Jefferson Policy Journal

Should Non-Profit Hospitals Boost Redskins’ Profits?

Posted on August 17, 2016 by matt ohern

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Not too long ago, sports facility naming rights were reserved for corporations with big bank accounts and grandiose advertising campaigns: automobile companies, banks, technology giants and beer companies. Now another category of advertiser, a disturbing one, has entered the picture: nonprofit hospitals.

Nonprofit hospitals in Virginia, including Inova, have been a part of the chorus urging a dramatic expansion of Medicaid and the effort to block competition through reforming the monopolistic regulations known as the Certificate of Public Need. These nonprofit hospitals say that their finances are shaky and government subsidies are needed.
But last month, the Washington Redskins sold the naming rights to their training facility and headquarters in Ashburn to nonprofit mega-hospital chain Inova Health. While the financial details of the Inova deal have yet to be released, a similar partnership between the Redskins and Bon Secours, another nonprofit health system, may provide some idea.
In 2012, Bon Secours Richmond Health System became the sponsor of the Redskins’ training camp facility in Richmond. It agreed to pay $3.2 million for the naming rights.
Nonprofit hospitals such as Inova and Bon Secours are expected to provide charity care, not advertising for major NFL teams, in exchange for tax exemptions that include not paying property taxes. The Virginia Hospital & Healthcare Association reported that in fiscal 2013 Virginia’s nonprofit hospitals benefited from more than $928 million in tax exemptions. Yet, a Watchdog.org review of 2012-2013 financial reports found that charity care averaged only 4.2 percent of total expenses for Virginia’s nonprofit hospitals.
Inova’s 2014 financial numbers clearly show that it can do a lot more to help those who can’t pay for health care. Inova reported a compensation package for its chief executive that rivals many of the Redskins players’ contracts at about $6 million, a $217.7 million operating surplus and nearly $2 billion net assets on hand.
These numbers make it hard to accept the “we’re hurting financially” argument and show how much Inova could do to help those who need health care but can’t afford it.

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Strategic Investment Funds: Not Just for UVa Anymore

Posted on August 17, 2016 by matt ohern

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The University of Virginia’s controversial $2.2 billion Strategic Investment Fund is such a great idea that UVa officials are recommending it as a model for other state universities.
By adopting UVa’s approach and consolidating university reserve funds statewide, a sum that could approach $9 billion, the Commonwealth could establish an investment fund that would generate $450 million annually in extra income, UVa Rector William H. Goodwin said Monday at a Board of Visitors meeting, reports the Richmond Times-Dispatch.
Vice Rector Frank Conner also recommended the investment strategy for other Virginia public universities. “A lot of people will be calling us,” he said. “This is very creative.”
Members of the UVa board are upset by questions swirling around the creation and purpose of the fund, the existence of which was revealed publicly in aWashington Post op-ed last month by former Rector Helen Dragas before the university could manage the roll-out. Questions have arisen regarding where the money came from and why it won’t be used to dampen tuition increases rather than fund programs to enhance the university’s prestige.
Board members pushed back yesterday against outside criticism. It is “a shame we’re getting arrows in the back for being first,” said James B. Murray Jr.
Barbara J. Fried said the university needed to do more to “overcome lying sound bites.”
But the university has been slow in explaining exactly how UVa’s Strategic Investment Fund was accumulated. A month ago, the official explanation was that the money was cobbled together from $385 million in operating reserves, $620 million in “unrestricted funds and related earnings that had accumulated in [the university’s] history,” and $700 million in earnings on those funds. The university provided no detail on the $620 million in “unrestricted funds and related earnings,” and legislators have called for an accounting.
Goodwin added a bit of new detail Monday. He credited Executive Vice President Patrick D. Hogan with, as the T-D put it, “finding efficiencies in operations during the past few years that, along with investment earnings, were used to create the fund.”
Bacon’s bottom line: Let’s make one thing clear: It is great news to discover that UVa has compiled a $2.2- to $2.3-billion pot of money. That money can do a lot of good.
Apparently, UVa, like other universities, kept a lot of cash sitting around in reserves yielding very low interest rates, and Hogan deserves credit for figuring out how to tap those funds to generate a higher return in other kinds of investments. Among other things, this involved negotiating a line of credit to maintain the university’s liquidity. The payoff from this financial restructuring could be huge. If Goodwin is right and the idea could be applied to other Virginia universities, the innovation could very well revolutionize higher education finance. (The idea must be viewed with caution, however. Not all institutions have a AAA credit rating like UVa; some may not be able to leverage their balance sheets in the same way.)
But no one is criticizing the board for being creative financial stewards and investing the money well.
People have legitimate questions about where the money came from. According to UVa’s own explanation, only $385 million of the seed funding came from operating reserves. Another $620 million came from what is described as “unrestricted funds and related earnings that had accumulated in its history.”
What the hell does that mean?
Well, we learn from Goodwin that a good portion if not all of that $620 million come from operating efficiencies — cost cutting. Again, Hogan deserves kudos for the achievement. But no one is criticizing him for running a tight ship.
These are the questions that people are asking: Should UVa have used the savings from cutting costs to blunt increases in tuition and fees rather than setting them aside and accumulating $620 million? Who set up this operational fund anyway? Did the Board of Visitors ever approve the strategy of setting aside and accumulating funds from cost-cutting initiatives, a strategic decision that should be made by the board and not the administration? Did the board approve handing those monies to the University of Virginia Investment Management Co. (UVIMCO) to invest? When the board recently voted to increase tuition for incoming students by 10%, were members aware that the university had accumulated hundreds of millions of dollars, plus investment returns, from cost cutting? Did board members give consideration to the possibility that the accumulation of those funds represented a form of overcharging students and their families?
Legislators want answers, and I don’t blame them.
(This article first ran in Bacon’s Rebellion on August 16, 2016)
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Ways to Bring Manufacturing Jobs Back to Virginia & the U.S.

