J. Michael Grubbs, M.B.A., J.D. Indiana Rural Health Association 2014 Annual Conference

1. Collaboration With Long-Term Care Providers:Medicaid Upper Payment Limit and Intergovernmental Transfers J. Michael Grubbs, M.B.A., J.D. Indiana Rural Health Association 2014 Annual Conference

2. Why is this topic important to Indiana’s Government Owned Hospitals? • State Fiscal Year 2013 • IGT of $152,904,580 by 22 county hospitals • Matched by $312,700,019 in FFP (federal financial participation) • UPL of $465,604,689 paid to 267 nursing facilities operated by the 22 county hospitals • Net gain of $312,700,109 • 6 Critical Access Hospitals netted over $40 million for the 39 facilities they leased

3. Opportunities Still Exist To Participate • Indiana has 484 NFs as of March 31, 2014 • Approximately 350 NFs have been leased to date • 6 Critical Access Hospitals netted over $40 million for the 39 facilities they have already leased

4. IGTs Have Existed Since The Inception Of The Medicaid Program In 1965 • The Medicaid statute (unchanged since 1965) • “non-federal” share, not the “state” share • state must provide at least 40 percent of the non-federal share. • Intergovernmental transfer (IGT) • public agency transfers monies to the state Medicaid agency • Transferred funds counted as the non-federal share of Medicaid payments.

5. Origin of UPL • Pre-1981 - Medicaid required to use cost reimbursement principles for LTC. • Boren Amendment – states could develop other types of reimbursement systems as long as aggregate Medicaid payments did not exceed Medicare payment levels.

6. 1980sUPL Rules • 1983 - average LTC rates could not exceed Medicare levels. • 1987 – 2 UPL groups, State government-owned and operated nursing facilities and all others.

7. 1991 Statute • “Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991” • The Secretary may not restrict States' use of funds where such funds are derived from State or local taxes . . . regardless of whether the unit of government is also a health care provider . . . unless the transferred funds are derived by the unit of government from donations or [impermissible] taxes.

8. 1991 Statute 4 types of local entities are considered a unit of government for IGT purposes: • city • county • special purpose district • other governmental units

9. 1992 IGT Rule “Until the Secretary adopts regulations changing the treatment of intergovernmental transfers, States may continue to use, as the State share of medical assistance expenditures, transferred or certified funds derived from any governmental source (other than impermissible taxes or donations derived at various parts of the State government or at the local level).” (emphasis added).

10. 2000 OIG Audit Audited payments to local public nursing facilities in four states: • Alabama • Nebraska • Pennsylvania • Washington

11. Focus of the OIG’s Audit • “[A]ttempted to track and determine the use of the dollars that were transferred between State and local governments.” • “[S]elected several locally-owned providers that received enhanced payments to determine how the enhanced payments were used.”

12. Alabama Audit Findings (1997-2000) • 9 county-owned NFs received $83.5 million in enhanced payments • $80.6 million returned to the State within a few days • Only $2.9 million was retained by the NFs.

13. Nebraska Audit Findings (1998-2000) • $227 million in enhanced payments were made to city and county-owned NFs • NFs “immediately” transferred all but $10,000 per facility to the State. • Net gain to the state - $225.5 million • Net gain to NFs - $1.5 million.

14. Pennsylvania Audit Findings (1997-1999) • Tax and revenue anticipation notes secured bank loan used to make IGT • State deposited IGT amount plus $1.5 million fee in county account • Net gain to State - $1.9 billion • Net gain to NFs - $7.5 million

15. Washington State Audit Findings (2000) • $147 million paid to 14 public hospital district NFs • Net gain to State - $127 million • Net gain to NFs - $9.8 million • Net gain to 3 health-related organizations - $10.2

16. OIG Audit Recommendations • Funds must be available to furnish Medicaid approved services to Medicaid eligiblebeneficiaries. • Payments returned to the State by a county or local government should be offset against the FFP generated and refunded.

17. 2001 UPL Rule • 3 UPL pools: State government-owned or operated NFs, Non-State government-owned or operated NFs, All other NFs • “It is our intent that under the new UPLs, Medicaid payments claimed as a nursing home expenditure, or as an expenditure for some other type of institutional service, will in fact be paid to and retained by those facilities to offset the costs they incurred in furnishing Medicaid services to eligible individuals.”

18. Indiana 2005 OIG Audit • SFY 2002 - $16.8 Million in UPL payments to NSGO NFs • “comprehensive review” of the facility-specific documentation of 5 NSGO NFs • “Indiana calculated the UPL for non-State government nursing homes in accordance with Federal regulations and the approved State plan amendment.”

19. 2007 IGT/UPL Rule “A county-operated hospital that is recognized in the county's budget to receive local tax subsidies via the county appropriation process, and without the need to contract for such tax revenues, would satisfy the criteria of direct access to tax revenues.” (emphasis added).

20. Indiana County Hospital Law The governing board may request support from the county, either by appropriation from the county general fund or by a separate tax levy, by filing with the county executive on or before August 1, a written budget of the amount estimated to be required to maintain, operate, or improve the hospital for the ensuing year.

21. 2007 IGT/UPL Proposed Rule • Capped Medicaid payments to governmentally operated health care providers at the cost of providing services to Medicaid individuals. • Required the NSGO NF to “receive and retain the full amount” of the enhanced payments generated by the IGT.

22. May 25, 2007 • Iraq War supplemental funding bill established a one-year legislative moratorium on adoption of the Proposed Rule • CMS ignored the moratorium and adopted the proposed rule as a Final Rule

23. Alameda County Medical. Center, et al., v. Leavitt, et al. (D.D.C. 2008). • CMS’s promulgation of the final regulation was “deliberately designed to outfox a clear directive of Congress.”

24. 2009 Recovery Act “It is the sense of Congress that the Secretary of Health and Human Services should not promulgate as final regulations the proposed regulation and . . . the purported final regulation published on May 29, 2007 (72 Federal Register 29748) and determined by the United States District Court for the District of Columbia to have been ‘improperly promulgated’, Alameda County Medical Center, et al., v. Leavitt, et al., Civil Action No. 08-0422, Mem. at 4 (D.D.C. May 23, 2008)).”

25. 2010 Final Rule • Implements the Alameda County decision. • Retains definition of units of governments that can make IGTs. • Removes Medicaid cost limits and restores Medicaid UPL. • Removes retention of payments requirement. • Shifts burden to State Medicaid agencies to evaluate the governmental status of health care providers.

26. 2012 GAO Report • 11 states reported that they paid supplemental payments to NFs in 2006 and 2010 • Reporting of State supplemental payments needs improvement

27. Pitfalls for Hospitals • “Too Much Too Fast” May Affect Bond Rating • Case in point: Moody downgraded Riverview

30. Areas to Monitor After Leasing NF • Bond Covenant Ratios May Be Affected By Accrued Liabilities Created • Startup Working Capital Loan Payoff • Insurance Coverage • Sale of the LTC Facility • CHOW not triggered • But due diligence must be done on the buyer and/or new management company

31. Questions J. Michael Grubbs Barnes & Thornburg, LLP 11 S. Meridian St. Indianapolis, IN 46204 (317) 231-7224 mgrubbs@btlaw.com