Topic:
UNCOMPENSATED CARE POOL; HEALTH INSURANCE;
Location:
INSURANCE - HEALTH - UNCOMPENSATED CARE;

OLR Research Report


September 17, 1999

 

99-R-0967

UNCOMPENSATED CARE, DISTRESSED HOSPITAL FUND

 
 

By: John Kasprak, Senior Attorney

You asked for a history of the state's experience with uncompensated care. You also want information on the "distressed hospital fund." (Information on the federal reimbursement issue is included in an attached memo from the Office of Fiscal Analysis.) This report updates an earlier OLR Report (99-R-0469) by including relevant legislation passed in the 1999 session.

SUMMARY

Table 1 following outlines the significant legislative actions and court decisions concerning the state's uncompensated care program.

Table 1: Significant Events Concerning Connecticut's Uncompensated Care Program (1991 to present)

Legislation/Litigation

Description

♦ PA 91-2, November Special Session

♦ Uncompensated Care pool (UCC) created

♦ PA 92-16, May Special Session

♦ Clarifications concerning pool assessments; assessment amount decreased

♦ PA 93-44

♦ Converted portion of assessment to a 6% sales tax on hospital services

♦ PA 93-229

♦ Changed assessment from a "payer" to a "provider" tax on hospital services

♦ Litigation (1994)

♦ Federal District Court holds UCC Pool preempted by ERISA ("1199" case)

♦ PA 94-9

♦ Terminated pool, replaced with General Fund appropriation for uncompensated care. Maintains 6% sales tax on hospital services; establishes 11% tax on hospital gross earnings

♦ Litigation (1994)

♦ Connecticut Hospital Association (CHA) sues, says PA 94-9 preempted by ERISA. Federal district court holds law preempted

♦ Late 1994

♦ Uncompensated Care program suspended

♦ U.S. Supreme Court Decision (April 1995)

♦ Supreme Court finds New York hospital surcharge law not preempted by ERISA ("Travelers" decision)

♦ PA 95-160

♦ U.S. Supreme Court decision important to passage of this act. Act reaffirmed operation of uncompensated care program. 6%sales tax, 11% gross earnings tax retained

♦ Federal Appellate Court Decisions (September 1995)

♦ 2nd Circuit reverses District Court decisions (1199, CHA cases)finds Connecticut uncompensated care laws not preempted by ERISA

♦ PA 96-144

♦ Reduced hospital gross earning tax (now 7%, becomes 6% on October 1, 1999).

♦ PA 96-238

♦ Eliminated hospital net revenue compliance beginning hospital fiscal year 1997

♦ PA 97-2

♦ Exempted children's hospitals from sales tax on hospital services and from gross earnings tax

♦ PA 99-173

♦ Reduces hospital gross earnings tax from 7% to 4% effective October 1, 1999 (instead of to 6%). Also reduces sales tax on patient care from 6% to 5% as of July 1, 1999.

♦ PA 99-279

♦ Exempts John Dempsey Hospital from current DSH payment system. Also eliminates DSS commissioner's duty to adjust interim DSH payments to hospitals to reflect the actual, rather than projected, amount of uncompensated care for hospital FYs 1998 and 1999, under certain conditions.

The "Distressed Hospital Fund" was established in 1995 (PA 95-306). It was supposed to provide $25 million to qualifying hospitals in each of fiscal years 1995-96 and 1996-97. But the program only operated for one year as funding was eliminated for the second year. It has not operated since.

Public Act 99-2, June Special Session, authorizes the Office of Health Care Access (OHCA) to provide loans to acute care hospitals to help them achieve financial stability and assure health care delivery in their service areas.

BACKGROUND

Uncompensated care is generally defined as a hospital's bad debt, charity care, and government underpayments (Medicaid, Medicare, and CHAMPUS (Civilian Health and Medical Program of the Uniformed Services)). In order to account for this uncompensated care, costs are shifted to other payers who are paying their bills. Hospitals were authorized, through the state Commission on Hospitals and Health Care's (now known as the Office of Health Care Access (OHCA)) hospital budget review system, to fund their uncompensated care by cost shifting. In effect, some payers paid higher hospital rates to compensate for those who were not paying their full bill or were not paying at all. The state permitted cost-shifting so that hospitals would have the ability to provide care to all patients, regardless of a patient's ability to pay.

