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TRENDSHow Did Safety-Net Hospitals Cope In The 1990s?
The hospital industry experienced financial pressure in the 1990s because of intense competition for managed care contracts and increasing efforts among all payers to contain growth in hospital payments. Despite this, U.S. hospitals provided $18.5 billion in uncompensated care in 1997.1 Safety-net hospitals faced special challenges. The growing numbers of uninsured persons increased demand for their services. Specific efforts to contain health care spending, most notably the 1997 Balanced Budget Act (BBA), threatened subsidies that have long supported indigent care. Also, Medicaid managed care likely steered Medicaid patients away from safety-net hospitals, leaving them with proportionately more uninsured patients.2 To survive these pressures, administrators of safety-net and other hospitals had to restructure to focus on new revenue opportunities, reduce some services, and become more efficient through mergers and streamlining of internal operations. Between 1989 and 1996, 190 hospital mergers occurred nationwide, involving approximately 450 hospitals.3 In addition, 60 percent of hospital administrators undertook one or more reengineering activities between 1990 and 1996, including reductions in personnel.4 Ultimately, if hospitals cannot improve their financial performance, they face the prospect of closing, as 295 hospitals did between 1990 and 1997.5 Safety-net hospitals often receive special subsidies through Medicare or Medicaid disproportionate-share hospital (DSH) funds, adjustments to payments for teaching, and tax appropriations or other grants. However, they may have fewer avenues to respond to financial pressures than non-safety-net hospitals have. In particular, they may be less likely to close because of their fundamental mission to serve the community. They also may be reluctant to drop services such as burn and trauma care, even though they do not generate revenues sufficient to cover costs, because there may be few alternative providers of these services or because they represent important components of an academic program. A further constraint for publicly owned safety-net hospitals may be strong unions that limit hospital administrators ability to streamline units and reduce staffing.6 A recent report by the Institute of Medicine (IOM) recognized threats to the continued viability of safety-net providers posed by the changing market and policy environment and called for research to monitor the effect of these changes.7 In this paper we describe some of the changes safety-net hospitals made in the face of industry wide pressures during 19901997, and the financial consequences. We compare safety-net hospitals with other hospitals to assess how the special role of safety-net hospitals may affect their ability or willingness to respond strategically. Identification of safety-net hospitals. The first step in this study was to identify safety-net hospitals. The IOM study committee used a general approach, defining the safety net as "providers that organize and deliver a significant level of health care and other related services to uninsured, Medicaid and other vulnerable patients."8 However, conducting statistical analyses using this general definition is not straightforward. Some researchers have identified certain categories of hospitals as safety-net based on their ownership, teaching status, or geographic location. For example, public hospitals and urban academic medical centers are often labeled as safety-net institutions.9 Clearly, large public teaching hospitals are likely to be important providers of uncompensated care in many urban areas.10 However, using organizational characteristics such as "public" or "teaching" may be misleading. For example, in markets with limited public hospital capacity or without major teaching hospitals, nonpublic and nonteaching hospitals may be major providers of uncompensated care; also, some public or major teaching hospitals may be located in wellinsured communities and may thus provide minimal uncompensated care. Recognizing this problem, researchers have begun to look at the actual pattern and level of uncompensated care delivered by particular hospitals. Some researchers have identified safety-net hospitals based on the proportion of a hospitals total resources devoted to Medicaid enrollees or patients for whom the hospital was not compensated. Linda Fishman and James Bentley referred to this as "hospital burden."11 Other researchers have focused on how dependent the community is on a particular hospital for treating its poor population. 12 Together, these two concepts provide different perspectives (hospital and community) on indigent care that are related to the IOM definition. Data sources and methods. Because both the hospital and community perspectives are important, this paper melds the concepts into a unified approach for identifying groups of urban safety-net hospitals. Our primary data source for the identification process was the 1990 American Hospital Association (AHA) Annual Survey of Hospitals.13 Our sample included all urban, nonfederal, short-term general hospitals (2,668 hospitals). We defined uncompensated care as the sum of charity care and bad-debt expense.14 Charity care and bad debt were reported as gross revenues or charges on the AHA annual survey. We adjusted uncompensated care charges by a hospital-specific ratio of cost to charges to compute uncompensated care expense.15 Our market share measure represents an "adjusted" measure because a hospitals expected market share depends on the number of hospitals in its metropolitan statistical area (MSA). We neutralize this effect by multiplying a hospitals uncompensated care market share by the number of hospitals in its market. If uncompensated care were equally distributed across all hospitals, these adjusted market shares would all equal 1. Hospitals with high uncompensated care market share are those with an adjusted market share of at least 2, approximately the eighty-fifth percentile of this measure for hospitals under study. Hospital burden is the percentage of hospitals total expenses that are uncompensated.16 As did Fishman and Bentley, we use the top decile of the distribution of hospital burden nationwide as a threshold for this dimension.17 Our method produces four groups of hospitals, which form the basis for our study.18 These four groups are (1) Group 1, high market share/high burden: The 107 safety-net hospitals that met both criteria in 1990 are unique in terms of the large community role they play in providing uncompensated care and in the large institutional commitment they have made to indigent care. (2) Group 2, high market share only: In 1990, 231 hospitals met only the high market share criteria but not the uncompensated care burden threshold. These play a major role in their community in uncompensated care but have paying patients who generate revenues that cover a large proportion of their expenses. (3) Group 3, high burden only: The 160 hospitals in 1990 that had high uncompensated care burden but not high market share may serve as safety nets for their immediate communities but do not treat a large share of indigent patients in the broader market. (4)Group 4, non-safety-net hospitals: The remaining 2,170 hospitals were by definition non-safety-net hospitals in 1990. While this approach has advantages over using organizational labels, it also has limitations. By looking at uncompensated care provision and patterns in the 1990 base period, we do not explicitly recognize that there is year-to-year variation in an institutions commitment to and involvement in uncompensated care. However, we identify a set of institutions that were important providers for persons who were unable to pay for care during the base period. In addition, the comparisons we make between the safety-net and non-safety-net groups do not attempt to control for differences in market characteristics that could affect behavior and performance. For example, safety-net hospitals could be less likely than non-safety-net hospitals to drop certain services because demand for these services is greater in the markets in which the safety-net hospitals are located.
