Background: At the maintenance level budget baseline, Washington is expected to spend $3.7 billion during the 2011-13 fiscal biennium on inpatient and outpatient hospital services for the 1.2 million low-income children and adults covered by Medicaid and the other state medical assistance programs. Of this total expenditure, $1.5 billion is expected to be paid from the state General Fund (GF-S); $368 million from the Hospital Safety Net Assessment Fund; and the balance from federal Medicaid matching funds.

These funds will be expended for care provided at 90 in-state and ten border county hospitals. Of the 90 in-state hospitals, 11 are government-owned facilities that are paid under a certified public expenditure (CPE) mechanism; 37 are designated rural critical access hospitals for which state Medicaid payments are set at 100 percent of cost; and the remaining 42 are private facilities that are paid under the hospital prospective payment system (PPS) adopted by the state in 2007.

The safety net assessment fund was established by legislation enacted in 2010 that imposed fees ranging from $10 to $200 per patient day on all non-Medicare patient days of care delivered by non-governmental hospitals in the state. This assessment is projected to raise $427 million of revenue during the 2011-13 fiscal biennium. Revenues in the fund, and associated federal Medicaid matching funds, may only be used for payments to hospitals. The 2010 legislation establishing the assessment and fund directed that funds were to be used to rescind a 4 percent reduction in Medicaid inpatient and outpatient payment rates that had been budgeted for implementation in July 2009; to increase Medicaid inpatient payment rates by amounts ranging from 3 percent for governmental hospitals to 17.7 percent for PPS hospitals; to increase Medicaid outpatient payment rates by amounts ranging from 4 percent for non-state CPE hospitals to 42.5 percent for PPS hospitals; and to pay $49.3 million of hospital billings that would otherwise need to be paid from the GF-S.

In preparation for the 2011 session, at the request of the chairs of the legislative health care and fiscal committees, the Department of Social and Health Services contracted with Navigant Consulting to assess the adequacy of Washington's Medicaid hospital payment rates following enactment of the assessment and associated rate increases. Among other findings, the review concluded that there is sufficient access to hospital services in Washington; that the quality of care in Washington's hospitals is comparable to that provided nationwide; that 2011 Medicaid inpatient and outpatient rates for PPS hospitals exceed the rates the federal Medicare program would pay for the same services by an average of 6 percent and 5 percent respectively; and that the net operating margin of the 27 hospitals that provided more than 5000 days of care to Medicaid patients in fiscal 2009 totaled $664 million, and averaged 6.1 percent of revenue.