“I read the news today, oh boy”

This is a white-water time of day-to-day news on matters that greatly affect UF&Shands. As I have walked our halls over the past couple of weeks, faculty and staff have come forward with questions that have urgency like never before. With the federal sequester going into effect, and with daily news reports on the deliberations in Tallahassee regarding Medicaid expansion, everyone is asking: “What is the effect of the sequester on UF&Shands?” and “What will happen without Medicaid expansion?”

Let’s put these questions in context. Our strategic plan embodies the idea that the quality of our future will depend mainly on our ability to create our own resources. That is, we should not pursue strategies that depend on any growth in funding from the state or federal governments. Rather, with flat or reduced funding for our educational programs from the state, and with flat or reduced funding at the National Institutes of Health and other external funding agencies in which our scientists compete for support, we must increasingly rely on improving the performance of the clinical enterprise, enhancing philanthropy, diversifying the funding base for research and generating revenue-producing intellectual property: All of these sources of revenue, net of expenses, are plowed back into our research mission, which is the key to local economic development and national reputation.

But even with improving trends in clinical volumes, in fundraising and in revenues from inventions and nontraditional research funding — all of which, I am pleased to report, are occurring in robust fashion — recent events as summarized above are potentially powerful forces that oppose these advancing trends. In this newsletter, I will summarize the federal sequester and key provisions of the Patient Protection and Affordable Care Act, also referred to as PPACA, and their potential effects on UF&Shands.

Of course, the Florida budget also includes funding for the University of Florida, including the Health Science Center’s educational programs. Reductions in these budgets over the years have had a significant impact; some of those reductions will hopefully be restored in the current session, but that is another subject for another time.

While this is not an upbeat newsletter, given the many issues coming at us from several different directions, rest assured that we are working hard on behalf of the needs of our patients, students, faculty and staff, and for the vibrancy of our region and state. I have no doubt that if we continue to work together as a functionally integrated academic health center, we will weather this storm and continue to advance strongly in patient care, research and education.

The Sequester

The “sequester” — a series of across-the-board federal budget cuts — will directly affect UF&Shands in terms of reduced National Institutes of Health funding and Medicare payments, although there will be indirect effects as well. The NIH and the other federal agencies that support HSC faculty research, such as the Agency for Healthcare Research and Quality and the Centers for Disease Control and Prevention, are in the “non-defense, discretionary” category of the sequester, which calls for a 5.1 percent reduction. Since the HSC last year received about $120 million in federal funding, the reduction would be about $6 million during the current federal budget year. The actual impact, however, is far greater.

In anticipation of the sequester, the NIH began reducing research-grant payments to scientists at universities around the country over recent months, even before the across-the-board federal spending cuts took effect last Friday. At NIH, spending will be cut by 5 percent at each of the NIH’s 27 institutes and centers. Most of the cuts have to come out of extramural grants, because that’s where most of NIH’s money goes: about 70 percent of NIH’s $30.9 billion budget is spent on grants to outside scientists such as those at UF, and about 30 percent is spent on intramural research programs, including the research hospital on the NIH campus.

The NIH and other federal agencies fund researchers and their assistants for specific scientific projects. These grants are paid out over time, and the NIH has already reduced payments for existing grants to 90 percent of the original amount. Many grants can be renewed, but now the renewals — especially competitive renewals — are far less certain under the sequester.

Also, knowing that the sequester was scheduled to begin March 1, NIH had already been approving a much smaller share of grant applications this year. Even grants with the very best scores possible are not assured of funding. Experienced investigators with long-standing grants, large program grants at UF that might be viewed as crowding out the ability to fund a number of individual grants, and grants in a scientific area that NIH institutes may deem “lower priority,” are all at risk.

Medicaid is thankfully protected from the sequester, but there will be a 2 percent reduction in Medicare payments to our hospitals and faculty physicians. This will amount to about a $10 million reduction in Medicare payments across UF&Shands overall on both campuses.

Indirect effects of the sequester may be substantial. In addition to the “anticipatory behaviors” illustrated above vis-à-vis NIH funding, there will be indirect effects due to reduced economic activity in Florida, especially in areas that serve military bases. This will lead to additional job losses, more people with health care needs who lose their insurance, and greater constraints on the state budget. Further, if federal funding of extramural research remains reduced for an extended period, our graduate students and postdocs, and their counterparts at other research universities, may come to question their future careers in science as they watch their mentors struggle with funding despite superb peer reviews of their grant proposals. This would be a tremendous disservice to the current generation of scientists-in-training who are trying to follow their passion for a career in biomedical research, and across time may lead to the loss of a generation of biomedical scientists in our nation.

