AUGUSTA, Maine — When supporters and opponents of Gov. Paul LePage’s plan to pay off Maine’s $484 million hospital debt square off at a State House hearing Monday, they’ll be discussing a liability with roots that stretch back three decades.

Maine has accrued debts to hospitals for services they provide to patients covered under the state’s Medicaid program since the early 1980s. That’s when the state started using a system to pay its hospital Medicaid bills that made debt part of the process.

The liability didn’t start to pile up in a big way until about a decade ago, however. Since then, it’s become the basis for frequent political fights among Republicans and Democrats in Augusta.

Prospective payments

The prospective interim payments, or PIPs, which Maine’s Medicaid program started to use in the early 1980s to pay hospitals for the services they provided to Medicaid patients, assured a steady revenue stream for health care providers, said Jeff Austin, vice president of government relations and communications at the Maine Hospital Association.

Regardless of patient volume, providers could expect the same payout each week. “It’s a good system, particularly for small providers,” Austin said.

State officials calculated that weekly payment for hospitals based on annual cost reports the hospitals submitted to the state. If the weekly payouts — the prospective interim payments — fell short of a hospital’s actual costs by the end of the year, the state would owe the hospital. If the state’s payments exceeded a hospital’s costs, that hospital would owe the state.

Debt didn’t accrue in a significant way during the first two decades of the PIP, said Herb Downs, director of the audit division at the Maine Department of Health and Human Services. At the end of fiscal year 2000, the state had $10.4 million in Medicaid debt on the books, according to the Office of the State Controller.

The state could more or less estimate hospitals’ costs and accurately judge the weekly payouts, he said. And when the state owed hospitals, it could generally settle up on schedule — meaning about 18 months to two years after the service was provided — without letting the debt build up.

“You had them go both ways,” with the state owing hospitals at times and the hospitals owing the state at other times, Downs said. “There’s always a settlement amount for sure, but it’s not big numbers. The big numbers don’t come until probably 2005, 2006, 2007.”

By the end of fiscal year 2005 — a fiscal year runs July 1 through June 30 — the debt had grown to $254.7 million. The debt level peaked in 2008, when it reached $546.4 million.

Confluence of costs

That’s when the costs of expanding Medicaid services, rising health care charges, tight state budgets and a legal settlement the state paid out to 21 hospitals came to a head.

“You can have a PIP system without huge debt,” Austin said. “What happened to us, they found the costs were growing, and they knew they wouldn’t have the money to pay the costs.”

Maine in the late 1990s and early 2000s started expanding Medicaid coverage to a greater portion of children and parents. Medicaid coverage expanded to some adults without children in 2002.

Medicaid enrollment in the state rose 78 percent between 2002 and 2011 to about 361,000 people, according to the Department of Health and Human Services. Between 1997 and 2012, total Medicaid spending — a combination of state and federal funds — more than doubled, increasing 137 percent, to $2.44 billion from $1.03 billion, according to the Legislature’s nonpartisan Office of Fiscal and Program Review.

Today, Maine ranks fourth for the percentage of its residents — 27 percent — covered by Medicaid.

But as more Medicaid patients started visiting the state’s 39 hospitals for treatment, the state didn’t adjust its weekly payouts accordingly. One reason was that the estimated payment system became less accurate as Medicaid enrollments grew, Downs said. Another reason was the state’s decision to cap those weekly payments to hospitals.

“There was only so much in the budget to pay PIPs,” Downs said. “We had to cap the PIP because we couldn’t pay the full obligation.”

In 2006, the state paid out a $96 million settlement to 21 hospitals that had taken the Department of Health and Human Services to court, alleging the department didn’t accurately pay out a federal funding stream known as the Disproportionate Share Hospital payments between 1993 and 2001.

“That’s $96 million we didn’t have to pay toward settlements and other things,” said John Martins, a DHHS spokesman.

And around that same time, a change in federal rules meant the Department of Health and Human Services had to change the way it paid out claims for elderly patients who qualified for both Medicare and Medicaid. The department’s billing system at the time couldn’t make the change, so additional bills went unpaid, Downs said.

“You had the rule change come in after the system was already designed. It just wasn’t built into the system,” he said. “That’s part of the debt that’s still outstanding.”

The state’s outstanding Medicaid debt is owed mostly to the state’s large, acute-care hospitals, said Austin. Sixteen of the state’s smaller hospitals, known as critical access hospitals, account for about 15 percent of the $484 million debt load. Those hospitals, located largely in rural areas far from other health care centers, receive additional federal funds but are limited to 25 beds and don’t provide a full range of medical services.

Debt politics

As Maine’s Medicaid debt grew, the liability found itself at the center of budget battles during Gov. John Baldacci’s administration as Democrats and Republicans wrangled over how large a payback a strained state budget could handle.

During the 2006 gubernatorial campaign, Republican Chandler Woodcock criticized the Democratic incumbent for taking credit for a balanced budget while the state’s Medicaid debt remained on the books.

And as the 2006 election approached, Baldacci struck a deal with the Maine Hospital Association that put hospitals first in line for any surplus funds at the end of a budget year. Baldacci and hospital officials expected the arrangement would yield $82 million in state funds by 2010 that could be leveraged into a $221 million Medicaid debt paydown with federal matching funds included.

Democrats praised the move, while Republicans questioned its timing. “It seems that if there had been an election a year ago, this problem would have been solved,” said Josh Tardy, who was the House Republican leader.

Four years later, LePage made a campaign issue of paying back the state’s hospitals, and, during his first months in office in 2011, he negotiated a supplemental budget that included $66.8 million in state funds for the hospitals, which translated into a $247 million total payment with federal funds. That payment brought Maine’s debt current through the first half of 2009.

State payments to hospitals to settle up for Medicaid services had increased throughout the decade, but they didn’t keep up with a debt that was still accruing. According to DHHS, hospitals received a $101 million payback in 2007 and a $264 million payment in 2009. Those numbers compared with a $1.7 million settlement payment in 2002, before major debt started to accrue.

Now, LePage says he’ll veto any legislation that comes across his desk before lawmakers agree to his plan to repay the hospital Medicaid debt using increased revenues from a renegotiated wholesale liquor contract. The current $484 million debt dates back to mid-2009.

Accruing debt

While the state devoted more funding during the last decade to settle up with hospitals, it continued to accrue debt because it continued paying hospitals through the PIP system that didn’t keep pace with hospital costs. The two-year budget passed in 2009 by the Democratically controlled 124th Legislature started to change that by requiring the state to implement a real-time payment system modeled after the system the federal government uses to pay Medicare bills.

As lawmakers in Augusta debate hospital debt this winter, Democrats have claimed credit for switching to a payment system that put an end to the hospital debt’s accrual. But the funding to start using the new payment system didn’t come for another two years, until the Republican-controlled 125th Legislature passed a new two-year state budget in 2011.

With the new payment systems in place — the reimbursement tool for inpatient services took effect in July 2011, and the outpatient reimbursement system took effect in July 2012 — the state has virtually stopped accruing new Medicaid debt.

“It’s one thing to build the machine,” said Austin. “It’s another to start sending money through it.”

Matthew Stone is a reporter in the BDN’s State House bureau.