Posted on August 17, 2016 by matt ohern

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Thomas Jefferson recognized the important role that trade can play to benefit our nation’s economy, saying, “Commerce with other nations is not only necessary and beneficial to all parties, it is a right and a duty…” Yet, he also spoke clearly that trade must be fair, saying, “In order to function properly, however, free trade must be established on a reciprocal basis.”
Take a look at our economy today, and, in particular, our manufacturing sector, and one could easily imagine Jefferson shaking his head in disappointment at the record trade deficits we regularly amass. After all, Jefferson cited public debt as one of the “greatest dangers” to be feared, saying, “To preserve our independence, we must not let our rulers load us with perpetual debt.”
In 2015 alone, the United States amassed a record $367 billion goods trade deficit with China – hardly the reciprocity that Jefferson envisioned when touting a system of tade that “function[s] properly.” Make no mistake: This massive trade deficit saps our economy of wealth and jobs and increases our foreign debt.
Currently, China and its state-owned companies are exporting massive amounts of paper, steel, aluminum and other goods to our market at any cost to avoid the pains that come with a slowing economy. The consequences of selling at a loss are absorbed by the Chinese government in order to maintain production, employment, and, in turn, social stability. Here in America, where market forces have real impact, China’s aggressive actions have depressed prices, forced plant closures, and left 15,000 steel workers with layoff notices.
This trend is repeated throughout America in a number of vital industrial sectors. The Commonwealth of Virginia has lost nearly 130,000 manufacturing jobs since 2001 when China was granted permanent duty reductions to the U.S. market and entry into the World Trade Organization (WTO).
This massive decline is a direct result of the obstacles to legitimate commerce that Jefferson spoke of in his 1793 Report on Foreign Commerce when justifying what we today refer to as trade enforcement. “Should any nation, contrary to our wishes, suppose it may better find its advantage by continuing its system of prohibitions, duties and regulations, it behooves us to protect our citizens, their commerce and navigation, by counter prohibitions, duties and regulations also.”
Many U.S. companies are currently suffering from unfair foreign competition, including illegal subsidies granted to overseas producers, good dumped into our market at below market levels, and inequitable enforcement of regulation abroad to benefit their own exporters and impede our attempts to sell goods overseas.
As a result, many U.S. companies have been forced to take the extraordinary step of petitioning their government to stop the flow of illegally-traded goods into the American market. That’s often mislabeled as “protectionism,” but few companies anywhere can compete against the vast resources of a rival operating in a state-directed economy like China’s, home to many powerful state-owned companies.
Another hard truth: As domestic companies work to comply with unparalleled levels of government regulation, we are rewarding companies operating in China with access to our lucrative government procurement markets. Spending hard-earned American tax dollars on foreign made goods – produced free of environmental safeguards and other regulatory protections – for our roads, bridges, water system, and other needs flies in the face of the principles our country was built on. And, from Jefferson’s point of view, conflicts with the idea that “we should encourage home manufactures to the extent of our own consumption.”
Jefferson later came to the resolution that he would “never again…purchase any article of foreign manufacture which can be had of American make, be the difference of price what it may.”
So, then, imagine his reaction to the concept of relying on a potential hostile trading partner like China (or Europe, as it was in his time) to equip our own military. “To make [arms] within ourselves… as well as the other implements of war, is as necessary as to make our bread within ourselves,” he said.
Yet, the United States is increasingly becoming reliant on countries like China and Russia for everything from steel to construct aircraft carriers (like those at Newport News) to the rare earth elements used in night-vision goggles to the communications systems used on the front lines of combat.
There is hope that we may be able to turn this manufacturing crisis around and back on better footing. The solutions are simple: stronger trade enforcement and more effective measures to ensure that trade is a beneficial, two-way street for all involved. And, we must spend Americans’ tax dollars on goods produced here at home.
As the presidential election continues and voters look toward selecting a new leader for our country, solid public policy solutions will be required to eliminate our surging trade deficit with China and put strong penalties in place for currency manipulation, cyber-spying, intellectual property theft and trade cheating.
Thomas Jefferson certainly would have had the will and strong leadership to help the American manufacturing sector get back on its feet.

