A proposed change in Medicaid rules could cost Texas hospitals billions of dollars, forcing many to cut services and some rural hospitals to close their doors, health care industry officials said.

The change, aimed at increasing the transparency of how the program’s money is spent, narrows the definition of state and local funds that can be used to determine federal matching funds. That, in turn, would reduce federal funding and cost Texas hopsitals an estimated $11 billion a year, industry officials said.

Houston hospitals would lose an estimated $500 million a year, said Tim Ottinger, director of governmental relations at CHI St. Luke’s Health.

A drop in funding would mean extreme hardship for many of Texas’ rural hospitals, which stand to lose some $900 million a year. The Texas Organization for Rural and Community Hospitals (TORCH) found that 46 percent of the state’s rural hospitals operate at a loss. Over the last decade, 26 rural hospitals have closed in Texas, the highest rate in the nation.

It’s unclear how many more rural hospitals could close if the proposed rule goes into effect as written, but it would be devastating to pull so much money from their budgets, said John Henderson, president of TORCH.

“A business can’t survive,” Henderson said. “But this isn’t just a business, it’s a service.”

Changing the rules

Medicaid, which is jointly funded by state and federal governments, is the health insurance program for the poor. The Medicaid Fiscal Accountability Rule proposed by the Centers for Medicaid and Medicare Services (CMS) calls on hospitals to share more data publicly about what they do with money received from Medicaid.

But it also redefines public funds, which include money from city, county and state taxes, patient revenues, lease and grant income and miscellaneous revenue sources. The federal government matches what those hospitals generate in public funds in supplemental Medicaid payments

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Under the proposed rule, “public funds” would be redefined as “state or local funds,” meaning hospitals can’t count patient revenues. The less money a hospital reports in public funds, the fewer federal Medicaid dollars are available to them.

The Centers for Medicaid and Medicare Services have not set a date for finalizing the proposed rule. Seema Verma, administrator of CMS, said the rule aims to ensure taxpayer money is well spent.

“CMS recognizes the critical importance of supplemental funding to the safety net,” she said, “but those payments must support value and improve care and the quality of life of our Medicaid beneficiaries.”

An analysis from the American Hospital Association and the consulting firm Manatt Health found Medicaid payments to hospitals nationwide would fall between $23 billion to $31 billion annually, or by up to 17 percent of hospital funding.

While the Centers for Medicaid and Medicare Services said the change would increase transparency, critics said the alterations would cripple Medicaid financing nationwide as health care costs rise.

“CMS has provided little to no analysis to justify these policy changes, nor has the agency assessed the impact on providers and the patients they serve,” the American Health Care Association, which represents long-term care providers such as assisted living facilities, and American Hospital Association said in a joint statement.

Over 4,000 hospitals, doctors and advocacy groups filed comments by the Feb. 1 public comment deadline, according to the Centers for Medicaid and Medicare Services.

Urban and suburban hospitals wouldn’t see a large number of closures from the proposed rule change, industry officials said. But, experts said, losing that amount of of money would drastically affect their services. For instance, hospitals that offer trauma care may stop treating severe cases or stop taking trauma patients altogether if they don’t have the funding to support it, CHI St. Luke’s Ottinger said.

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“Changes this substantial would cause all hospitals to look at consolidations of services, locations of sites of care,” he said.

An ideal rule?

If the definition of public funds were limited to those collected by local and state government, hospitals and legislators might try to implement tax increases to make up the difference — and that’s a hard sell in historically tax-averse Texas, health care officials said.

That would leave it to urban hospitals and local districts to shoulder the burden of Medicaid patient and program costs.

“As states have shrunk and shrunk their revenue generating capacity and cut their budgets, part of what happens is they start pushing more of Medicaid program outside of the state budget,” said Anne Dunkelberg, associate director at the Austin-based Center for Public Policy Priorities.

Local funds, rather than state money, currently provide approximately 60 percent of revenues at Texas hospitals, she said.

The American Hospital Association wants the Centers for Medicaid and Medicare Services to do away with the proposed rule because of the sizable funding cuts, unclear data reporting requirements and legal concerns that it violated federal rules on issuing regulations.

Others just want the definition of public funds rewritten to avoid funding crises at the state level.

“It’s pulling the rug out from under everything states like Texas are doing to get to the stated goal of transparency,” said Henderson, the president of the rural hospital association.