In 1990-1991, a controversy arose between the states and the Bush administration over states' use of revenues from taxes on and donations from medical providers as a basis for federal financial participation (i.e., federal matching funds) in the Medicaid program. As of late 1991, about 23 states were taxing medical providers, most often hospitals, and using most, if not all, of the revenues to obtain a federal match. Bush administration officials charged that this procedure shifted billions of dollars of Medicaid costs from the states to the federal government. States disagreed, arguing that the revenue-raising mechanism was legal, the funding paid for states' needed health care services, and that in many cases the fiscal stress in states made such funding arrangements necessary.

Following negotiations between representatives of the National Governors' Association and the Bush administration, a compromise law was passed in November 1991 that set parameters on the use of health care-related taxes. Generally, that law said states could tax medical providers without adverse consequences on federal matching funds for Medicaid expenditures as long as the tax was applicable to all members of a provider class, was uniform and broad based, and did not hold providers harmless for the costs of the tax.

CREATION OF THE UNCOMPENSATED CARE POOL (PA 91-2, NOVEMBER SPECIAL SESSION)

The General Assembly established the Uncompensated Care Pool (UCC pool) (PA 91-2, November Special Session) for two primary reasons: (1) to level the playing field for hospitals serving a "disproportionate share" of government-financed, low income, and uninsured patients by providing a method of funding the cost of care provided to these patients and (2) to take advantage of the federal provider specific tax amendments of 1991 in order to obtain federal revenues for the state.

Connecticut chose to take advantage of the available federal dollars because:

1. uncompensated care is, in substantial part, the result of providing hospital services to low income and Medicaid patients;

2. hospitals could be required to remit a uniform, statewide uncompensated care assessment to the state;

3. hospitals could be reimbursed out of the Department of Social Services' Medicaid account for authorized uncompensated care actually given to patients; and

4. the state would then qualify for 50% federal matching funds.

As originally designed under PA 91-2, November Special Session, Connecticut's UCC pool was funded by an assessment (almost 31%) on all payments to hospitals by payers other than Medicare, Medicaid, and CHAMPUS. The pool paid for the approved uncompensated care costs of hospitals; for underpayments to hospitals by Medicare, Medicaid, and CHAMPUS; and for the costs and obligations resulting from the pool.

Funds from the pool were transferred to the Department of Income Maintenance's (DIM, now DSS) Medicaid account so that DIM could make weekly payments to hospitals. These payments were Medicaid "disproportionate share") payments thus entitling the state to the federal matching funds. ("Disproportionate share" (DSH) payments refer to additional payments required by federal law to hospitals serving a disproportionate share of low-income patients.)

PA 91-2 also required hospitals to include the following information about the UCC assessment: (1) a notice that the price charged includes a percentage assessment for uncompensated care, (2) identification of the dollar amount of the assessment, and (3) a statement on its face that says that payers historically have been paying for costs of care not fully reimbursed and that the state has established a new mechanism for funding such care.

SUBSEQUENT LEGISLATIVE CHANGES (PA 92-16, MAY SPECIAL SESSION; 93-44; 93-229)

In November 1992, the federal Health Care Financing Administration (HCFA) published regulations that interpreted a number of sections of the 1991 law on health care-related taxes and the federal matching dollars. States argued that HCFA's interpretations (1) did not reflect the spirit of the previous year's negotiations and (2) restricted the use of tax revenues beyond the intent of the law. Connecticut, for example, faced substantial federal financial penalties for failure to comply with the new regulations. The General Assembly had passed PA 92-16 of the May Special Session in order to minimize the penalty the state might face. This act clarified that the pool was funded by an assessment on all hospital charges for services to be paid by all nongovernment payers. The act also no longer required the pool to pay for underpayments by government (Medicare, Medicaid, CHAMPUS) payers. The pool continued to pay for a hospital's approved uncompensated care (bad debt, charity care). Instead of an almost 31% assessment on each hospital bill for the pool, the changes in PA 92-16 dropped the assessment to about 8.4%.

Despite these adjustments to the pool, the state still faced federal financial penalties concerning its Medicaid revenues because the federal government claimed, in effect, that the state was collecting excess uncompensated care pool revenue and getting more federal dollars than it was entitled to. The state was limited by a federal cap on disproportionate share (DSH) payments, which limit Medicaid to paying no more than 12% of its Medicaid expenditures in DSH payments.