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Mr. Boos is Senior Vice President, Government Affairs & Policy for the Alliance for American Manufacturing (AAM). Prior to joining AAM, Mr. Boos served as a senior policy adviser to Sen. Arlen Specter of Pennsylvania.

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Ways to Bring Manufacturing Jobs Back to Virginia & the U.S.

Posted on August 17, 2016 by matt ohern

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The Soaring Costs of the ACA’s Medicaid Expansion

Posted on August 17, 2016 by matt ohern

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The implementation of major legislation such as the Affordable Care Act (ACA) often results in fiscal outcomes that differ significantly from prior projections. Whenever this happens it leads to many questions, much confusion, and several claims and counter-claims. Rarely is it immediately clear whether the law is working differently than envisioned, or whether the unexpected outcomes are due to inevitable projection errors having nothing to do with the law.
On rare occasion, however, a prior projection proves so far off that its significance must be noted. Two weeks ago my colleague Brian Blase uncovered such a development with respect to the ACA’s Medicaid expansion. Recall that the ACA considerably expanded Medicaid eligibility – an expansion made optional for the states in a later Supreme Court ruling. It turns out that the 2015 per-capita cost of this Medicaid expansion is a whopping 49% higher than projections made just one year before.
This disclosure can be found on page 27 of the 2015 Actuarial Report for Medicaid, released this July. Here is how the report described the issue:
“While the newly eligible adult per enrollee costs in 2014 were slightly lower than estimated in last year’s report ($5,488 compared to $5,517, or about 1 percent lower), the estimated per enrollee costs for 2015 in this year’s report are substantially greater ($6,366 compared to $4,281, or about 49 percent higher).”
How can a projection be this far off after only one year? To understand, let’s first discuss more of the “what” of the projection, and then proceed to the “why.”
The 2013 Medicaid report was the last one reflecting expectations prior to the 2014 expansion. Medicaid’s actuaries then expected that the initial per-capita costs of covering newly eligible adults would be comparable to those for previously-eligible adults, but would later become substantially lower. The explanation given in the 2013 report was:
“The estimated average benefit costs for adults who enroll as a result of the expanded eligibility criteria in the Affordable Care Act are significantly lower than those for the average beneficiary. This difference arises partly from the fact that adults in poor health often suffer a loss in income, increasing their likelihood of qualifying for Medicaid under the pre-Affordable Care Act criteria.”
Translated into layman’s terms this just means that sicker people tend to have less income. Thus, the lower-income people previously eligible for Medicaid were more likely to be in poor health than the relatively higher-income people in the expansion population. This higher-income expansion population, being in better health, would be less expensive to cover.
It was also thought then that among the newly-eligible population, the sickest would enroll first and the healthier individuals later, causing per-capita costs to drop during the next few years. The 2013 report projected that the per-capita cost for newly eligible adults would be just 1% lower than previously-eligible adults in the first year, but a good 28% lower in the third.
But this isn’t what happened. First, the initial per-capita cost came in much higher than expected. Here’s how the 2014 report described it:
“Newly eligible adults are estimated to have had average benefit costs of $5,517 in 2014, 19 percent greater than non-newly eligible adults’ average benefit costs of $4,650. These estimates are significantly different from those in previous reports, in which average benefit costs for newly eligible adults in 2014 were estimated to be 1 percent lower than those of non-newly eligible adults.”
The 2014 report offers some explanations for the unexpected cost increase, but I’ll return to those after discussing the results for 2015. Heading into 2015 the actuaries still expected costs per newly eligible adult to drop (by 22%, from $5,488 to $4,281) as healthier individuals enrolled. But instead they rose by 16% (to $6,366). Thus 2015 per-capita costs are 49% higher ($6,366 over $4,281) than previously predicted.

