April 7, 2017

ILLINOIS HEALTH AND HOSPITAL ASSOCIATION

MEMORANDUM

TO: Chief Executive Officers, Member Hospitals and Health Systems

Chief Financial Officers
Government Relations Officers

FROM: A.J. Wilhelmi, President and Chief Executive Officer

John Bomher, Senior Vice President and Counsel, Govt. Relations & Policy
Joe Holler, Vice President, Finance

SUBJECT: Hospital Assessment Redesign Project Update #1

Synopsis: On June 30, 2018, the Illinois law that authorizes the Hospital Assessment Program
sunsets. The Hospital Assessment Program provides about $3.5 billion in Medicaid funding
for hospital and other health care services. Over the coming months, IHA will be working
with its members to reach consensus on legislation for a replacement Hospital Assessment
Program for consideration by the General Assembly during the Fall Veto Session in
November. This memo is the first in a series of regular updates that IHA will provide to its
members on the Hospital Assessment Redesign project.

Below are key questions and answers on the Hospital Assessment Redesign project.

What funding is provided by the Hospital Assessment Program?

Under the current Hospital Assessment Program, hospitals pay an assessment to the State of
about $1.3 billion per year. These funds are used to obtain federal Medicaid matching funds,
generating a total of about $3.5 billion in annual Medicaid funding. On June 30, 2018, this $3.5
billion in total annual Medicaid funding sunsets under the Illinois law authorizing the Hospital
Assessment Program. This funding includes:
$2.7 billion dedicated for Medicaid hospital services; and
$750 million for other Medicaid services.

What payments to hospitals are included under the Hospital Assessment Program?

The $2.7 billion in Medicaid hospital payments financed by the Hospital Assessment Program
consists of: 1) $1.9 billion in hospital access payments under the assessment programs
established in 2008 and 2012; and 2) $800 million in hospital ACA access payments, which are
the extension of the original assessment payments to new adults under the ACA, which began
in 2014 and were expanded to ACA adults enrolled in MCOs in 2016.
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What supplemental payment programs sunset under State law on June 30, 2018?

The payment programs described below sunset under State law on June 30, 2018. These
hospital payments are known as supplemental payments because the amount of the payment
is not linked to a specific claim for service, but is instead a fixed guaranteed amount, based on
utilization from a prior period, which supplements the current claim based payments. For
example, the 2008 Assessment payments are based on 2005 utilization and the 2012
Assessment payments are based on 2009 data. The following table summarizes each
supplemental payment program, including the amount of the assessment (or tax) paid by
hospitals:

Supplemental Assessment Payment to Net Gain State Plan Sunset

Payment Program (Tax) Hospitals 6/30/18 (Y/N)
2008 Inpatient ($892 M) $1,467M $575M No
Assessment
(uses 2005 data)
2012 Enhanced ($289M) $481M $192M No
Assessment
(uses 2009 data)
2014 Rate Reform 0 $325M $325M Yes
Transition
2014 ACA-FFS ($76M) $400M $324M Yes
2016 ACA-MCO ($76M) $400M $324M Yes
Total $1,335,130 $3,073,591 $1,738,460

What are the ACA-FFS and ACA-MCO supplemental payments?

The ACA access payments are essentially an extension of the assessment payment programs to
the newly eligible Medicaid adults under the ACA. They were implemented in 2014 for ACA
adults enrolled in the Fee for Service (FFS) program. In 2016, the State insisted that hospitals
increase the assessment (tax) to share a portion of the federal ACA funds with the State (similar
to the State taking a share of the funding under the hospital assessment program), when these
payments were extended to ACA adults enrolled in MCOs. It is estimated that the state will
receive approximately $150 million annually through FY 2018 due to the increased assessment
(tax) related to the ACA program. The provision in the Medicaid State Plan that authorizes the
ACA Access Payments under the FFS reimbursement system sunsets on June 30, 2018, which
means that federal CMS would have to approve any extension of the current payments.

What are the Rate Reform Transition Payments? Do they also sunset?

