Editor’s note: This essay is more than twice the length of our usual posts but with the takeover of LSU Medical Center in Shreveport and E.A. Conway Medical Center in Monroe set to take effect on Tuesday (Oct. 1), we felt it vital to provide more detailed information about the administration’s smokescreen that it likes to call a $125 million taxpayer savings. Please take the time to read it in its entirety.
False reasons for privatizing
The governor’s stated purpose of privatization was to improve quality, improve medical education, and save the taxpayers about $125 million (The Advocate 9/4/13). His actions, however, support none of these stated purposes.
- Improve quality? There are many measures of quality, safety, and patient satisfaction that Medicare and others publish (see the discussion on NOLA.com September 14, 2013 story on East Jefferson and West Jefferson Hospitals). Through a public records request I asked DHH what measures of quality they used in concluding that quality would be improved with these privatizations. To no surprise, they did not attempt to review any data on quality despite this being one of the governor’s primary reasons for privatizing. If you look at Medicare’s website http://www.medicare.gov/hospitalcompare/search.html the LSU facilities compare very favorably to the new private partners. Furthermore, the Cooperative Endeavor Agreements (CEAs) do not have requirements of the partner hospitals to measure, report, and be held accountable for any quality measures.
- Improve medical education? This is vintage Jindal. He creates a crisis to force change then regardless of the outcome, declares victory for staving off the crisis he created. Compared to not having hospitals to train in, the partnerships are better, but the public hospital system under LSU prior to Jindal’s meddling was very supportive of medical education and programs were performing well there. Since the governor slashed funding for the hospitals, however, the programs ran into difficulty because of the governor’s actions.
- Save taxpayers about $125 million? Go back to the Medicare website (http://www.medicare.gov/hospitalcompare/search.html ) and compare the cost to Medicare for care delivered around a hospital stay at the LSU hospital and at the private partner. In every case the care associated with the LSU hospital was much cheaper than the private partner. The truth is the governor’s team never asked the private partners what their costs were. In response to a public records request in which I asked DHH for their analysis comparing costs, DHH was unable to provide any documents demonstrating they compared the actual cost of care at the public and private hospitals prior to entering into the CEAs. Even though the CEAs commit the state to paying the cost of care at the private hospitals, no one from the administration bothered to ask them what their costs were. The LSU Board signed off on these agreements without knowing this basic information – an action they were willing to take with the public’s money but that none of them would be so irresponsible to do with his own business.
Here is the breakdown for all cost to Medicare for a patient from 3 days prior to hospitalization to 30 days after the hospital stay (from the Medicare website):
So despite the governor’s claim, DHH has no evidence that these deals will save taxpayers $125 million and in fact the public data available indicate just the opposite. The governor’s real plan is to quietly shift this added cost from state funds to federal funds. It may save state funds but this approach does not match his public stance on rejecting additional spending, even federal funds since those are taxpayer dollars too.
Examining the money
Why would the state agree to pay these private partners their costs without knowing how much that is? Why would the state move its patient care from the lower cost state providers to higher cost private providers? One explanation is that the higher cost will be borne by the federal government, not the state. Last year, the public hospitals were appropriated $955 million. Commissioner of Administration, Kristy Nichols, testified that in 2014 that number will exceed $1 billion. As reported in The Advocate (May 28, 2013), “The total operating expense associated with the privatization of the LSU hospitals will hit $1 billion during the next fiscal year, Commissioner of Administration Kristy Nichols said Thursday. That’s more than there is in the current year’s budget – $955 million for the state to operate the charity hospitals…”
The private partners will participate with the state in a financing scheme that will allow the state to withdraw its support of the LSU hospitals while increasing the flow of federal funds. The scheme involves at least 3 different components. In isolation, each component may be (MAY BE) deemed allowable by the federal government but viewed together they demonstrate an effort to skirt federal requirements that the state put up its fair share of funding for the Medicaid program.
