The budget recently adopted by the de Blasio Administration and the City Council continued the string of budget actions that have substantially increased the city’s financial support of its public hospital system over the course of fiscal year 2016. Through increased subsidies and forgiven payments, the city will provide $588 million in 2016 and a total of $1.7 billion from this year through 2020 in additional fiscal relief to NYC Health + Hospitals (H+H) over the amount budgeted when the 2016 budget was adopted last June. (Unless otherwise noted, all years refer to city fiscal years.) Including payments for health care services, city support for H+H in 2016 totaled $2.4 billion.¹

Even after taking these city actions into account, H+H projects a cumulative operating deficit—as measured on a cash basis—of $6.1 billion over the five-year period, 2016 through 2020. In April, the city published a long-term plan (the “Transformation Plan”) to eliminate this deficit with increased revenue and reduced costs to H+H. This brief updates figures on the city’s subsidy to H+H (detailed in a previous IBO report) and provides an overview of H+H’s Transformation Plan as it relates to the system’s ongoing financial difficulties.

Increased City Support of H+H in 2016

NYC Health + Hospital’s long-term financial stability depends not only on the execution of H+H’s internal initiatives, but also on several city budget actions. These actions build on the city’s existing fiscal relationship with H+H. In past years the city has paid H+H for providing certain health care services to specific populations, provided H+H with an unrestricted subsidy, and funded part of its supplemental Medicaid. Supplemental Medicaid payments are funds that health care facilities providing care to high rates of Medicaid and uninsured patients may receive to compensate for the low service payments made on behalf of these patients (see sidebar).

The city also directly pays some of H+H’s expenses: medical malpractice claims, employee health insurance, and debt service. (In theory the system reimburses the city for each of these expenses, but in some years the city opts to forgive NYC Health + Hospital’s obligation to pay for one or more of these expenses.) In 2015, the city began paying for the system’s increased expenses due to recently settled labor agreements. The city’s net payments to H+H increased from $492 million in 2009 to $1.3 billion in 2015, driven largely by increased supplemental Medicaid payments by the city.

When the 2016 budget was adopted last spring, the city’s net payments to H+H were set to increase to $1.8 billion for this year. The 2017 adopted budget commits to forgiving some of H+H’s reimbursement payments to the city, paying for additional labor agreement settlement costs, and increasing the city’s unrestricted subsidy to H+H. These actions further increase the city’s net payments to H+H in 2016 by $588 million to total $2.4 billion. While the increase in the unrestricted subsidy was only for 2016, the city will forgive debt service payments and cover increased labor agreement costs in future years.² In total these city actions will provide $1.7 billion in additional fiscal relief to H+H from 2016 through 2020.

The city’s annual financial support for H+H is budgeted to decline slightly in future years as fewer payments are forgiven and other payment streams decline. The city may be forced to increase this support if the Transformation Plan fails to eliminate H+H’s deficit. In addition, the city is prepaying $400 million of its 2017 payments to H+H in 2016 for accounting purposes, which provides H+H with additional cash on hand as it begins its Transformation Plan. The following section details these initiatives and calls attention to those savings and revenue that are uncertain.

Transforming H+H

Recent changes in the health care system and government policies have, and will continue to, compound the issues that have long created financial trouble for NYC Health + Hospitals. H+H and the city have developed a Transformation Plan to eliminate the H+H deficit by addressing some of these issues. This section outlines the factors contributing to H+H’s low levels of patient revenue, declines in nonpatient revenue, and increases in expenses and then details the related Transformation Plan initiatives to address these difficulties.

Increase Low Patient Revenue. Inpatient admissions are declining at hospitals nationwide as the use of preventive and outpatient care grows. H+H has experienced stagnant patient revenue because of declining inpatient admissions without a parallel increase in outpatient visits. From 2011 through 2015, inpatient admissions at H+H facilities dropped by 13 percent—from almost 200,000 in 2011 to 172,000 in 2015—while outpatient visits remained relatively constant. Slight increases in revenue from outpatient services have only barely offset decreases in revenue from inpatient services.

This decline in inpatient visits and lack of growth in outpatient visits has been particularly detrimental to H+H because the system already receives low reimbursements for the services it provides. H+H provides services for disproportionately high shares of Medicaid and uninsured patients as compared with the general New York City population. While only 24 percent of the New York City adult population is enrolled in Medicaid and 14 percent is uninsured, 45 percent of visits to H+H facilities are by Medicaid enrollees and 25 percent of visits are by the uninsured.³

The Medicaid program typically provides lower reimbursement for services than private insurance programs and the uninsured may provide little or no payment for the services they receive. In addition, H+H is losing some of its Medicaid patients to other hospital systems—as these patients recognize their choices in providers throughout the city—and is maintaining its share of uninsured patients.
H+H plans to increase patient revenue not by reversing the decline in inpatient admissions, but by boosting outpatient service availability and by receiving greater reimbursement for providing services for Medicaid and uninsured patients. It assumes H+H can maintain its current patient base and does not depend on H+H caring for substantially more patients or on receiving higher payments from private insurers.