The state's response was to further amend the pool law in the form of two 1993 acts. PA 93-44 converted a portion of the existing 8.4% pool assessment to the 6% sales tax. Thus, the pool was now funded by a 6% sales tax on hospital services plus an assessment (2.4% ) on all hospital charges for patient services except those rendered to government payers. By reducing the assessment, the state would reduce its potential financial penalty without a loss of revenue to the hospitals providing the uncompensated care. Effective October 1, 1993, this act increased the pool assessment to an estimated 12.6% (plus the 6% sales tax), thus allowing the pool to pay hospitals for a portion of government underpayments not previously covered by the pool. This increase would allow the state to maintain its current level of federal revenue obtained through disproportionate share payments, and not be in violation of the federal regulations, as well as begin to obtain additional federal money. Basically, federal law provided that to the extent state revenue was generated from general tax sources, those sources wouldn't be governed by the federal provider tax law. Thus, part of the uncompensated care assessment was converted to a sales tax.

Under PA 93-44, the pool also would fund Emergency Assistance to Families (EAF) payments which would generate more federal revenue for the state. EAF, a program under the federal Social Security Act, provides a 50% federal match of state payments for services provided to any family in crisis without sufficient funds otherwise. Many of those currently receiving uncompensated care in hospitals would be eligible for EAF. Consequently, revenues from the sales tax could pay hospitals for services to this population through the pool as EAF payments. This would allow the state to get a federal match on payments made to hospitals for emergency assistance to families, which would not count as a disproportionate share (DSH) payment and therefore not subject to the federal DSH cap.

The second 1993 act, PA 93-229 specified that the pool was funded by an assessment on hospitals instead of by an assessment on hospital charges. This changed the assessment from a "payer" to a "provider" tax. It did not change the UCC assessment amount and still included the 6% sales tax. Under this act, the assessment was a uniform percentage of the hospital's revenues for patient care services, except those services provided to patients covered by government payers. Any payment amount received by a hospital had to be used to pay the sales tax and assessment in full before it was used to cover the remainder of the charges. After a hospital collected the assessment and remitted it to the state, it was pooled in an amount maintained by DSS and then periodically redistributed to the hospitals in proportion to their levels of uncompensated care.

LAWSUIT CHALLENGING UCC POOL (1994)

In a February 25, 1994 decision, the Connecticut U.S. District Court held that the state's Uncompensated Care Pool Act was preempted by the federal Employee Income Security Act ("ERISA"; New England Health Care Employee Union District 1199 v. Mt. Sinai Hospital, Civil Action No. 2:92-CV-1012, U.S. District Court for District of Connecticut, February 25, 1994).

The New England Health Care Employees Union 1199 filed the lawsuit in December 1992, arguing that it was illegal for the state to collect an uncompensated care surcharge on hospital bills covered under an employee welfare benefit plan.

The suit was brought against Mount Sinai Hospital for seeking payment of an uncompensated care assessment from a participant of the union's employee welfare fund. The fund reimbursed the hospital for the participant's charges except for the portion of uncompensated care included in the bill.

Federal Judge Jose Cabranes enjoined the state (through the Commission on Hospitals and Health Care (CHHC)) from enforcing the act against the plaintiff fund. Defendant Mount Sinai Hospital (and other hospitals which were "signatory hospitals" pursuant to an earlier consent order in the case) were barred from including in the hospital bills of patients who are fund participants or beneficiaries charges which exceed those authorized by CHHC in accordance with this decision. The court also ordered refunds to the plaintiff fund.

The court found that Connecticut's act clearly affected ERISA plans and their participants disparately. It stated, "the Connecticut statute depends on ERISA plans to accomplish its purpose. Data submitted by the plaintiffs, and not contested by the defendants, suggest that ERISA plans provide as much as 70% of the funding for the act." According to the court, "without ERISA plans, the act would not be economically viable."

Because the act contemplates the existence of ERISA plans and depends on their participation (the court noted that the act has a provision calling for the pool's termination if ERISA plans are exempted by judicial decision from paying the assessment), it is preempted by ERISA according to the court.

The union argued that placing surcharges for uncompensated care on the fund's participants violated ERISA. The union did not pay the uncompensated care portion of the hospital bill because, they argued, it forced them to help pay for health care for nonmembers.