- Supplemental or extra payments from Medicaid to private hospitals using federal Medicaid dollars
- Lease payments including “up front” payments, in effect, the state “borrowing” funds from a private Medicaid provider (that it just prepaid a supplement using federal funds) in order to cover a state budget shortfall
- The state using the private hospital lease payments as match to draw more federal funds and then paying a portion of that back the private provider.
The entire process is designed to cut out the state support and increase the federal support.
Reducing state support
In September 2011 a consulting group named Verite hired by DHH submitted a business plan review that was considered by the Joint Legislative Committee on the Budget at its September 2011 meeting when it voted to approve contracting for construction of the new hospital www.newhospital.org. The report points out the average state funds in the Interim LSU Hospital (ILH or “Charity”) from 2006 – 2011 was $42.8 million. It projected an average annual amount of state funds in years 2015-2020 of $52.5 million necessary to pay for the cost of caring for uninsured people. The JLCB approved construction based on these expectations.
However, the 2014 state budget includes zero state funds for ILH. How can this be?
Here is the scheme: The private hospital pays LSU money to lease the LSU hospital. That money does not stay with LSU; it ends up (directly or indirectly) being used as match in the Medicaid program. After matching those lease payments with federal funds, the total, larger amount is paid back to the private partner in the form of a Medicaid payment. The lease payments supplant the state funds. However, the legislative fiscal office has already raised concerns about the leases being $39 million short which is why the Division of Administration has already begun planning on “double” lease payments this year. http://www.nola.com/politics/index.ssf/2013/09/new_orleans_shreveport_hospita.html
For years states have devised schemes to receive additional federal funds while reducing the state contribution for Medicaid. There is a problem with these schemes, however. Consider this from a 2009 report by the Congressional Research Office:
“In 1991, Congress passed the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments (P.L. 102-234). This bill grappled with several Medicaid funding mechanisms that were sometimes used to circumvent the state/federal shared responsibility for funding the cost of the Medicaid program. Under these funding methods, states collect funds (through taxes or other means) from providers and pay the money back to those providers as Medicaid payments, while claiming the federal matching share of those payments. States were essentially “borrowing” their required state matching amounts from the providers. Once the state share was netted out, the federal matching funds claimed could be used to raise provider payment rates, to fund other portions of the Medicaid program, or for other non-Medicaid purposes.”
DHH’s current scheme includes a “borrowing” component that looks similar to the practices this legislation was aimed at preventing. Medicaid rules do not allow a Medicaid provider (read “hospital” here) to voluntarily donate money to the state when they know they will get this money back plus more (the federal share) as part of an increase in their Medicaid payments. The federal oversight agency, CMS, has already expressed concerns to state officials that these lease payments could qualify as non bona fide provider donations http://louisianavoice.com/2013/06/26/cart-ahead-of-the-horse-cms-letter-to-sen-ben-nevers-continues-to-leave-jindal-hospital-plan-approval-up-in-air/ and they will be examining the hospital leases to determine this. If CMS determines these are conventional fair market value leases, they will allow the payments. Beyond the basic annual lease payments, the deals include “double lease payments” and other large up front lease payments designed to fix the state’s budget problem raising the specter of non bona fide provider donations. If these payments are deemed to be non-allowable, the federal government will recoup any federal funds that were paid as match for these state funds http://louisianavoice.com/2013/06/26/cart-ahead-of-the-horse-cms-letter-to-sen-ben-nevers-continues-to-leave-jindal-hospital-plan-approval-up-in-air/. This will likely be resolved after Jindal leaves office and can just be added to the huge mess the state will need to clean up when he departs. The legislature is derelict in counting on these up front lease payments for at least two reasons: First, if they are legitimate, they are still borrowing from future years, and second, there is a good chance that they are not legitimate and will not be allowed by CMS.