Both the high market share/high burden (Group 1) and the high market share only (Group 2) safety-net hospitals are much larger and more likely to be members of the Council of Teaching Hospitals (COTH) or have residency programs than are the other two groups of hospitals (Exhibit 1
Somewhat surprisingly, more than half of public hospitals and 40 percent of COTH-affiliated teaching hospitals in this study did not meet either of our criteria for safety-net status. The public hospitals not identified as safety-net hospitals tended to be smaller, have a higher share of Medicaid patients, and provide fewer specialty services (data not shown). Public hospitals located in regions with higher Medicaid enrollment rates (the Northeast and Midwest) were also less likely to meet the uncompensated care burden or market share requirements. COTH hospitals not identified as safety-net hospitals shared these size and region characteristics and tended to be religiously affiliated. These findings highlight the limitations of using organizational labels such as "public" or "teaching" to identify safety-net hospitals.
Uncompensated care burden.
Patterns of uncompensated care provision for various safety-net hospital categories shown in Exhibit 1
Specialty services.
Provision of selected specialty services also varied across hospital groups (Exhibit 1
Closures and mergers. Overall, 154 urban hospitals (5.7 percent) closed between 1990 and 1997, and 321 (12 percent) merged with other facilities (Exhibit 2
Changes in service provision. Among all groups of hospitals in continuous operation throughout the eight-year study period, there was a trend toward dropping six of the nine services shown in Exhibit 3
The major exceptions to these patterns were trauma centers and maternity care. These services increased across all hospital groups, although not always significantly. The key finding here relates to maternity care. The share of non-safety-net hospitals providing maternity care expanded significantly, by 5.6 percentage points.21 Moreover, the growth in maternity care in these hospitals closed some of the large gap that existed in 1990 relative to Group 1 hospitals. Non-safety-net hospitals may have been responding to the fact that a growing share of births were being covered by Medicaid over the study period.22
Operational and financial changes.
Group 1 hospitals differed significantly from non-safety-net hospitals along several operating and financial dimensions (Exhibit 4
Slower growth in outpatient service volume and fewer births did not translate into slower net patient revenue or total expense growth for Group 1 hospitals. In fact, these hospitals had significantly greater revenue growth than non-safety-net hospitals had. It is possible that the more rapid revenue growth was due to an expansion of subsidies such as Medicaid or Medicare DSH payments that occurred during the 1990s. Despite this higher growth in net patient revenues, total margins among Group 1 hospitals remained unchanged and, in fact, declined relative to those of non-safety-net hospitals. Group 2 hospitals are statistically similar to non-safety-net hospitals in terms of changes in service volume, expenses, and net patient care revenues. The only exception is that Group 2 hospitals had a significant decline in births relative to non-safety-net hospitals. Both experienced improvements in total margin, but the improvement was significantly smaller for Group 2 hospitals.24 These hospitals also had slower growth in uncompensated care expenses and reduced uncompensated care market share relative to the non-safety-net hospital group. However, because their 1990 base was higher, the absolute average amount of uncompensated care that each Group 2 hospital provided in 1997was still greater than among non-safety-net hospitals.