ERISA regulates pension and welfare benefit plans. It exempts all such employee benefit plans, including their health insurance coverage, from state regulation. This broad preemption provision declares that the act "shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan."

The ERISA preemption is qualified by an "insurance savings clause" which states that nothing in ERISA "shall be construed to exempt or relieve any person from any law of any state which regulates insurance, banking or securities." Thus, state law may regulate only those activities that fall directly within the core risk-spreading activity of insurance.

One of the significant policy effects of the ERISA preemption is to promote employer self-insurance. The insurance savings provision in ERISA is limited by a provision that prohibits states from deeming a benefit plan to be insurance. The effect of this is that self-funded insurance plans are entirely exempt from state regulation, regardless of the scope of the savings clause.

RESTRUCTURING OF CONNECTICUT'S UCC PROGRAM (PA 94-9)

In response to Judge Cabranes' order, the General Assembly passed PA 94-9, effective April 1, 1994. This act terminated the UCC pool and replaced it with a General Fund appropriation for uncompensated care. Before its termination in PA 94-9, the UCC pool was funded by an assessment on all hospitals and revenue from the state's sales tax. Hospitals were required to pay the assessment and the tax into the pool. The monies received into the pool were then redistributed to hospitals as disproportionate share (DSH) payments in proportion to the individual level of un-and under-compensated care that they provided to their patients.

Under the act, the uncompensated care program was funded by an appropriation from the state's general fund. The Department of Social Services made disproportionate share payments and Emergency Assistance to Families payments to hospitals from this appropriation ($304 million for SFY 1995). Public Act 94-9 also contained provisions that maintain the state's 6% sales tax on hospital patient care services and established a new 11% tax on each hospital's gross earnings. Revenues from each of these taxes were paid into the General Fund. The income from this new system was leveraged to generate about $150 million in federal matching reimbursement per year.

As of April 1, 1994, the act allowed a hospital to determine its own rates on charges without regulation by CHHC. Under PA 94-9, CHHC would establish a net revenue limit for each hospital beginning January 1, 1995.

LITIGATION CONCERNING PA 94-9

In August 1994, the CHA filed a lawsuit in federal district court concerning PA 94-9. Specifically, CHA sought a temporary restraining order and a preliminary injunction against the state's continued enforcement of PA 94-9 on the grounds that certain of its provisions were preempted by ERISA along with preliminary and permanent injunctive relief barring the state from continuing to enforce these provisions (Connecticut Hospital Association v. Donald Pogue, DC Conn., No. 3:94 CV01224 AVC, November 17, 1994).

In its lawsuit, the CHA charged that the state's 6% sales tax on patient services and the 11% hospital gross earnings tax were preempted by federal law because they related to ERISA benefit plans. Revenues from these taxes were directed into the state's general fund and a new program was established to finance the cost of hospital uncompensated care.

In his November 17, 1994 ruling, U.S. District Court Judge Alfred Covello found that the sales taxes, gross earnings taxes, and revenue caps established by PA 94-9 were preempted by ERISA. Citing numerous other court decisions, Judge Covello found that "statutes that have a substantial economic impact on ERISA plans, causing such plans to either increase costs or reduce benefits, are preempted by ERISA."

The court also stated that even though the state argued that the Connecticut tax is a tax of general application, "its primary directive is aimed at the health care industry, which is 'the realm where ERISA welfare plans must operate'." The sales tax at issue in the case has a substantial impact on plans because much of the patients' care services are funded by ERISA plans, noted the court. Even if the tax is one of general application and thus treats ERISA and non-ERISA plans in the same manner, the Second Circuit Court of Appeals has ruled that ERISA preempts such laws even if they have "only an indirect effect on a pension plan."

The court also found that the gross earning tax of PA 94-9 "relates to" ERISA benefit plans because hospitals derive most of their gross earnings from patient care services, a large portion of which are paid by ERISA plans. The district court cited the 1994 Second Circuit case of NYSA-ILA Medical Services v. Axelrod, which struck down a New York law that taxed gross receipts of health services providers insofar as the tax applied to the gross receipts of medical centers operated by an ERISA employee welfare benefit plan. In that case, the court found the gross earnings tax "depletes those assets earmarked for the provision of health care benefits and, as a result, will cause the (fiduciary) to reduce benefits provided and/or to charge beneficiaries more in the future for benefits received."