A key question is, “Are these fair market value leases?” The state and the complicit private hospital want the lease amounts to be as high as possible – this is how they will maximize the fund shift from private hospital to the state; then the funds will be used to generate the maximum amount of federal match which will be paid back to the hospital. The state did not engage in a competitive bid process to determine the value of the leased facilities. Instead, the state identified existing in-state private hospitals that it could pay additional funds through the Medicaid program to make the funding scheme work. After receiving large up-front extra Medicaid payments, these hospitals would agree to lease the LSU hospitals and the lease payments would be used (recycled?) as match to replace the state funds the governor cut out. The annual lease amounts are presumably based on an appraised value of the property being leased, but the actual payments which include large up-front amounts and multiples of the annual lease amounts – have nothing to do with the value of the property and everything to do with the state’s budget holes. Furthermore, it is all but certain that none of the hospitals would garner the large lease amounts without the corresponding agreement by DHH to pay them higher Medicaid payments once they agree to lease the facilities.
Let’s take a closer look at the New Orleans deal.
The LSU Interim Hospital will be leased by Louisiana Children’s Medical Center (LCMC), a health system that includes Children’s Hospital and Touro Infirmary. In addition to the annual lease LCMC agreed to pay $110 million in an “up front” lease payment to be repaid by the state over the next 20 years. LCMC is in essence loaning the state $110 million for its use in the Medicaid program. In addition, LCMC agreed to pay an additional $143 million to the state in order to build the parking garage and clinic office building at the new hospital in New Orleans.
- $110 million payment. This amount is notably similar to the state fund shortfall that the governor imposed on LSU shortly after the 2013 legislative session. Remember the meeting of LSU leadership, board members, and Alan Levine that Fred Cerise documented in the recently circulated memo http://louisianavoice.com/2013/08/21/cerise-townsend-firing-came-soon-after-fateful-2012-levine-meeting-with-lsu-officials-to-discuss-lsumc-privatization/)? The supposed purpose was to identify a way to deal with the massive budget cut that the governor was laying at LSU’s feet. Cerise outlined the magnitude of the cut which was equivalent to $122 million in state funds and a total – including federal funds -of $329 million and the impact would result in the closure of over half of the LSU hospitals. Those cuts were never made, yet the governor never explained how the funds were restored to LSU’s budget. In the New Orleans CEA, LCMC agreed to make an upfront lease payment of $110 million to LSU on or before June 24, 2013. So with one week left in the fiscal year, LCMC paid LSU $110 million to avoid the massive budget cuts that were assigned to LSU by the governor to prompt the wholesale privatization. But the cuts were never made, savings never achieved. Instead, the administration borrowed the money from a private partner. These funds will be repaid to LCMC over the next 20 years. The state “borrowed” from LCMC, a private entity, funds to be used as match in the Medicaid program – a practice that is at the very least against the intent of the federal Medicaid regulations and which the state will be repaying for many years after Jindal is gone from office. If CMS does not approve of this trick, the state will be repaying the federal funds too (which is a much larger amount).
- $143 million payment for parking and clinic buildings. When LSU finally gained legislative approval of its business plan for the new hospital in New Orleans at the JLCB on September 16, 2011, there was a gap of $130 million in funding needed to complete the project (it appears that has grown to $143 million). LSU explained at the time that it intended to use an LSU- affiliated foundation to provide that funding. The approval to enter into a contract for construction was based on that assumption which was included in the business plan the JLCB considered.
The motion by Senator Murray (stated at 1:08 on the video archive of September 16, 2011 by Rep. Leger) was to “authorize the Office of Facility Planning and Control to enter into contracts up to the amount of funding in place for construction and completion of UMC in New Orleans.”
LSU received a commitment from the LSU Health Sciences Center – New Orleans Foundation as stated in this excerpt from a letter from LSU President John Lombardi to Thomas Rish, the senior manager for the Division of Administration.
“The mechanism for accomplishing such financing involves the UMCMC [University Medical Center Management Corporation] Board entering into an agreement with LSU for LSU to provide services to the UMCMC Board, as represented by that board to the Joint Legislative Committee on the Budget on September 16, 2011, and in accordance with the business plan presented in open committee hearing at that time. In carrying out that business plan and the above-described construction, it is expected and necessary for the UMCMC Board at the appropriate time to enter into one or more agreements with one or more other affiliated entities of LSU so that the affiliated entity will have a sufficient revenue stream to support the financing of the Ambulatory Care Building and the Parking Structure. LSU has engaged in such financing methods in the past with great success, without affecting the state tax supported debt limit or relying upon the full faith and credit of the state.”