Patient Protection and Affordable Care Act

About 40 million Americans do not have health insurance — they fall in the gap between Medicaid and employer-provided commercial insurance. In Florida, 28 percent of the adult, pre-Medicare population are uninsured, the third worst nationally, behind Texas (31 percent) and New Mexico (29 percent).

PPACA contains two provisions to cover the uninsured, beginning in 2014: Medicaid expansion and health care exchanges. These two provisions were planned to extend coverage to 36 million people nationally. The Supreme Court ruled that the Affordable Care Act, including the health care exchanges, was constitutional, but that each state could decide whether to adopt Medicaid expansion. In Florida, about 4 million people are currently uninsured. Of these, about 1 million are potentially eligible for coverage under Medicaid expansion and about 3 million are potentially eligible for coverage by the health plan exchanges.

Under ACA, Medicaid expansion covers those with incomes up to 133 percent of the federal poverty line, including adults without children (who are not currently covered). The exchanges will be for those between 133 percent and 400 percent of the federal poverty line. If a state decides to proceed with Medicaid expansion, by statute its cost is fully covered by the federal government for three years, with no cost to the state. (Also, Medicaid is exempted from the federal sequester.) From 2017-2019, states will contribute 5 percent, 6 percent and 7 percent, respectively. From 2020 on, the split will be 90 percent federal and 10 percent state.

Put differently, a large number of federal tax dollars paid by Floridians would come back to the state’s economy under Medicaid expansion. In a report issued by the Safety Net Hospital Alliance, James Zingale, a former Florida budget analyst, concluded that the federal revenue coming into Florida over the next decade would be $27.8 billion under Medicaid expansion, while the matching funds required from the state would be $1.7 billion. And there would be a substantial economic ripple effect: In a study by Alan W. Hodges and Mohammad Rahmani (two faculty members from the Food and Resource Economics Department of IFAS), titled “Economic Impacts of Affordable Care Act in Florida,” the authors forecast federal revenue of over $24 billion, industry revenues of $71 billion, payroll of $31 million and $2.6 billion in indirect business tax. They calculate that over the decade Medicaid expansion would add about 54,000 permanent jobs.

At a time when Florida’s economy will be hit by sequester-required reductions in military bases and elsewhere, the buoyant effect of the private-sector jobs in health care to be created by Medicaid expansion — and its multiplier effect through the economy that will generate jobs in other industries — is one reason the Florida business community is generally supportive. As well, a potential benefit for Florida businesses is that about 8 percent of the premiums for employer-provided health represent a “hidden” cost due to the burden of providing services to the uninsured (ED and any associated admissions, procedures, laboratory and pharmacy). Since, under Medicaid expansion, providers will be reimbursed for most of these patient services, this hidden tax on employers should be reduced by PPACA.

Affiliated Industries of Florida, a large voluntary association of private businesses, told its member firms that “the cost of treating the uninsured is a $1.3 billion ‘hidden tax’ on Florida’s employers. The business community is already paying for the uninsured, in the most costly setting possible, in the emergency rooms.” As a result, AIF is supportive of Medicaid expansion, “encouraging legislators to best leverage available federal funding to ensure that we provide coverage to Floridians in a manner that protects the state’s financial health.” Similarly, the Florida Chamber of Commerce Board debated the matter extensively and concluded that the state should accept federal dollars to expand Medicaid so long as certain prerequisites are met that they believe would control costs and produce improved health outcomes. Gov. Scott has indicated support for Medicaid expansion for three years, at which time its performance would be reviewed, an idea that became one of the “prerequisites” of the Chamber. Scott’s proposal is supported not only by AIF and the Florida Chamber, but by the AARP, which points out that 260,000 Floridians between the ages of 50 and 64 who have lost their jobs, or who work for employers who don’t provide health insurance, will have access to health care under the plan. On March 4, however, a House select committee on PPACA voted against Medicaid expansion along strict party lines. Those voting against expansion expressed “skepticism” that the federal government will deliver on its statutory obligation long term, and therefore had reservations about going forward with initial implementation. On March 11, the Senate select committee on PPACA also voted against Medicaid expansion along party lines, but its leadership indicated that they want to pursue an alternative plan that would use federal funding under PPACA to help pay for premiums to cover the same low-income population through private insurers. Such a plan would have to be approved by the U.S. Department of Health and Human Services.

