on Governor Jan Brewer’s plan to strike as many as 280,000 adults from Medicaid, the health-care program for the poor funded by the state and federal governments, to help bridge a $1.2 billion budget gap for the year that begins July 1.

“There are no more options,” said Schoenhoft, who said he couldn’t afford insurance even if he could qualify with his condition.

“It’s just a business decision to them,” he said of his potential Medicaid loss. “They don’t see the humanitarian side. They don’t see that it will cause more problems down the line.”

The Medicaid program that covers 48 million Americans is the single biggest expense for states, consuming 22 percent of their total $1.6 trillion in expenditures, according to a National Governors Association report. That makes it a primary target of governors grappling with budget deficits of as much as $125 billion in the coming fiscal year, from Republicans like Brewer and Florida’s Rick Scott, to Democrats including New York’s Andrew Cuomo and California’s Jerry Brown.

Nowhere has the national Medicaid crisis come under a harsher glare than in Arizona, where Brewer, 66, drew international condemnation for being the only governor to stop paying for certain organ transplants, including hearts and livers. Cutting Medicaid for about one in five Arizonans now on the rolls, as she proposes, would help save $541.5 million in the coming year.

‘Pushing the Cost’

“It’s not like the care will stop,” said Vernon Smith, a health-policy consultant in Lansing, Michigan, and former director of that state’s Medicaid program. “The state is essentially pushing the cost burden of this population onto the public hospitals.”

That prospect may cost Banner Health System, Arizona’s largest health-care provider and second-largest private employer, which wrote off $80.2 million in charity care in 2009, according to company filings. Charity would balloon to “hundreds of millions” of dollars a year if Brewer’s plan is adopted, said Bill Byron, a spokesman for closely held Banner.

Banner, a secular, nonprofit company created in 1999 by the merger of Methodist and Lutheran church-founded hospital chains, has sold about $2.24 billion in outstanding municipal bonds.

Bond Spread

A 2035 revenue bond sold in 2008 by Banner through the Arizona Health Facilities Authority rated A+ traded at an average yield of 6 percent on Feb. 24, according to Municipal Securities Rulemaking Board Data. That’s 132 basis points over top-rated 24-year debt, according to a Bloomberg Valuation index.

The same securities traded at a so-called spread of 106 basis points to a 25-year index on Oct. 1, when Brewer eliminated state-paid transplants. A basis point is 0.01 percentage point.

In Arizona, where 13 of Banner’s 23 hospitals are located, about one-fourth of its patients are covered by Medicaid, Byron said. Brewer’s cuts may force the company to fire staff, reduce service and negotiate “far, far higher rates for private insurers,” Byron said.

Boosting insurance costs could force businesses to shrink payrolls or reduce employee benefits, said Suzanne Taylor, senior vice president of public policy for the Arizona Chamber of Commerce and Industry, which opposes Brewer’s plan. An Arizona State University study last year estimated that slashing Medicaid like Brewer proposes would cost 30,000 jobs, including 13,600 in health-care and others in construction and retailing.

‘Don’t Disappear’

“The costs just don’t disappear from the system,” Taylor said. Former Medicaid recipients “will still be seeking care in the emergency rooms and those costs will be passed on.”

Matthew Benson, a spokesman for the governor, said reductions are needed to fix the state budget and preserve care for those who would remain on Medicaid, including children, pregnant women and the disabled.

“I don’t think she has illusions that cutting a population this significant from health care can be done without significant ramifications,” Benson said, referring to Brewer. “But there are significant ramifications for having a billion- dollar deficit, too.”

Expanded Medicaid

The governor’s proposal would roll back a Medicaid expansion approved by voters in 2000 for poor adults without dependent children. Delaware, Hawaii, Massachusetts, New York and Vermont have similar programs.

Even with the increase, about 20 percent of Arizonans were left uninsured, according to the Kaiser Family Foundation, a nonprofit health-care research organization in Menlo Park, California. Arizona ranks fourth in the rate of uninsured, behind Texas, New Mexico and Florida, and tied with Nevada, Kaiser said. Brewer’s cuts may bump the rate to 22.6 percent, estimated St. Luke’s Health Initiatives, a Phoenix-based health policy group.

When Brewer first announced the cuts in January, the proposal seemed likely to run afoul of federal health-care reform rules that require states to maintain existing benefit levels. That changed Feb. 15 when the U.S. Department of Health and Human Services said Brewer could allow a federal waiver to expire without consequences, dropping coverage for 250,000 of the 280,000 recipients she targeted.

Federal Match

Trimming the Medicaid program, known as the Arizona Health Care Cost Containment System, would save $541 million in the first year and almost $1 billion in the following fiscal year, according to the governor’s office. Because the federal government matches state dollars at a rate of 2-to-1 or more, the governor’s office estimated health-care providers may see a drop of $1.6 billion in the first year.

To avert such a loss, the Arizona Hospital and Healthcare Association proposed a tax on its members. The one-year assessment on hospital revenue would generate $300 million -- $200 million to help pay for people who would otherwise be cut from the Medicaid program and $100 million that would go back to hospitals to attract matching federal funds and make the hospitals whole.

Legislative leaders have been cool to the proposal. It’s “too little, too late,” said House Appropriations Chairman John Kavanagh, a Republican from Fountain Hills.

Services Dwindle

Some Republican lawmakers have pressed for cuts in Medicaid for years, even during boom times. Services have dwindled since Brewer replaced Democrat Janet Napolitano as governor two years ago. Enrollment in a program for low-income children has been frozen. Medicaid benefits, from primary care visits to prosthetics coverage, have been cut.

For some lawmakers, Brewer’s plan doesn’t go far enough. Several bills propose to chip away more at Medicaid, including one that would eliminate it altogether. Shutting Medicaid would trim $1 billion from general-fund spending and cost almost $7 billion in federal matching funds, according to Tom Betlach, the state Medicaid director.

Kavanagh said he supports the governor’s effort to scale back Medicaid and would encourage it even without the current fiscal crisis.

“I think that government has to provide a safety net,” Kavanagh said, “but has to be careful it doesn’t turn into a comfortable hammock.”

To contact the reporter on this story: Amanda J. Crawford in Phoenix at amandajanecrawford@gmail.com

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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