At a time when many Texas school districts have adopted deficit budgets to cope with flat state funding and rising costs, districts across the state received some unexpected and unwelcome news last month.
On Dec. 15, the Texas Health and Human Services Commission notified districts that Medicaid reimbursements for special education students would be reduced by more than $300 million.
The change comes after HHSC lost its years-long appeal to a federal audit on the funding. By October 2023, the commission had reached the end of the line, resulting in immediate cuts to SHARS, a type of federal special education funding.
The School Health and Related Services program lets school districts get reimbursed by Medicaid for providing required health services like physical therapy, tube feeding, and diaper changes to eligible special education students.
Prior to learning the result of the appeal, the Texas Health and Human Services Commission had planned to disburse nearly $740 million in Medicaid reimbursements to districts. This money helps districts cover costs associated with medical services provided to special education students during the 2022 fiscal year.
Data provided by HHSC shows the $300 million cut was determined after the agency calculated the full impact of the final appeals decision.
What this means for Texas schools
The notice now leaves districts with millions of dollars to make up halfway through the school year, months after they passed their budgets.
Three districts — Northside ISD in San Antonio, Dallas and Cypress-Fairbanks — will each receive more than $10 million less than HHSC expected to give them. Houston, Austin and Katy ISD are close behind, with special education deficits of more than $5 million each to make up.
Harlandale ISD and San Antonio ISD, two districts that announced school closures in 2023 in order to make better use of limited funds, will both receive more than $2 million less than expected.
Topping the list is San Antonio’s Northside ISD, with the state’s biggest cut to expected reimbursements. The district will receive more than $14 million less than anticipated.
The scope of the cuts, and the finality of it, came as a shock to district leadership.
“We adopted our budget back in August of 2023 not knowing this,” said Rene Barajas, Northside’s deputy superintendent of business and finance. “We are already in January, four or five months into our fiscal year.”
Barajas said Northside’s budget projected a little less in Medicaid reimbursements than the state’s estimate, but that still leaves the district with a $13 million hole in their current budget.
“We will do what we can to reduce costs wherever we can, to kind of take the sting off,” Barajas said. “But our budget is very, very tight. So we don’t have a lot of wiggle room.”
And it’s not just this year’s budget that will have to be adjusted. According to the Office of the Inspector General for the U.S. Department of Health and Human Services, Texas has been improperly coding its medical services under the school-based Medicaid program for years, overbilling the federal government in the process.
That means Texas districts will have to adjust how they file for reimbursement in future years.
"We're going to have to then make the adjustments to next year's budget, as well as all future budgets to try to figure out how to make up for that shortfall,” Barajas said.
However, despite the $13 million loss to this year’s budget for services provided to special education students, Barajas said Northside ISD will not cut its special education budget.
“Even though it's going to be reimbursed at a lower rate, we're going to continue to provide all those services,” Barajas said. “The sting of it is that we're going to have to figure out other ways to make up that revenue or reduce expenses on the perimeter of what we do as a school district. But, the thing that is in the middle that is sacrosanct is instruction services to students. As best as we can, we never touch that.”
The impact to special education in Texas
After four years without an increase in state funding, many Texas school districts don’t have much in the way of expenses left on the perimeter.
“This is exacerbating the problem of an already underfunded special education program in Texas. School districts right now are spending about $2 billion more per year than the state is reimbursing them for these special education services,” said Dax Gonzalez with the Texas Association of School Boards, pointing to an analysis of state financial data compiled by education advocacy groups. “And so, another $300 million to that is just insult to injury.”
Gonzalez said funding for special education is especially important right now because Texas school districts are still trying to compensate for more than 10 years when the Texas Education Agency asked districts to limit the number of students enrolled in special education.
“Districts are still kind of working out of that hole,” Gonzalez said. “But it’s taking time, so the number [of students in special education is] growing, kids are requiring more and more services and more intensive services. And so, as those costs increase, districts are having to find other ways to cope with the budget impact.”
Because districts are legally required to provide special education services, Gonzalez said it’s more likely that other programs will be cut.
“These are medical services that most people wouldn't think would happen at a school, but without these services, kids aren't able to learn,” Gonzalez said. “And so, the less money that districts have to support these students, from the state or from the federal government, it means that they're having to divert it from other sources.”
The federal audit
In 2017, the Office of Inspector General for the Department of Health and Human Services completed an audit of how the Texas Health and Human Services Commission bills the federal government for the state’s school-based health services.
The OIG determined that Texas overbilled Medicaid by improperly coding some education services as health services, but the state agency appealed the decision.
“Since 2017, HHSC submitted every possible denial and request for the opinion to be overturned,” said the state agency in a statement provided to KUT Austin on January 10.
The Texas Health and Human Services Commission said they couldn’t notify districts of the financial impact sooner because they didn’t know when their final appeal would be decided.
“HHSC notified providers of the fiscal impact of the federal government’s decision within weeks of receiving the final determination on Oct. 27, 2023. HHSC has also regularly and publicly stated that the potential impact of a loss of our appeal could result in the loss of hundreds of millions of dollars in funding,” the statement said.
Although the initial federal audit only found that Texas owed Medicaid $18 million for overbilling during the school year analyzed by the OIG, the audit also found that Texas needed to change the way it codes bills for all districts going forward, including for the reimbursements expected this year.
Because of that change, every district that participates in the program had their reimbursements cut.
The Texas Association of School Board helps about 90 districts in the state submit their Medicaid reimbursements to HHSC and represents many more of the state’s school boards. Gonzalez said insufficient state funding for public schools is an ongoing issue that needs to be addressed, but in the specific case of the audit, he hopes state agencies and state lawmakers can work with school districts to make the best of the situation.
“The reimbursements that were submitted in previous years — that is already gone,” Gonzalez said. “But this is an issue that's going to continue through the future. And so, I think it's going to take the HHSC, it's going to take legislators, it's going to take stakeholders and districts to work together to figure out how do we move forward.”
He said that will include developing “the best reporting systems so that we make sure that the eligible services are being coded correctly and being submitted correctly to the federal government — so that we can make sure that they are getting the reimbursements for what they are eligible to receive.”
KUT Austin’s Becky Fogel contributed to this story.
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