However, the UMCMC Board subsequently refused to commit to an agreement that acknowledged its support for LSU because a plan was already underway to reconfigure the governance structure into a private entity unencumbered with the commitments to LSU, commitments that LSU and UMCMC used in gaining approval for acquisition of private property and construction. As a result, the LSU Foundation could not obtain this funding.
The Division of Administration proceeded to enter into a contract for construction of the entire project anyway (without the funding in place) in violation of the JLCB motion that authorized contracting for up to an amount of funding in place. As construction proceeded and desperate for a funder so it could meet its obligations to the contractor, the Administration turned to LCMC for the funds which they agreed to provide on or before June 24, 2013.
Why would LCMC, in addition to an annual rent payment for the hospital agree to pay an additional $253 million up front to the state? Likely because the state gave them the money first. On June 18, 2013, DHH made a series of supplemental Medicaid payments to Children’s Hospital and Touro Infirmary in the amount of $250 million. DHH made Medicaid payments (which include federal money) to LCMC affiliates so that LCMC could return those funds to the state to use as match for more federal funds. You have to appreciate this scheme from a governor who doesn’t like federal money.
Annual lease payments.
In addition to the $253 million up-front payments, Children’s will make its first annual lease payment this year. But that won’t be enough money to fill the budget hole for the 2014 budget year. Remember, any lease payment Children’s makes is to be multiplied with federal match dollars and repaid to Children’s so they have every incentive to pay as much “lease” as possible. Given federal prohibition on “provider donations” these lease payments must be restricted to fair market value amounts. In order to address the state budget shortfall, the state will borrow from future year lease payments and have Children’s make a “double” lease payment this year (in addition to the $110 million “up front” lease payment to be repaid over the next 20 years). The Times Picayune reported this plan by Commissioner Nichols’s to have Children’s make a “double lease payment” of $68 million to plug the current year’s budget hole by encumbering future administrations and legislatures with a payback of state funds and potentially the federal match as well. http://www.nola.com/politics/index.ssf/2013/09/new_orleans_shreveport_hospita.html
The state will use this $68 million to draw down additional federal funds ($107 million in federal funds based on most recent match rate for Louisiana) and pay the entire amount back to Children’s or an affiliate of Children’s for Medicaid services. Who wouldn’t put up a double payment? Why not triple payment? Quadruple? Only CMS can put the brakes on this scheme. They have been through this type of thing before in Louisiana and so will be closely scrutinizing the entire arrangement. Jindal is calculating that any recoupment of funds will come well after he has destroyed the public hospital system and celebrated his success. He seems to believe he can violate the CMS provider donation provisions by simply calling the donations “lease payments.” We’ll see if CMS agrees.
- The state is building a replacement hospital for Charity Hospital in New Orleans using $474 million in federal funds from FEMA and $300 million in other hurricane recovery funds.
- The state agreed to lease this facility built with federal funds to a private entity that is a Medicaid provider.
- Those lease dollars will be used annually as match in the Medicaid program to draw additional federal dollars. “Monetizing” an asset built with federal funds, the state will generate additional federal funds as match dollars to support the operation. This will allow the Division of Administration to renege in its commitment of state funds to LSU (which the legislature accepted in the business plan submitted to JLCB as a condition for approval of construction).
- In addition, the state made a $250 million Medicaid payment to the private provider on June 18, 2013. This Medicaid payment included roughly 2/3 federal funds.
- The private provider then made a $253 million payment back to the state on June 24, 2013.
- $110 million of that payment was directly or indirectly used as match in the Medicaid program to draw more federal money by which LSU was able to meet its budget for 2013.
- $143 million of that payment is targeted to complete construction of the new hospital in New Orleans (and qualify as all future rent payments for LCMC) that will be operated as a private facility.
That’s a lot of recycling federal dollars and private handouts, even for Louisiana. Surely the governor must be proud of this innovation in financing. Why is he not clearly explaining it to the public?