The Group 3 hospitals that continued operations through the 1990s did not experience service volume changes that were significantly different from those in non-safety-net hospitals (Exhibit 4
Safety-net hospitals are heterogeneous and undergo different organizational, operational, and financial changes, which have implications for their future viability. Hospitals with high market share/high burden remained the most important providers of uncompensated care and, despite stagnant growth in admissions and losses in the number of births relative to non-safety-net hospitals, virtually never closed. Hospitals with high market share only continued their important role but did reduce their share of uncompensated care relative to non-safety-net hospitals. These facilities also appeared to be the most attractive merger partners, which suggests that being a large provider of indigent care in a market area is not a barrier to merger. Hospitals with high burden only were most at risk of closing. Even among those that remained open, despite curtailing their uncompensated care burden and achieving significantly greater growth in patient revenues, margins fell relative to those of non-safety-net hospitals. Implications of service changes. Our finding that safety-net hospitals reduced the provision of some services during the study period may reflect internal reorganization or consolidation of services with affiliated hospitals. 27 These service changes also may reflect changes in technology or treatment modality that allowed care to shift from a hospital to another setting. To the extent that these explain the observed patterns, then the hospitals management response should be seen in a positive light. However, hospitals may be dropping some of these specialty services to reduce their exposure to uninsured patients, and this could curtail access. The changes we observed in maternity care could be ominous for safety-net hospitals, especially those in the groups with high uncompensated care market share. At a time when Medicaid was paying for an increasing share of births, these hospitals were providing significantly fewer births. In contrast, non-safety- net hospitals that provided maternity care in 1990 had no reduction in births, and a significant share added maternity care. To the extent that Medicaid payments for births are greater than the marginal costs of providing the service, safety-net hospitals are losing revenues that could be used to cross-subsidize uncompensated care. However, prior research suggests that these effects might be small.28 Medicaid DSH payments. It appears that Medicaid DSH payments may have allowed hospitals with high burden/high market share to survive in the face of declining patient volumes, although with deteriorated financial positions relative to those of non-safety- net hospitals.29 Federal DSH payments to states increased from $801 million in 1990 to $8.9 billion in 1997.30 Although not all of the funds were distributed to hospitals, the expansion in many states increased total Medicaid hospital payments.31 Among hospitals, those with high market share/high burden would be most likely to receive these supplements. Hospitals with high burden/high market share could have been adversely affected if Medicaid DSH policy changes in the 1997 BBA had been kept in place. Under those rules, Medicaid DSH payments were to have been constrained, with expected reductions of 20 percent between 1998 and 2002.32 Congress passed the Benefits Improvement and Protection Act (BIPA) of 2000 and eliminated the biggest Medicaid DSH cuts that were planned for 2001 and 2002. In fact, BIPA raised Medicaid DSH allotments in states with very low DSH spending and gave states the ability to increase Medicaid DSH payments to public hospitals.33 These rollbacks suggest that Congress recognized the role these payments play in financing public safety-net hospitals. Impact of managed care. The period we studied represented a time of substantial growth in Medicaid health maintenance organization (HMO) enrollmentMedicaid HMO penetration increased from 12 percent in 1990 to 39 percent in 1997.34 The introduction of managed care into Medicaid has had a negative effect on safety-net hospitals, by redistributing Medicaid patients to non-safety-net providers and by reducing payments to safety-net providers through negotiated rates.35 Our findings suggest that the Medicaid managed care expansion may not have had a heavy financial toll on major safety-net hospitals between 1990 and 1997 even though the volume of several hospital services fell for some hospitals. Since 1997, however, some states have expanded enrollment to include different populations (for example, the disabled), while others have continued implementation of mandatory HMO programs. Thus, the threats to safety-net hospitals viability associated with Medicaid managed care are likely to increase over time. Staffing levels and expenses. Our findings suggest that although hospitals with high market share/high burden lost service volume, they did not reduce staffing levels and expenses commensurately. This may represent a decrease in efficiency resulting from a lack of management flexibility. However, it also could indicate that these facilities maintain excess capacity to be able to respond to uncertain demand or that they treat a greater number of sicker patients. One limitation of our study is that we did not examine changes in efficiency of hospital operations over time. Evidence from the late 1980s suggests that hospitals with low margins respond to payment pressures by increasing efficiency.36 Thus, reductions in payment generosity through limits on DSH spending and growth in managed care may force higher levels of efficiency in safety-net hospitals, rather than causing a reduction in essential services to needy populations. If safety-net hospitals can respond by improving efficiency, their viability and patient care may be less affected by environmental changes, at least for small levels of change. This along with continued careful tracking and monitoring of the U.S. hospital safety net are important areas for future study.
Stephen Zuckerman is principal research associate at the Urban Institutes Health Policy Center in Washington, D.C. Gloria Bazzoli is a professor of health administration, Medical College of Virginia/Virginia Commonwealth University. Amy Davidoff is a research associate at Urban. Anthony LoSasso is research assistant professor, Institute for Health Services Research and Policy Studies, Northwestern University. This paper, as part of the Urban Institutes Assessing the New Federalism project, has received funding from the Annie E. Casey, W.K. Kellogg, Robert Wood Johnson, Henry J. Kaiser Family, Ford, John D. and Catherine T. MacArthur, Charles Stewart Mott, and David and Lucile Packard Foundations and several other foundations. This research was conducted in collaboration with the Health Research and Educational Trust (HRET) of the American Hospital Association, which undertook aspects of the data analysis. The authors are particularly grateful for the programming support provided by Ray Kang of HRET. This research was conducted while Gloria Bazzoli was research professor with the Institute for Health Services Research and Policy Studies at Northwestern University. The opinions expressed are those of the authors and do not represent the views of the Urban Institute, Northwestern University, Virginia Commonwealth University, the American Hospital Association, their trustees, or their sponsors.
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