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Budget fix in health and human services: Cut rates or cut eligibility

I called Rep. Paul Thissen (D-Minneapolis) the other day to talk about the upcoming legislative session and the Pawlenty administration’s direction to state agencies to draft budgets with 5 percent cuts.

I called Rep. Paul Thissen (D-Minneapolis) the other day to talk about the upcoming legislative session and the Pawlenty administration’s direction to state agencies to draft budgets with 5 percent cuts.

When the dust settles, the cuts are expected to fall disproportionately on health and human services.  Thissen, who chaired the House Health and Human Services Committee last session, said the education budget would be held harmless, at the very least. If education (40 percent of general fund spending) is off limits, that makes health and human services budget (PDF) (more than 27 percent of the general fund spending) a big target to make up for the billion-dollar-plus deficit.

Thissen said he has already heard from many human services nonprofits worried about the cuts. Their concerns are well founded, he said. Then he said something about the cutting process that seemed pretty obvious, but I never heard it framed so clearly. In health and human services, he said, the Legislature can address the deficit either by cutting service provider rates or reducing program eligibility.

“That [choice] will be what the legislative process will be about,” Thissen said. “Those are the two ways that you get at it.”

Subsidizing the gap
Nonprofit leaders have watched the oncoming budget train wreck for months. I called several to get their view on the tough choice: Rates vs. Eligibility.

Kate Barr, executive director of the Nonprofit Assistance Fund, said freezing or cutting rates puts more pressure on nonprofits to raise money to cover the program’s true cots. If the Legislature cut program eligibility to save money, nonprofits have to deal with clients who still come for help. “It is difficult for the nonprofits to justify turning away people who were eligible at some point,” she said. “But yes, cutting rates would be much more devastating. Then you are forced into subsidizing the gap.”

Jodi Sandfort, assistant professor at the Humphrey Institute of Public Affairs Public and Nonprofit Leadership Center, said nonprofit leaders are committed to serving as many people as possible, but reimbursement haven’t kept up with costs. “There comes a point of no return, and I would argue that we are at that point,” she said. “You can only continue to cut your own administration and your own operations so far before you begin to lose effectiveness.”

At risk of closing
Kari Thurlow, vice president of advocacy for Aging Services of Minnesota, said any Medicaid rate cuts would be devastating to her members. For nursing homes that accept Medicaid patients, Medicaid rates have a powerful impact on revenue. Those nursing homes have to charge uniform rates for all patients; the Medicaid rate sets payments for private-pay patients, too.

So which is tougher to absorb, eligibility or rate cuts? “That is a really hard question to answer,” she said. “They would both be bad news.”

Aging Services represents nursing homes, assisted living programs and home care providers, including 227 nonprofit and faith-based nursing homes. A survey of member nursing homes found one third are “at-risk of closing,” she said. To be “at risk,” a nursing home has to have a negative 5 percent operating margin or worse and have no cash on hand. The number of at-risk facilities has grown over the years. “We are in a precarious state,” Thurlow said.

Laurie Pumper, executive director of the Minnesota Association of Mental Health Residential Facilities, said her member organizations work with adults with persistent and severe mental illness, those who have recently left a hospital or need intensive services. Making fewer people eligible for government supports for those services would probably mean more homeless people.

“To say, ‘Sorry, we can’t serve you,’ that is a bad message to send,” Pumper said.

In the alternative, if the state cuts reimbursement rates or leaves rates flat, that could mean wage freezes of layoffs. That would make it more difficult for facilities to retain workers and meet state-mandated staffing levels, Pumper said.

Nonprofits will make these and other arguments throughout the session.

The Nonprofit Assistance Fund’s Barr said long-term, people need to take advantage of the funding crisis to talk about better service delivery.

But in the short-term, it’s going to be about cutting, either rates or eligibility.

Or perhaps entire programs.