On the issue of the hospital net revenue cap established by PA 94-9 (which was scheduled to take effect January 1, 1995), the district court stated the cap "constitutes an attempt to regulate hospital rates and authorizes shifting costs of uncompensated care from government payers to private pay patients. For all of the reasons previously discussed, the court concludes that these sections also have a substantial impact on ERISA benefit plants, and are therefore preempted by ERISA."

On November 30, 1994, Judge Covello denied the state's motion for clarification of his original order in this case. The state, in its motion, argued that Covello's original decision should just apply to CHA's self-insured plan for its employees. The judge rejected that interpretation, but also rejected the hospitals' argument that this order struck down the new taxes in their entirety. In his November 30 order, Covello specified that the gross earnings tax and sales tax could be applied to hospital care provided to patients whose insurance is not provided by employers under ERISA.

On December 15, 1994, Judge Covello denied the state's motion for a stay of his decision in CHA v. Pogue. The state had asked for a stay of the decision pending an appeal.

RELATED ISSUE—CHA v. O'NEILL DECISION (1995)

In 1990, the U.S. Supreme Court held that health care providers could sue in federal court to enforce their legal right to "reasonable and adequate" reimbursement for the cost of treating patients covered by Medicaid. The case before the court focused on what Congress meant in 1980 when it amended the Medicaid law (the "Boren Amendment") to give the states more flexibility in setting reimbursement rates. Under the original 1965 law establishing Medicaid, states were required to reimburse the reasonable costs of services that hospitals actually provided. The Boren Amendment said that the rates only had to be "reasonable and adequate" to meet the costs which must be incurred by efficiently and economically operated facilities. (The Boren Amendment was originally enacted for nursing homes in 1980 and extended to hospitals in 1981.)

A number of hospitals and hospital associations have sued their respective states under the Boren Amendment seeking "adequate Medicaid funding." In Connecticut, the CHA filed a Boren Amendment lawsuit in 1990 against the state (CHA v. O'Neill). In April 1994, a federal judge held that Connecticut's method of reimbursing hospitals for Medicaid patients was null and void. In its place, the judge ordered DSS to immediately reimburse hospitals on the basis of Medicare principles of reimbursement for 60 days, until a new payment could be created covering the Medicaid population. The CHA lawsuit focused on the difference between the state's payment schedule for inpatient hospital services and their actual costs.

PA 94-9 allowed the state to use appropriations for the Uncompensated Care Program to increase standard Medicaid payments to hospitals to address the CHA v. O'Neill decision.

In a January 30, 1995 decision, the United States Court of Appeals for the Second Circuit set aside the U.S. District Court's decision concerning the state's system for reimbursing Medicaid hospital charges (Connecticut Hospital Association v. Weicker, Docket Nos. 94-6112, 6150).

The Second Circuit reversed the summary judgment to the hospitals, vacated the preliminary injunction, and remanded the case to the district court for further proceedings. The Second Circuit basically found that Connecticut had made findings sufficient to support assurance to the federal government that it was in compliance with the Boren Amendment.

U.S. SUPREME COURT DECISION ON NEW YORK HOSPITAL SURCHARGES (SPRING 1995)

The U.S. Supreme Court issued an important decision in April 1995, concerning a hospital surcharge program. In an April 26, 1995 unanimous decision, the U.S. Supreme Court held that the New York statute imposing surcharges on hospital bills paid by commercial insurers and HMOs, in order to compensate hospitals for state-imposed limits on what they could charge patients covered by Blue Cross and Blue Shield plans, was not preempted by ERISA (New York State Conference of Blue Cross and Blue Shield Plans v. Travelers Insurance Co.; this case is also referred to as "Travelers v. Cuomo"). The court found that New York's surcharge provision did not "relate to" employee benefits plan within the meaning of the ERISA preemption and thus, was not preempted. In so ruling, the Supreme Court reversed the Second Circuit's decision which had invalidated New York's surcharge system as preempted by ERISA.

This decision was important for Connecticut. Shortly after the Supreme Court's decision, the Connecticut legislature restored the uncompensated care program's operation (see PA 95-160 below.) The Travelers decision was viewed as allowing Connecticut's uncompensated care system to operate.