Why were 2015 costs so high? The 2015 report speculates that some costs incurred in 2014 were reported in 2015. But reporting those costs in 2014 wouldn’t have meant they were any less underestimated. It would just mean that more of the underestimation happened in 2014 than 2015.
The report attempts to explain the underestimation as follows:
“Many States included adjustments to reflect a higher level of acuity or morbidity among newly eligible adults compared to non-newly eligible adults. In most States, these adjustments were positive (in other words, newly eligible adults had a higher level of acuity than non-newly eligible adults), and in some cases the adjustments were substantial. States also included other adjustments in the capitation rates for newly eligible adults. Many States projected increased costs due to pent-up demand, expecting that many enrollees would have been previously uninsured and would use additional services in the first several months of coverage. Some States also included adjustments for adverse selection with the anticipation that the persons who were most likely to enroll in the first year would be those with the greatest health care needs.”
Again a translation may be in order: Basically states established far higher expenditure requirements for the expansion population than the federal government expected, by positing that beneficiaries would be in need of more health services.
Why did this happen? Remember, the ACA established an initial 100% federal matching payment for state Medicaid expansion costs, contrasting with historical federal match rates that averaged 57%. Even when the feds paid 57% of the bill there was a longstanding concern that states were insufficiently accountable for their cost-expanding decisions, with much of that cost being shifted to federal taxpayers. But the ACA’s current 100% match means that states make the decisions about expanding Medicaid while the federal government picks up all the costs. Even after the ACA is fully phased in, the feds will still pay for 90%. Under such arrangements, cost overruns are predictable.
The fact that the states set payment rates higher than the federal government expected carries additional implications. If the states set payment rates too high for the expansion population, then per their risk-sharing arrangements with insurance plans some money will flow back to the federal government. If this happens to the extent the Medicaid actuaries expect, recent per-capita costs will be about 9% less than shown in the 2015 report – though still dramatically higher than estimated last year.
The rising cost of Medicaid expansion leads to worsening budgetary evaluations for the ACA. Contained in CBO’s recent projections are harbingers of this:

The slight uptick in CBO’s latest cost projections reflects higher enrollment as well as growth in per-capita costs. If the latest Medicaid actuaries’ report is any indication, future cost projections may well get significantly worse. Thus far CBO’s adjustments to per capita costs do not appear to fully reflect an increase of the magnitude shown in the latest Medicaid report. Remember also that the program’s actuaries still assume that due to risk-sharing payments and other factors, per-capita expansion costs will decline in 2016 and 2017. If this assumption proves incorrect, future costs will be higher still.
Having federal taxpayers pick up between 90-100% of the cost of state Medicaid expansions was one of many questionable policy decisions made in the ACA. It’s also proving to be much more expensive than the federal government expected.

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Charles Blahous is a senior research fellow for the Mercatus Center, a visiting fellow at the Hoover Institution, and a contributor to E21. He recently served as a public trustee for Social Security and Medicare.