The House and Senate will now grapple with these issues, which are at the interface between politics, policy and practicality. Bills may be introduced that take advantage of the federal dollars to provide insurance for the population that would have been covered by Medicaid expansion, but using different payment mechanisms. The outcome will have significant consequences for UF&Shands. Regardless of what any given state decides about Medicaid expansion, PPACA will reduce to all states Disproportionate Share Hospital payments (DSH), which are payments that the federal government currently provides to hospitals that care for the uninsured. Specifically, as a partial means of funding PPACA, Medicare DSH payments will be reduced up to 75 percent. During the PPACA debate, hospitals supported this provision with the understanding that the reduced DSH payments would be offset by payments from Medicaid expansion and the exchanges. We estimate that reduced Medicare DSH payments will, across time, amount to a loss of up to $35 million annually for Shands at the Gainesville and Jacksonville campuses. Without the offset from federal payments for Medicaid expansion or a variant, such reductions in DSH payments would significantly impact operations at Shands at UF and would be devastating for Shands Jacksonville.

On the brighter side, Florida will proceed with implementing the health exchanges component of ACA, which covers individuals between 133 percent and 400 percent of the federal poverty line. HHS will set up the structure for implementation. Once implemented, qualified individuals will be able to choose one of a number of health plans on the exchange offered by private insurance companies. These individuals will pay for part of their health plan premium and the federal government will pay for the remainder of the premium. The amount paid by individuals rises as income rises. The state will have no liability for a share of these premiums. We are reviewing how UF & Shands may offer a health insurance exchange product directly or in partnership with a current insurance plan.

Distribution of State Medicaid Funding

During the current session, the Florida Legislature is also looking to change the method by which it pays for Medicaid recipients. This applies to coverage for individuals currently eligible for Medicaid — mostly children and the aged and disabled — and potentially for those to be covered by Medicaid expansion or a variant. Currently, Medicaid pays hospitals a fixed amount per hospital day, up to a cap. The per-diem amount is adjusted across hospitals by considerations such as the amount of charity care, the presence of residencies and fellowships, trauma/burn care and other factors. In addition, payments to account for residencies and fellowships — Graduate Medical Education or “GME” — are built into the Medicaid rates. Faculty physician services to Medicaid patients are currently paid on a fee-for-service basis, with a supplement from federal DSH-type funding. The new system will convert hospital payments to a “diagnosis-related group” methodology (“DRG”), and incorporate funding for the faculty physician payment into a capitated model under “Medicaid managed care.”

DRGs have been used successfully for many years by the federal government in connection with Medicare payments, and some states have begun to implement DRGs for Medicaid, with the same kinds of adjustments used for Medicare. The Florida Hospital Association last year agreed to the state’s implementation of DRGs for Medicaid, with adjustments. However, some legislative proposals now being considered in Tallahassee would implement Medicaid DRGs without adjustments. Such legislation would not establish new funds for existing Medicaid recipients; it would just establish a method to redistribute existing Medicaid payments. It has been estimated that DRGs without adjustments would distribute about $60 million of current state Medicaid hospital payments from safety-net hospitals in Florida such as Shands at UF and Shands Jacksonville to investor-owned, for-profit hospitals, and that an additional $60 million currently built into Medicaid rates for Florida hospitals such as ours that run GME programs would also be redistributed across a broader range of hospitals. All of these issues are being considered by various legislative committees; the final legislative outcome will hopefully reflect and recognize the important contribution of hospitals such as ours that provide safety-net care and graduate medical education.

Finally, the conversion of fee-for-service to capitation under Medicaid may lead to ineligibility for federal matching funds to pay for faculty physician supplements for Medicaid patients, another hit that would amount to ten of millions of dollars in current revenue. We are working with the Legislature and AHCA to develop mechanisms within a capitated system for Medicaid (i.e., “Managed Medicaid”) to maintain these federal matching funds.

The Way Forward

Yes, financial challenges abound, but just think: There are patients to see, students to teach, residents and fellows to train, and discoveries to make. These needs aren’t going away. If anything, our missions of patient care, education and research are becoming increasingly important in our society, as we live longer and shift increasingly towards a knowledge economy. Thus, on one level, we have no option but to keep doing what we’re doing: improve the technical quality of our patient care from a system and individual standpoint while attending to the hospitality expectations of each of our patient-guests, educating the next generation of health care professionals and biomedical scientists to lead the clinical and scientific path forward, and contribute to knowledge about the fundamental biological mechanisms and applied discovery in a manner that improves health.

On another level, however, to continue this critical work we must redouble our efforts to create the resources that are needed to fund our missions. We should also have confidence that, across the span of time (which might be years rather than weeks or months), our economic and political system will produce a rational result — increased federal investment in research, and improved access to health care in a manner that is affordable, both nationally and locally. That said, however, we need more than confidence; not only does chance favor the prepared mind, but outcomes regarding societal support for research and health care access favor legislative bodies that are fully informed and educated. Since we are in the education business, our voice hopefully will be articulate and compelling. When the dust settles on the current legislative session in Tallahassee, I will provide a summary of the outcome in a future newsletter.

Forward Together,

David S. Guzick, M.D., Ph.D. Senior Vice President, Health Affairs President, UF&Shands Health System