Operating margins at Arizona hospitals are declining despite a recent financial boost they got when the state expanded its Medicaid program, new data show.

While uncompensated care in Arizona hospitals has dropped by one-third since the Medicaid expansion, other expenses are up, officials say.

The leader of Arizona’s hospital association, which released the financial report, is blaming the drop in revenue on low reimbursement rates by Arizona’s Medicaid program.

One possible solution, he said, is an Arizona ballot proposition that would ask voters to approve an entirely new business model for Medicaid, which is a government health insurance program for low-income people funded with state and federal money.

Medicaid in Arizona is called the Arizona Health Care Cost Containment System, or AHCCCS. Last year Arizona expanded qualifications for AHCCCS to 133 percent of the federal poverty level and at the same time restored childless adults to the program. Childless adults had been frozen out since July 2011.

The expansion and restoration resulted in a 22 percent jump in AHCCCS enrollment since 2014. Currently one in four Arizonans is enrolled. With so many Arizonans on AHCCCS, the low reimbursement rates are having an impact.

Uncompensated care is an overall measure of hospital care provided when no payment is received from the patient or insurer. The Arizona Hospital and Healthcare Association calculates it as the sum of a hospital’s “bad debt” and the charity care it provides. Charity care means care that hospitals give for free and do not expect to be paid for.

reimbursement cuts

AHCCCS officials say it’s hard to measure reimbursement rates against cost because providers influence their own costs. For that reason, they would not confirm any specific reimbursement rates per dollar charged.

But Arizona Hospital and Healthcare Association president and CEO Greg Vigdor says hospitals are getting about 70 cents for every dollar it costs hospitals to provide services to Medicaid patients.

And by Vigdor’s calculation, that reimbursement rate could worsen. Gov. Doug Ducey’s budget for the upcoming 2016 fiscal year calls for reimbursement cuts of up to an additional 5 percent.

AHCCCS spokeswoman Monica Coury noted that the 5 percent is actually an aggregate, meaning the agency has the flexibility to reduce rates at a lower level for certain providers and a higher level for others, including going above 5 percent. But the state will ask for input before making such decisions, she said.

“These decisions will be based on a thorough access to care analysis,” she wrote in an email. “We will be seeking broad stakeholder input so providers can precisely give us information about how the rate reductions may impact them. This process will begin April 1, with the reductions expected to be implemented by October 1.”

Arizona’s hospitals say another rate cut for their sector would have severe impact.

“The problem here is over time. If you go back to 2008 we have had a series of provider freezes and cuts,” Vigdor said.

“Our payment rates were probably 80 percent or more and they have continued to drop to this point where it’s just hard to figure out how to make this thing work.”

Historically, the answer to reimbursement cuts is to charge someone else more money, but that is becoming increasingly difficult because of all the other changes going on with health care, Vigdor said.

policy conference set

The hospital association plans to host a policy conference about the future of Medicaid April 20 when it will bring in national experts who will share creative models in place in other states, and possibly inspire ideas for Arizona, Vigdor said.

“Our hope is we can find a better business model in terms of state Medicaid policy where we could somehow succeed,” he said.

“We’re certainly willing to consider taking something more directly to the people if we find the right answer.”

Vigdor said hospitals across the country are also concerned about possible Medicare cuts, since Medicare comprises a larger portion of hospital business than Medicaid.

Operating losses

The new Arizona Hospital and Healthcare Association report shows that nearly a third of the state’s hospitals incurred a loss from operations in January.

And the data show a drop in average hospital operating margins from 3.3 percent for all of 2013 to 2.2 percent in 2014. Seventy-five percent of the state’s hospitals responded to the hospital association survey.

Tucson Medical Center spokeswoman Julia Strange said it seems counterintuitive that hospital operating margins went down as more people got insurance through the Affordable Care Act and enrolled in AHCCCS.

Tucson Medical Center’s operating margin in 2013 was 3 percent. In 2014 it dropped to 1.4 percent.

But Strange explained that as part of the Medicaid expansion plan created by then-Gov. Jan Brewer in 2013, Arizona hospitals were required to pay an assessment. The benefits of having more people on AHCCCS were offset not only by the low reimbursement rates, but by the assessment, too, she said.

“Nothing is going to get easier for hospitals. I don’t want to say our operating margin will continue to decline,” Strange said. “Hopefully it won’t. We are focusing on what we can control, which is the cost of care and making sure we are the hospital of choice.”

Still making money

Coury pointed out that hospitals in Arizona have still been making money, and cited a net operating profitability of $688.9 million in 2013, prior to the influx of patients with insurance. In 2013, average hospital occupancy was less than 60 percent, she said.

“And these figures are before the restoration of AHCCCS coverage for about 300,000 individuals who would have otherwise had no coverage, and the enrollment of approximately 200,000 in the federal marketplace, both of which should increase reimbursement to hospitals,” she wrote.

But hospital association officials say Coury is cherry-picking numbers. Revenue dropped between 2013 and 2014, they note. One contributing factor to that dip, they say, was the loss of funds from something called the Safety Net Care pool, which expired at the end of 2013.

The pool was created in cooperation with AHCCCS to provide matching federal funds of about $300 million each year for two years to Phoenix Children’s Hospital, the Maricopa Integrated Health System and the UA Health Network (now owned by Banner Health) to cover uninsured patients. Only Phoenix Children’s continued to receive funds after 2013.

At Banner-University Medical Center Tucson, 1501 N. Campbell Ave., the operating margin went from 6 percent in the fiscal year ending June 30, 2013, to negative 1.6 percent in the fiscal year ending June 30, 2014.

The operating margin at Banner-University Medical Center South, 2800 E. Ajo Way, also dropped between 2013 and 2014.

One additional reason for the decline at the local Banner hospitals was due to a new, expensive electronic medical records system that incurred big expenses in the 2014 fiscal year, officials said.

“Part of the frustration is that it is not just a stagnant business world,” Vigdor said. “Even as the provider rates are being cut we are actually being asked to do more in terms of a regulatory basis with new coding approaches, electronic medical records — a whole series of things.”

Medicaid’s plus side

Vigdor stressed that expanding Medicaid and restoring childless adults to the program was an overall positive.

“Medicaid expansion and restoration has helped in moderating the incredible growth in uncompensated care since the recession. It’s down by one-third,” he said. “Without that, I think we’d have some really, really bad things going on.”

Officials with the local Catholic Carondelet Health Network, which operates two Tucson hospitals, also say Medicaid expansion was a positive.

“It has provided an opportunity for thousands of Southern Arizonans to gain access to preventive care and coverage for chronic conditions,” Carondelet spokeswoman Lisa Contreras said.

“When people have access to care early in the onset of an illness, they can seek medical attention before it progresses to a more complex and costly state.”

But Contreras added that it’s too early to know whether Medicaid expansion will have a sustainable, positive effect on Carondelet’s operating margins.

Hospital officials have other financial concerns, aside from reimbursement rates. Two pending lawsuits have the potential to disrupt the healthcare system in Arizona.

One is a state lawsuit challenging Brewer’s Medicaid expansion. The other is a federal case under consideration by the U.S. Supreme Court — King v Burwell — challenging the validity of giving federal subsidies for insurance to people from states, including Arizona, that did not create their own insurance exchanges via the Affordable Care Act.

“There’s a lot of concern in my world about what’s going on right now,” Vigdor said.

Contact reporter Stephanie Innes at sinnes@tucson.com.