Letter to The Honorable Max Baucus, Chairman, Committee on Finanace and The Honorable Charles Grassley, Ranking Member, Committee on Finance

Letter

March 19, 2007

The Honorable Max Baucus
Chairman
Committee on Finance
U.S.Senate
219 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Charles Grassley
Ranking Member
Committee on Finance
U.S. Senate
219 Dirksen Senate Office Building
Washington, DC 20510

Dear Chairman Baucus and Ranking Member Grassley:

We are writing to express our concern about the proposed rule (CMS-2258-P) recently released by the Centers for Medicare and Medicaid Services (CMS) that would change how states fund their Medicaid programs and their hospitals. Although we generally support efforts to control Medicaid spending, we are concerned about the impact this particular proposal would have on our state of Tennessee.

The proposed rule imposes cost limits for public health care providers and alters the definition of "public" status. Specifically, the proposed rule would limit payments to safety-net providers by capping reimbursement payments, redefining eligible public providers and imposing new restrictions on non-federal funding sources. According to CMS, the estimated impact of these changes could reach $3.87 billion over five years.

The proposed rule also imposes significant new restrictions on certified public expenditures (CPEs). Under the proposal, only hospitals meeting the new definition of public hospital and are reimbursed on a cost basis would be eligible to use CPEs to help states fund their programs. These restrictions would result in fewer dollars available to offset rising costs and would threaten hospitals' financial stability.

Based on analysis from the TennCare Bureau, which administers Tennessee's Medicaid program, the proposed rule would cost our state's hospitals an estimated $306 million over five years. Operating margins for 19 Tennessee hospitals, including 10 rural facilities, seven urban facilities and two safety net providers will turn from positive to negative solely as the result of the loss of Medicaid revenue.

Some of the hardest hit facilities in our state are safety net hospitals, such as the Memphis Medical Center ("the Med") and Erlanger Hospital, which would most likely no longer meet the definition of a government hospital. A loss of federal funds would trigger a decrease in state funds going to these hospitals from TennCare. This one-two punch for the region's largest safety net hospitals would cause certain closures of entire services for the community and perhaps even the hospitals themselves.

Tennessee hospitals continue to face increasing costs for workers, drugs and biologics, professional liability coverage, and disaster readiness. Decreases in payments of this magnitude could result in staff reductions, as well as forcing our state's hospitals to reduce or eliminate services - such as obstetrical services and psychiatric units - that would put further pressure on their financial viability. Decreased payments will also make it more difficult for Tennessee hospitals to comply with the cost of federal mandates, such as greater reliance on electronic health records.

In addition, the proposed rule would impact the cost of capital for hospitals as well as their basic access to capital. Hospitals that are governed or owned by cities and states frequently have bonds issued using the credit authority of the city or county. If these hospitals are no longer considered government facilities by CMS, they would likely experience a decrease in their credit rating. The resulting increase in the cost of capital - and in some cases the loss of access to capital altogether - would have real consequences ranging from deteriorating physical plants to an inability to provide the newest technology.

We hope that we can work with the Finance Committee to address the shortcomings in this rule as originally proposed. We'd be glad to furnish additional information, or your staff may wish to be in touch with Mary-Sumpter Johnson with Senator Alexander at 224-2915 or Paul Palagyi with Senator Corker at 224-2945.

Thank you for your attention to this matter.

Sincerely,

Sen. Lamar Alexander

Sen. Bob Corker

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