FINAL SETTLEMENT OF POOL OBLIGATIONS (PA 95-160)

In the wake of the Supreme Court ruling, the Connecticut legislature enacted PA 95-160. It sought to reaffirm the operation of the uncompensated care system and set aside any confusion created by the court decisions. It required final settlement of all prior uncompensated care pool obligations and liabilities by June 15, 1995. All pool assessments and other hospital liabilities had to be paid to the state, and all pool payments by the state to the hospitals had to be made by that date.

The 6% sales tax on hospital patient care services and the 11% hospital gross earnings tax remained in place. This act also authorized, instead of required, the state to make payments to hospitals for uncompensated care. It also required each hospital to include all applicable taxes in the price for each item in its pricemaster. (A hospital's "pricemaster" is its detailed list of its charges for services.)

The act continued a "net revenue cap" for each hospital and subjected hospitals to compliance adjustments. ("Compliance adjustments" are payments a hospital must make to the state if its revenues exceed its authorized net revenue cap.)

SUBSEQUENT FEDERAL APPELLATE COURT DECISIONS ON CONNECTICUT'S UNCOMPENSATED CARE POOL LAWS (1995)

In September of 1995, the U.S. Court of Appeals for the Second Circuit reversed the district court's decision and upheld Connecticut's original hospital uncompensated care statute (New England Health Care Union, District 1199 v. Mt. Sinai Hospital, CA 2, September 11, 1995). The Second Circuit held that ERISA did not preempt the Connecticut law (the original law PA 91-2, November Special Session).

The next day (September 12, 1995) the Second Circuit reversed the district court's decision that had found Connecticut's second uncompensated care statute (PA 94-9) was preempted by ERISA because of its impact on employee plans. (Connecticut Hospital Association v. Weltman, CA 2, September 19, 1995). The Second Circuit upheld Connecticut's sales tax on hospital bills and hospital gross earnings tax system.

REDUCTION IN HOSPITAL TAXES (PA 96-144)

PA 96-144 reduced the hospital gross earnings tax from 11% to 9% on October 1, 1996, 8 % on October 1, 1997, 7 % on October 1, 1998, and 6 % on October 1, 1999 (see CGS 12-263b).

HOSPITAL COMPLIANCE (PA 96-238)

PA 96-238 eliminated hospital net revenue compliance beginning with hospital fiscal year 1997 (the hospital fiscal year beginning October 1, 1996) and amended the payment method for compliance payments for the previous fiscal year. It also clarified existing restrictions on hospitals concerning back billing for services provided to patients from November 1, 1994 to June 1, 1995.

CHILDREN'S HOSPITAL (PA 97-2)

PA 97-2 exempts licensed children's general hospitals from the sales tax on hospital patient care services and from the hospital gross earnings tax. It specifies that children's general hospitals not subject to the gross earnings tax cannot receive disproportionate share payments. The DSS must seek approval from the federal government concerning these tax changes and the disproportionate share payment program

Under the Medicaid program, some hospitals receive "disproportionate share" payments from DSS. These are additional payments federal law requires states to make to hospitals serving a disproportionate share of low-income patients. The state receives federal matching funds for these payments.

REDUCTION IN HOSPITAL TAXES (PA 99-173)

PA 99-173 reduces the hospital gross earnings tax from 7% to 4% on October 1, 1999. Prior law would have reduced the tax after that date to 6%.

Also, the act reduces the sales tax on patient care services effective July 1, 1999 from 6% to 5% and exempts those services provided at John Dempsey Hospital from the sales tax after that date.

DISPROPORTIONATE SHARE (DSH) HOSPITAL FINAL SETTLEMENTS (PA 99-279)

The act exempts John Dempsey Hospital of the University of Connecticut Health Center from the current DSH payment system.

It also eliminates the DSS commissioner's duty to adjust interim DSH payments to hospitals to reflect the actual, rather than projected, amount of uncompensated care they provide during hospital fiscal years 1998 and 1999 (which run from October 1, to September 30; this procedure is known as "final settlement.") But she can do so only if each of the 32 private hospitals entitled to them agrees to this in writing.

The act eliminates final DSH settlements in future years. It leaves unchanged the current method of calculating DSH interim payment amounts based on projected uncompensated care costs; the commissioner's authority to make exceptions, exemptions, and adjustments consistent with federal regulations; and the requirement that she submit annual reports to the Public Health Committee on the hospitals' financial stability.

