Phoenix Hospitals Tax Themselves to Cash In on Federal Funds

The city expects to bring in hundreds of millions in federal dollars through the initiative.
by | February 12, 2013

What can hospitals do when the weight of uncompensated care, driven by high uninsurance, is costing them millions of dollars every year? Well in Phoenix, they decided to tax themselves—of all things—and in turn draw hundreds of millions of dollars in matching federal funding.

The Phoenix Access to Care Ordinance, passed by the City Council in December, places a yearlong assessment on local hospitals, with a few exceptions for government-run facilities and children’s hospitals. The tax will funnel $130 million to a new funding stream within the Arizona Medicaid program, which will be used to pay claims at the city’s hospitals. The federal government will match that revenue at a 2:1 rate, which means more than $200 million in federal dollars will be coming back to Phoenix.

It won’t offset all of the hospitals’ uncompensated care costs—estimated to be more than $540 million in 2013—but it will make a significant dent in those losses. By solidifying an industry that is crucial to both Phoenix and Arizona as a whole, accounting for $28 billion in business activity across the state, the policy works not only toward the public health, but also economic development, says Phoenix Mayor Greg Stanton.

The hospitals approached Stanton with the proposal last year, he says, after the Arizona Legislature failed to pass a bill that would have enacted a statewide initiative but allowed cities to pursue one on their own. The hospital executives painted a dire picture for him. Though he declines to give specific figures, Stanton says they told him “the job losses were going to be massive” if they continued to lose such huge sums on uncompensated care. So he quickly became the top advocate for the plan.

“Our hospitals were being hammered, and our hospitals were being put at a competitive disadvantage because those costs,” he says. But the city also added some rules of its own, including a stipulation that average people not bear the cost of the assessment by paying more for their care.

“I have a close working relationship with our hospitals. I know how important they are to the long-term well-being of our community,” Stanton says. “This really is a public-private partnership, to protect jobs and increase health care, by doing the right thing for Phoenix.”

To underline his point, more than 100 doctors, hospitals CEO’s and other health-care providers came to the Dec. 12 City Council meeting when the ordinance was passed, according to the Arizona Republic. “There are a lot of people who rely on Phoenix’s emergency rooms to be there for them when they get sick or injured,” said Larry Volkmar, chief executive officer of Banner Good Samaritan Medical Center, one of the city’s largest hospitals, in a statement endorsing the plan. “Simply put, this is the right thing to do for patients.”

The last piece of the puzzle is getting federal approval. It wasn’t a guarantee that the feds would sign off on Phoenix’s plan—the ordinance is essentially the same as the statewide provider tax that more than 40 states employ to pay for their share of Medicaid funding, and President Barack Obama has proposed in recent budgets limiting states’ ability to charge those taxes, because they end up costing the federal government more money.

But Stanton came personally to Washington, D.C., to meet with officials from the Centers for Medicare and Medicaid Services (CMS) last fall, and he says the conversations went well. “I could get the call today,” he says. “I’m like a daddy waiting for the baby to be born.”

If approved, the tax would last for the year, and the city would reassess. The big question is whether the state legislature approves the Affordable Care Act’s Medicaid expansion, which Gov. Jan Brewer unexpectedly endorsed last month. A common argument in favor of the expansion, and one used by Brewer, is that it would reduce uncompensated care costs for health-care providers. One study suggested that states would even save money for that reason, and estimates from the Urban Institute project that Arizona would reduce its number of uninsured by more than 400,000.

In theory, expanding Medicaid would eliminate most of the need for the hospital tax. But that’s far from a certainty with a Republican-controlled legislature, even with Brewer’s endorsement. While Stanton is a passionate advocate for expansion, he knows “the politics are hot and heavy.” So whichever way the expansion debate goes, he says the hospital tax has positioned Phoenix to start lightening the load of uncompensated care.

“We knew it was a one-year thing. It was the right thing to do, and we’ll take appropriate steps as needed next year,” Stanton says. “For now, we’re just making sure that Phoenix is going to be a leader on this in our state.”

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