The 2014 Rate Reform Transition payments are time-limited fixed supplemental payments,
which were established to supplement the new claims-based rate system implemented in 2014,
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for those hospitals with projected estimated losses under the new system. The State reserved
these funds from the previous total General Revenue Fund spending levels, for the purpose of
mitigating estimated losses. Under current statute, the methodology for distributing these
Rate Reform Transition payments ends on June 30, 2018. However, these funds are to continue
to be used to pay for hospital services and may be incorporated into the hospital
reimbursement system to increase base rates or finance certain targeted adjustments to the
base payments. The provision in the Medicaid State Plan that authorizes the current Rate
Reform Transition payments sunsets on June 30, 2018, which means that federal CMS would
have to approve any extension of the current payments.

How will IHA obtain member input into the redesign of the Hospital Assessment Program?

The IHA Board has charged the IHA Medicaid Transformation Task Force (MTTF) with
developing recommendations on the strategy to preserve the funding provided by the Hospital
Assessment Program. The MTTF includes hospital leaders who represent the diverse
membership of IHA. In addition, IHA will be engaging the entire membership for input on this
critical issue.

What options are being considered for preserving the funding from the Hospital Assessment
Program?

The MTTF has discussed that there is a continuum of options for preserving the Hospital
Assessment funding. On one end of the continuum would be to simply extend the current
Hospital Assessment Program, as is. At the other end of this continuum would be to have all of
the funding used to increase the hospital claims based payment rates, either through base rate
increases or certain add-on payments (e.g., $100 for each inpatient day). Several factors will
need to be considered in evaluating these options, including, but not limited to, the net impact
on hospitals, the need to preserve access to services in vulnerable urban and rural
communities, the desire to have a predictable source of funding, the desire to have payments
more closely align with the current delivery of services, and compliance with the complex set of
federal Medicaid regulations that specify requirements for the State to receive federal
matching funds. Of course, the political environment will also be a key factor as we move
forward with this project (see below).

What steps are required to obtain approval of a Hospital Assessment Program?

First, as with any major public policy initiative, it is critically important that the hospital
community have consensus on any assessment program proposal. If there is significant
disagreement among hospitals, obtaining approval from the state and federal government will
be significantly more challenging. Second, the assessment program needs to be authorized
under State statute, which means that the General Assembly must pass a statute and the
Governor must sign it. One key fact that needs to be considered is that the Rauner
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Administration, through the Department of Healthcare and Family Services, is charged with
submitting the proposal to the U.S. Centers for Medicare and Medicaid Services (federal
CMS). Finally, federal CMS has to approve the assessment and the payments that are
financed by it. Under the FFS program, this involves approving the Medicaid State Plan
Amendment that HFS must submit. Under managed care, CMS also has authority to review the
MCO capitation rates that the State must submit to CMS for review. Often, obtaining CMS
approval involves negotiation between the state and federal agencies.

What is IHAs Position on seeking an extension of the current Hospital Assessment Program?

IHA is working with its diverse members, the Department of Healthcare and Family Services
(HFS), and other stakeholders, to reach consensus on legislation for a replacement Hospital
Assessment Program for consideration by the General Assembly during the Fall Veto Session in
November. If agreement on a new program is not reached by then, legislation to extend the
current Hospital Assessment Program may be necessary. Legislative action by Fall 2017 is
needed to allow time for the State to obtain federal CMS approval and implementation by July
1, 2018.

What are the next steps with respect to the redesign of the Hospital Assessment Program?

Staff envisions an iterative process of developing various assessment models with the input and
guidance of the Medicaid Transformation Task Force, its technical work group, other IHA
member groups as well as the general membership. Over the coming months, IHA will engage
the membership to obtain comments and input into the process. In the coming weeks, IHA will
be asking hospitals to validate the data that will be used to develop assessment models.

IHA staff anticipates having a draft final recommendation for the IHA Board of Trustees to
consider at its September 2017 meeting.

For additional background on the current assessment programs:

2008 Inpatient Assessment Click Here
2012 Enhanced Outpatient Assessment Click Here

For further information, please contact:

Joe Holler, Vice President, Finance, 217-541-1189 or jholler@team-iha.org
Jo Ann Spoor, Senior Director, Finance, 217-541-1187 or jspoor@team-iha.org
John Bomher, Senior VP and Counsel, Government Relations and Policy, 630-276-5470
or jbomher@team-iha.org