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Advocate staff file photo by BILL FEIG -- Gov. Bobby Jindal.

The federal government Friday rejected the Jindal administration’s financing plan for privatizing the administration of LSU hospitals.

The U.S. Centers for Medicare and Medicaid Services questioned the administration’s use of $260.8 million in advance lease payments to prop up the deals involving six public hospitals, including those in New Orleans, Lafayette and Houma. If the decision stands, the state would have to find another way to cover those payments.

“It is not about how Louisiana manages its charity care system,” wrote Marilyn Tavenner, the administrator of the Centers for Medicare and Medicaid Services, in a letter released late Friday.

It’s how “specific financial transactions” are organized.

The private hospital companies leasing the state’s charity hospitals agreed to pay up-front a larger proportion of their long-term leases, which would result in paying lesser amounts toward the end of the contracts. But Tavenner wrote the arrangement amounted to Louisiana trying to get extra federal Medicaid dollars to repay private managers for those advanced lease payments.

Tavenner wrote that constitutes a “hold harmless arrangement” that is not allowed under the federal rules.

Gov. Bobby Jindal called the CMS decision “disappointing.” In a prepared statement released by his press office, Jindal said: “CMS has no legal basis for this decision and we will appeal it.”

Federal law gives the department 60 days to challenge the rejection. If there’s another adverse ruling, the state can go to the U.S. 5th Circuit Court of Appeals.

CMS is the federal agency overseeing the Medicaid program that covers the poor and uninsured. CMS pays about 60 percent of the Medicaid costs in Louisiana. Medicaid, which covers one of every four Louisiana residents, accounts for about a third of the state’s $25 billion annual budget.

Louisiana Department of Health and Hospitals Secretary Kathy Kliebert said the rejection would have no immediate budget impact.

In early April, CMS had warned the state that it might disallow $307 million in Medicaid reimbursement that the state had billed as associated with the private hospital deals. CMS urged the state to make financial adjustments accordingly.

Kliebert said the state has provided “clear evidence that the leases were based on independent, third party appraisals.”

Even after the April letter deferring $307 million in Medicaid payments, Kliebert and other state health officials remained optimistic that the plans would be approved by CMS.

Former DHH Undersecretary Jerry Phillips, who helped organize the deal, said late Friday that he did not think CMS understood that the advance payments were part of the overall payments due over the long-term hospital leases. He said CMS did not seem to have a problem with the lease arrangement, just to the advance payments.

“It did not increase the payment to the state. It came back to the fair market value of the entire lease,” Phillips said.

The advance lease payments CMS questioned involved hospital and equipment leases. The CMS letter mentioned $250 million in advance lease payments that Louisiana Children’s Medical Corp. made in connection with the New Orleans hospital deal and another $15.8 million in advance payments made by Lafayette General Medical Center related to the University Hospital deal in Lafayette.

State Senate Health and Welfare Committee Chairman David Heitmeier, D-New Orleans, said, “I’m absolutely concerned about providing services for our citizens ... I will work to look at other financing options.”

Democratic Party Chairwoman Karen Peterson said CMS rejection of the Jindal plan was not surprising.

“Louisiana Democrats have been warning for years that the deals weren’t worth the paper — in some cases blank paper — they were printed on,” said state Sen. Peterson, D-New Orleans. “Moving forward without federal approval was gross negligence on the part of the Jindal administration.”