Under prior law, final settlements were made after the close of the year, allowing DSS to recapture its overpayments to hospitals and increase underpaid hospitals' budgeted allocations for the following year.

DISTRESSED HOSPITAL FUND (PA 95-306)

The "Distressed Hospital Fund" originated in PA 95-306 and was actually known as the Department of Social Services" (DSS) Hospital Assistance Program. It was designed to provide grants to certain hospitals based on their overall financial circumstances. The program was funded by a $25 million appropriation to DSS for each of FYs 1995-96 and 1996-97. Under the act, DSS could make grants to hospitals in consultation with the Office of Policy and Management and the OHCA.

In actuality, the program only operated for one year. PA 96-144 eliminated DSS' authorization to provide grants to hospitals for FY 1997-98. Funding for the program was eliminated in the 1996 budget act (SA 96-8).

In 1998, Connecticut hospitals sought $25 million in state funding to be distributed through a distressed hospital fund. The fund, according to the hospitals, would give back some of the funds authorized to the uncompensated care pool by small and medium-sized hospitals. Ultimately, a distressed hospital fund bill (HB 5994) was favorably reported by the Public Health Committee but was not approved by the Appropriations Committee.

Legislation was introduced in 1999 (SB 1298) to establish a distressed hospital fund. The Public Health Committee held a hearing on the proposal on March 11, 1999. Under the bill, $25 million would have been appropriated to DSS for FYs 1999-2000 and 2000-2001 for a hospital assistance program. Allocation of the funds among applying hospitals would be determined by the DSS commissioner based on the overall financial circumstances of each hospital. The bill also provides that the commissioner must make the allocation "in a manner that . . . achieves the maximum benefit in securing the continuing financial viability of hospitals". The bill did not pass.

Proponents of this fund, such as the CHA, explained that it would ensure that each hospital contributing to the uncompensated care pool receives at least 74% of the money contributed back.

Questions were raised concerning whether adoption of this funding proposal would result in the state failing a federal law concerning compliance with disproportionate share upper payment limits and thus put federal matching dollars at risk. The federal law at issue passed in 1994 and basically said that at least a quarter of the UCC pool participants had to lose 25% to the pool.

CHA argued in testimony before the Public Health Committee on March 11, 1999 that the bill as proposed complied with the federal rules. But CHA also testified:

The bill is drafted with vague language allowing great discretion to the commissioner to approve grants to hospitals. This is fine as long as everyone agrees to the purpose of the bill and its long legislative history. The purpose is to bring every hospital to the 74% return rate every year. The reason it was drafted to be intentionally vague is to comply with requests of the DSS. A clear statement in the bill that each hospital receive no less than 74% from the uncompensated care pool could cause problems attracting the matching funds. Using formulas to attain that goal rather than explicit legislated language avoids that problem. (Testimony of Joseph Coatsworth, March 11, 1999 on SB 1298.)

HOSPITAL LOANS (PA 99-2, JUNE SPECIAL SESSION)

SB 1298, as described above, did not pass. But legislation was enacted establishing a hospital loan program (PA 99-2, June Special Session).

The act authorizes OHCA to provide loans to acute care hospitals to assist them in (1) developing and implementing plans to achieve financial stability and (2) assuring appropriate health care delivery in their service areas. Loans are for a maximum five years.

A hospital seeking a loan must submit a plan to OHCA that includes (1) the facility's current financial projections for the loan term; (2) the major financial issues affecting the hospital's stability; (3) proposed steps to improve the hospital's financial status and eliminate ongoing operating losses; (4) plans to change the service mix of the hospital, including changing to an alternative licensure category; and (5) other related elements as determined by OHCA. The plan must clearly identify the loan amount requested.

Any loans must have an interest rate agreed to by OPM and must not jeopardize federal matching payments under the medical assistance and emergency assistance to families programs as determined by DSS, in consultation with OPM. The hospital's proposed financial plan must include a plan to repay the loan with interest within five years.

The act establishes a nonlapsing account from which the loans are made. Loan repayments must be put in the General Fund.

OHCA can recommend that a loan be made and make such loan upon review and approval of the financial viability of a hospital's plan.

Under the act, the hospital's submittal of its proposed plan can be considered a letter of intent for certificate of need (CON) purposes, if a CON is required to change the facility's service offering.

The sum of $8 million was appropriated from the FY 99 surplus (included within Special Act 99-10) to support this loan program.

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