Kentucky state budget includes $61 million to settle lawsuit with rural hospitals

Feb. 7--FRANKFORT -- Tucked onto one page of Democratic Gov. Andy Beshear's $24 billion state budget proposal is a single line item -- "Judgments" -- that holds $61.9 million to cover one expense for the remainder of this fiscal year and the next two.

That's more than the state's General Fund spends in a single year on the Department of Parks. And there's a story behind it.

This winter, the state of Kentucky is trying to negotiate a financial settlement with more than 50 rural hospitals that won a series of court rulings finding their Medicaid reimbursement rates unfairly low from 2007 to 2015. Last year, a unanimous three-judge panel of the Kentucky Court of Appeals sided with the hospitals.

The Cabinet for Health and Family Services erred during the administration of then-Gov. Steve Beshear, the current governor's father, the appeals court found.

"The hospitals may seek monetary damages for past underpayments from the cabinet," Judge Donna Dixon of Paducah wrote for the panel. "The cabinet waived its sovereign immunity for contract damages by entering into the provider agreements with the hospitals."

The outgoing administration of Gov. Matt Bevin was fully aware of the impending legal liability. In December, it estimated the cost of a settlement with the hospitals at an eye-popping $426 million, and it shared the figure with all 138 members of the General Assembly in a budget memo.

That disclosure did not please officials within Andy Beshear's administration, who say they're busy working on a much smaller settlement. Hence, the "Judgments" line item in the budget, they say.

"The 420 was a number that never should have been revealed," state budget director John Hicks told the Senate budget committee on Feb. 4. Hicks was responding to lawmakers who asked how the sum Beshear budgeted for judgments could even come close to covering $420 million.

"The 420 was a guess and not a known thing," Hicks continued. "The 420 was not a concrete number. It was some forecast of the prospect of the loss to the commonwealth. And current events are proving that's not likely to take place to any extent to 420 million."

On Friday, an attorney for the majority of the hospitals suing the state said the $420 million estimate depends on whether the federal government, through the U.S. Centers for Medicare and Medicaid Services, agrees to share in the damages alongside the state of Kentucky.

Medicaid is a joint federal-state health insurance program for the poor and disabled. The federal government's funding match would be 71 percent, said attorney Stephen Price Sr. of Wyatt Tarrant & Combs in Louisville.

"I think the big question is, how much is CMS going to want to participate in this?" Price said.

No court has awarded a specific figure for damages in the case, Price added.

Asked if the sum Beshear included in his budget plan would adequately cover the state's share of a settlement with his clients and the other hospitals, Price said: "I certainly would like it to be more. But we haven't sat down and traded numbers."

The state has asked the Kentucky Supreme Court to hear the case, but the high court has not yet agreed. The case is on hold for 30 days while negotiations continue, Price said.

According to last year's Court of Appeals ruling, the 58 hospitals that sued began raising objections in 2007 to changes in their Medicaid reimbursements rates from the state. The Cabinet for Health and Family Services began holding individual dispute resolution meetings with the hospitals in 2010 to hear their complaints.

"Rather than issuing dispute resolution decisions, the cabinet waited until May 31, 2013, to write the hospitals letters (saying) that they did not have appeal rights and dismissing the same without administrative evidentiary hearings or further due process," the Court of Appeals wrote.

"The hospitals requested administrative hearings from the cabinet's dismissal letters within thirty days pursuant to (state administrative regulations). The cabinet responded to those requests with letters stating no administrative hearings would be conducted," the appeals court wrote.

The same day it sent the dismissal letters to the hospitals, the cabinet sued the hospitals in Fayette Circuit Court, seeking a ruling from a judge that upheld its Medicaid reimbursement rate methodologies. Instead, the hospitals counter-sued, the case was transferred to Franklin Circuit Court, and the state began its expensive losing streak through the judicial system.

In October 2015, the cabinet replaced the Medicaid reimbursement rate methodology that led to the litigation with a new one.

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