H+H expects nearly $1.6 billion in increased patient revenue through 2020. Most of the procedural and policy changes needed to achieve this revenue have already received the necessary approval from state and federal agencies. Since last year, H+H has received approval to receive increased reimbursement rates in exchange for providing higher quality care to its Medicaid managed care patients and for all Medicaid beneficiaries within some of its clinics. H+H also plans to increase its revenue from providing care to its currently uninsured patients by enrolling those eligible in insurance and by receiving additional federal funds for providing health care to those who cannot enroll in health insurance. The plan to receive additional federal funds for providing care to the uninsured—an anticipated $306 million over five years—has not yet received necessary federal approval.

Recapture Declining Nonpatient Revenue. As noted above, H+H sees a disproportionately high number of Medicaid and uninsured patients. Supplemental Medicaid funds are meant to enhance payments to such providers because their reimbursement for patient care is low, but a combination of state and federal policies will reduce these payments in the immediate future. Federal policy will decrease Disproportionate Share Hospital (DSH) funds nationally beginning in 2017 and the state’s transition of its Medicaid program into managed care decreases H+H’s ability to receive Upper Payment Limit (UPL) funds (see sidebar for additional detail). H+H projects that its supplemental Medicaid receipts will decline from $2.4 billion in 2016 to $1.4 billion in 2020.

New York State and federal agencies have already approved Medicaid waiver agreements to recapture some of these losses, but H+H is also depending on amendments to these agreements to further increase their supplemental Medicaid receipts. H+H aims to recapture $1.9 billion of the roughly $2.1 billion it will lose in aggregate supplemental Medicaid payments from 2017 through 2020. The majority of this anticipated revenue ($1.3 billion) depends on future state and federal approval. Specifically state and federal agencies must approve changes to New York’s DSH allocation methodology and amendments to the existing Medicaid waiver and state plan.

In addition to efforts to increase supplemental Medicaid payments, H+H is also planning to increase revenue through its health insurance company, MetroPlus. H+H’s budget assumes $374 million in increased revenue over five years from expanded MetroPlus enrollment and greater usage of H+H facilities by its enrollees. H+H also plans to repurpose some of its existing sites for new uses such as housing or retail and has budgeted $100 million in projected revenue from these efforts.

Decrease Costs. H+H reports high costs as compared with other New York City hospitals for the hospital-based procedures it performs.⁴ This may be due to staffing levels, as well as the price H+H pays for some medical and other supplies. Ongoing initiatives to reduce staff through attrition and improve supply and pharmacy costs aim to save H+H $220 million annually by 2020.

In addition to its ongoing cost issues, H+H’s staffing and maintenance expenses have continued to grow, even as usage of its facilities has declined in recent years. As inpatient admissions decreased by 13 percent from 2011 through 2015, total staffing expenses grew by 11 percent. Since H+H is not planning on substantial increases in admissions or visits in the future the hospital system must adjust its expenditures to correspond to the usage of its facilities. NYC Health + Hospitals plans on transitioning towards providing more preventive and ambulatory care and less acute hospital-based inpatient care. Through this shift H+H aims to increase the health of its patients and decrease costs. Providing more outpatient care is financially sensible both in the immediate years—as running a clinic is less expensive than running a hospital—and over the long term as many patients who receive preventive care need less emergency and acute care over time.

Although the Mayor has explicitly precluded closing entire hospitals, dismissing staff, or privatizing services, H+H has already begun reducing staff through attrition and plans to further reduce personnel and other maintenance expenses by downsizing inpatient and other underused services. H+H plans on saving $444 million annually by 2020 by shifting towards more outpatient and less inpatient care; however, H+H has not yet determined its specific plan for doing so. While these plans will not depend on approvals by outside government agencies, H+H must quickly identify the facilities involved and what services will change. H+H must also continue to work with its labor unions to achieve these savings goals.

Cooperation Needed to Raise Revenue, Reduce Costs

H+H plans to eliminate its deficit by increasing its patient and nonpatient revenue sources and by reducing costs. Over half (52 percent, or $3.0 billion) of the anticipated fiscal relief from the Transformation Plan initiatives is dependent on state or federal action. While just under half of this amount ($1.4 billion) has already received approval, the balance ($1.6 billion) is contingent on the approval of new or amended agreements with state and federal agencies. As such, the plan’s success depends not only on the execution of its internal initiatives and agreements with labor unions, but also on cooperation from state and federal agencies. In addition, H+H must quickly create a specific plan for downsizing its inpatient care and expanding its provision of outpatient care to achieve its projected expense reductions.

Prepared by Erin Kelly

PDF version available here.

Endnotes
¹Adjusted for prepayment.
² In the preliminary budget plan released in January 2016, the city shifted $204 million annually from its supplemental Medicaid budget to the H+H unrestricted subsidy because of anticipated declines in federal matching payments. This shift increased the unrestricted subsidy and decreased supplemental Medicaid funding in 2016-2020, but did not affect the city’s anticipated total payments to H+H.
³H+H Finance Committee Reports; Department of Health and Mental Hygiene Community Health Survey, 2014.
⁴IBO analysis of 2014 New York State SPARCS database.