Health care in the budget cross hairs

Minnesota's hospitals, nursing homes and community clinics -- already reeling from the worst recession in nearly three decades -- are bracing for a new round of cuts from the state's biggest single purchaser of health care: state government.

As legislators and Gov. Tim Pawlenty struggle to close a $4.6 billion deficit in the state budget, they are looking to trim between $400 million and $1.8 billion from projected state payments to hospitals, health plans, nursing homes and other providers.

With just a week left in the legislative session, the size of the cut was still in play as budget deliberations continued over the weekend. But with health and human services accounting for about 27 percent of the state budget -- second only to K-12 education -- no one doubts that excruciating cuts are in store.

"We got battered by budget cuts in 2003 and we still haven't recovered,'' said Patricia Coldwell, policy analyst at the Association of Minnesota Counties. "There is no low-hanging fruit left.''

If the worst cuts materialize, providers say:

Residents of Stearns County could see St. Cloud Hospital close its Diabetes Center, eliminating exercise and nutrition programs, and close some dialysis centers.

Uninsured residents of the Twin Cities area, unless they live in Hennepin County, could find themselves turned away from Hennepin County Medical Center, which ordinarily provides uncompensated care to hundreds of patients from surrounding counties.

Aged and developmentally disabled residents in the Duluth area could see reduced services if St. Louis County loses nonprofit firms that serve those populations.

Even Minnesotans who have private insurance could see the effect in higher premiums or larger deductibles, because unpaid costs in the public sector are often shifted to private payers.

Pawlenty and his aides say they want to limit the damage, "but the current growth in health care costs cannot be sustained," said Human Services Commissioner Cal Ludeman. "Given our budget problems, we must act responsibly."

Last year, the state paid roughly $7 billion for medical care and insurance, or nearly one-fourth of all health care spending in Minnesota. That $7 billion includes federal matching funds for the big public health insurance programs such as Medicaid.

Razor-thin margins

As the brawl continues in St. Paul, hospitals say they already are grappling with razor-thin margins because of fewer patients and mounting unpaid bills in the recession. More cuts, they say, mean eliminating services when they are most needed.

Since last fall, Minnesota hospitals have cut nearly 2,000 jobs, frozen or cut salaries for physicians and executives, and postponed new buildings.

Pawlenty's proposal would directly cut $336.6 million in revenues for hospitals, according to the Minnesota Hospital Association. Indirectly, hospitals say, it would cost them another $430 million in unpaid medical bills incurred by the newly uninsured who would be dropped from MinnesotaCare but still need care. The House and Senate versions would cut between $75 million and $117.1 million from hospital payments.

Children's Hospitals and Clinics of Minnesota, for example, would lose about $36 million over the next two years. House and Senate proposals would cut closer to $10 million. Children's had revenue of $540 million last year, 40 percent of it from Medicaid, the state-federal program for poor and elderly patients.

"What is usually not realized is that 50 percent of Medicaid recipients in this state are children," said Dr. Alan Goldbloom, chief executive of Children's. "Children are the group we should be investing in. They have the biggest and longest return on investment."

Children's recently closed an exercise medicine program for children with chronic illnesses and cut school outreach programs. Other support services -- interpreters, social workers and chaplains -- would be at risk with future cuts.

For HCMC, areas at risk are mental health, dental care, HIV care and clinics, said CEO Lynn Abrahamsen.

As a safety-net hospital, HCMC derives 43 percent of its revenue from Medicaid patients. To save money after the 2003 budget cuts, it closed a therapeutic pool and a Minneapolis clinic that served mostly Hmong patients, and stopped offering dental services in Richfield.

As it is, hospital executives say, Medicaid pays only about 80 percent of the actual cost of delivering care. Hospitals make up the loss by charging private insurers and their enrollees more.

In the past, hospitals could negotiate higher prices with insurers, who would then raise premiums. But as more consumers use high-deductible insurance plans in an effort to control their premiums, they're the ones who will face higher bills as a result of cost-shifting.

When consumers can't pay, hospitals see bad debt rise. "That shell game has fallen apart," said Allina spokesman David Kanihan.

Pressure on nursing homes

Nursing homes can't shift costs to other payers because state law forbids it. A recent survey of nursing homes showed that more than one-fourth had 2008 operating margins of minus 5 percent or worse "and it will be worse this year," said Gayle Kvenvold, CEO of Aging Services of Minnesota.

Medicaid payments for the poor are the main source of income for nursing homes, and they are likely to remain flat next biennium, although some other nursing home payments are likely to be cut.

Just as hospitals fear that health care cuts will result in more people getting care in emergency rooms, nursing homes worry that likely cuts to home-care programs will push frail people out of their homes and into nursing homes.

Said Coldwell, the analyst for the Minnesota counties group, "Some people get all upset about welfare moms. They ought to realize that -- in terms of dollars and number of people -- the welfare mom is your grandma in a nursing home."

Damage to reform?

Hospital officials also worry that budget cuts could derail Minnesota's much-touted reform efforts, passed by the Legislature in 2008. The wide-ranging reforms include coordinating care for people with chronic conditions and other services that keep them healthy and out of the hospital.

Yet those services, such as phone calls from nurses to check on patients, may not happen if finances get tighter.

Fairview Health System is working with Medica at its Eagan clinic to change the care model, breaking a large clinic into teams of doctors, nurses and aides who care for groups of patients. Fairview has committed $10 million a year over five years to reform efforts, said Fairview CEO Mark Eustis. That money is now at risk.

Despite their best arguments to legislators and the governor, health and human service providers recognize that they must endure painful cuts. The question is how damaging they will be.

For the state to cut programs that provide preventive medical care, said David Wessner, CEO at Park Nicollet Health Services, is akin to "treating diabetes by getting very good at amputation."

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