Indiana hospitals could pull in more than $100 million a year from the federal government under a new assessment fee included in the state’s 2011 budget bill.

The law, approved April 29 by the Legislature, authorizes a hospital assessment fee of roughly $200 million a year, which would be paid by the state’s roughly 120 hospitals.

The Indiana Medicaid program would use the extra money to increase its payments to hospitals that treat low-income patients covered by Medicaid. The higher payments in turn would draw extra money from the federal government, which matches state hospital payments at roughly a 2-to-1 ratio.

“There is the potential to draw down new dollars that we up until now we have not been leveraging. It is a bigger pie,” said Brian Tabor, vice president of government relations for the Indiana Hospital Association. IBJ first reported about the fee on April 11.

The new plan could also generate new revenue for the state, since the law directs 28.5 percent of the federal revenue generated under the program to the Indiana Medicaid program. That looks like it could boost state revenues by roughly $50 million a year, according to estimates by the Indiana Legislative Services Agency and the Indiana Hospital Association.

Thirty-four states already have hospital assessment fees, according to the Kaiser Family Foundation. And Indiana has a similar assessment fee for nursing homes.

The particulars of the hospital fee must now be worked out by a committee and submitted for approval to the federal Centers for Medicare and Medicaid Services, or CMS. Its work could change the estimate of $100 million a year for hospitals, Tabor said.

The four-member committee has a deadline of Oct. 1 to submit a plan to CMS. If approved, it would affect Medicaid services retroactively to July 1, 2011.

The committee will be led by Michael Gargano, the secretary of the Indiana Family and Social Services Administration, which administrates the Indiana Medicaid program. The other three members will be appointed by Gov. Mitch Daniels, with two of the seats based on suggestions by the Indiana Hospital Association.

Indiana Medicaid currently pays very low rates to health care providers for serving Medicaid patients. But it tries to boost payments to hospitals through a complex mechanism known as intergovernmental transfers. Counties operating hospitals can transfer money to the state, which uses it to boost payments to hospitals, thereby drawing down more revenue from the federal government, which then flows back to the county-run hospitals.

But that system of supplemental payments, known as Upper Payment Limit, only applies to Medicaid patients that pay hospitals on a fee-for-service basis. Those patients accounted for about 65 percent of the $922 million Indiana Medicaid paid to hospitals last year.

The remaining 35 percent of the dollars were spent through Medicaid managed care plans, such as Hoosier Healthwise, and were not eligible for the UPL supplementary payments.

So by replacing the UPL supplementary payment system with the new hospital assessment fee, hospitals would be able to get higher payments for all Medicaid patients, whether under a fee-for-service program or under a managed care program.

The fee revenue and additional federal reimbursement—estimated to be $600 million per year—would also be used to make disproportionate share payments to hospitals seeing large numbers of indigent patients. In 2009, such payments topped $143 million.

Tabor said the assessment fee committee will have to come up with a new plan on how to distribute money, exactly how to calculate the fee, and other details.

He said the new plan should help Indiana when the Medicaid program expands as stipulated by the federal health reform law of 2010, known as the Patient Protection and Affordable Care Act.

By 2020, Indiana officials expect nearly 500,000 additional Hoosiers to enroll in Medicaid, because people with higher incomes will be eligible for benefits.

Hospitals stand to benefit if they receive higher payments on all those patients—even if they have to pay a fee in order to make it happen.

“I think what we need to do now, with the expansion of Medicaid, is obtain better reimbursement,” Tabor said.