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An Update On Safety-Net Hospitals: Coping With The Late 1990s And Early 2000s

Abstract

 
Recent forces have created new financial stress for hospitals but also some relief. This paper explores hospitals’ changing involvement in the safety net between 1996 and 2002. We replicate approaches used in a study of 1990–1997 and thus provide a needed update on the U.S. hospital safety net. Overall, some groups of safety-net hospitals increased uncompensated care, but others did not. Non-safety-net hospitals trimmed certain services commonly used by the indigent; this may point to future reductions in access. We examine the implications of these findings for the future of the safety net.

The hospital industry generally, and safety-net providers in particular, were affected by a mixture of forces between 1996 and 2002. Initially in this period, health maintenance organizations (HMOs) were gaining power and negotiating tough deals with hospitals. This led to constrained payment growth and declining private-sector payment-to-cost ratios, which fell to around 115 percent in the early 2000s from the highs of approximately 130 percent in the early 1990s.⁴ HMOs’ ability to set hospital payment terms waned by 2002, because of a consumer and provider backlash against managed care.⁵ Indeed, reports from selected markets indicated that some hospitals were threatening to walk away from certain HMO contracts if their terms were not met.⁶

Another factor influencing hospitals during our study period was the Balanced Budget Act (BBA) of 1997, which affected Medicare and Medicaid payments to hospitals. Despite revisions to the BBA in 1999 and 2000 that softened its original provisions, hospitals’ total Medicare margins declined from 10.3 percent in 1996 to 1.7 percent in 2002.⁷ This largely resulted because constrained payment growth coincided with a period of increases in hospital expenses because of rising labor, pharmaceutical, and other operating costs.⁸

Three other factors influenced the safety net during 1996–2002. First, the number of uninsured people rose after an initial decline, reaching 43.6 million in 2002. This represented a 0.7 percent annual rate of increase in uninsurance during 1996–2002.⁹ Thus, the demand for indigent care was increasing just when available hospital resources, in the form of profits from private and public payers, were declining. Second, although HMOs in the commercial sector have lost strength, they have grown in prominence in the Medicaid sector. Medicaid managed care has traditionally steered patients away from safety-net hospitals to other institutions and thus may leave safety-net hospitals with a disproportionately uninsured patient mix.¹⁰ Countering these detrimental influences was a third factor: the establishment of new federal grant programs through the Community Access Program, which evidence suggests strengthened local safety nets, especially in communities that already had strong safety-net institutions in place.¹¹

A recent study examined market-level changes in the provision of safety-net care and suggested that the safety net did not erode in the late 1990s.¹² Our research complements this work by looking at individual hospitals to assess their changing involvement in the safety net and the operational decisions they made to cope with their environments. We summarize the approaches used by Zuckerman and colleagues to identify and classify safety-net hospitals, which we applied to our more recent data. We discuss the study’s implications for the future of the hospital safety net and related public policies.

Identifying Safety-Net Hospitals

Top Identifying Safety-Net Hospitals Study Data And Methods Characteristics Of Safety-Net... Changes In Operational Status Changes In Service Offerings Operational And Financial... Discussion And Policy... NOTES

 
An important first step to our analysis is the identification and classification of hospitals by their safety-net status. Many researchers have used organizational descriptors, such as public ownership or urban academic medical center (AMC), for purposes of identifying the safety net.¹³ This is problematic, because not all identified hospitals will provide substantial amounts of safety-net care.

To address this problem, Zuckerman and colleagues focused on the actual amount of uncompensated care provided by a hospital—namely, the sum of its charity care and bad-debt costs, in the base year of their study (1990).¹⁴ They identified hospitals providing a significant amount of uncompensated care, and constituting part of the safety net, in two ways: (1) from the hospital’s perspective, if the institution is highly burdened by having a large proportion of its costs go uncompensated; and (2) from a community’s perspective, if the hospital provided a large share of the uncompensated care provided there. For the latter, Zuckerman and colleagues constructed each hospital’s market share of uncompensated care costs in its metropolitan statistical area (MSA) and multiplied it by the number of hospitals in the MSA to adjust for varying hospital market sizes. They then established thresholds for high uncompensated care burden and high adjusted uncompensated care market share based on the work of Linda Fishman and their own examination of the distributions of these variables.¹⁵

We replicated these approaches using data from 1996 to identify safety-net hospitals. Specifically, we converted the sum of charity care and bad debt in 1996 to cost equivalents using institutional cost-to-charge ratios. We used the same methods used by Zuckerman and colleagues to impute uncompensated care for hospitals that did not report these data in 1996.¹⁶ Each hospital’s uncompensated care burden and adjusted market share were calculated; following the earlier study, we classified hospitals into one of four categories. Group 1 comprised hospitals that had both high adjusted market share and high uncompensated care burden. Group 2 included hospitals that only had high adjusted uncompensated care market share. Group 3 comprised hospitals with high uncompensated care burden only. Groups 1–3 were considered safety-net hospitals. Group 4 included all remaining hospitals and was deemed "non-safety-net hospitals" because of the relatively low uncompensated care burden and market share among those hospitals. This approach has advantages over the use of organizational labels, in that actual provision of uncompensated care is used to identify safety-net hospitals; it also has limitations, in that hospital uncompensated care may vary from year to year. The high levels of uncompensated care provided by Groups 1–3 hospitals in 1996, however, imply that they were major providers in their communities in that year.

Study Data And Methods

Top Identifying Safety-Net Hospitals Study Data And Methods Characteristics Of Safety-Net... Changes In Operational Status Changes In Service Offerings Operational And Financial... Discussion And Policy... NOTES

 
Data for our analysis came from the American Hospital Association (AHA) Annual Survey for the years 1996–2002; the AHA survey collects information annually on many aspects of hospital organization, operation, and finances. We used the 1996 data to classify hospitals into the four groups described above and also to assess differences in key organizational characteristics across the groups. Multiple years of the AHA data were examined to identify whether study hospitals experienced major organizational changes (such as closures and mergers) between 1996 and 2002. For hospitals that did not, we assessed changes in service offerings, bed size, staffing, volume of services, payer mix, uncompensated care, and financial condition. Uncompensated care and financial data for 2002 were deflated to 1996 dollars using the general medical/surgical hospital Producer Price Index. Overall, 2,268 urban general acute care hospitals were identified and classified into the four groups for 1996.

Characteristics Of Safety-Net Hospitals

Top Identifying Safety-Net Hospitals Study Data And Methods Characteristics Of Safety-Net... Changes In Operational Status Changes In Service Offerings Operational And Financial... Discussion And Policy... NOTES

 
Our findings on key organizational characteristics that distinguish each hospital group—namely, ownership, teaching status, and bed size—were very similar to those of Zuckerman and colleagues (Exhibit 1). This suggests that the types of hospitals populating each category have been stable over time.

Payer mix as reported in Exhibit 1 also differed greatly across the hospital groups. Group 1 hospitals had very low Medicare shares of patient days (27.5 percent) and high Medicaid patient shares (31.5 percent) in 1996. Compared with Group 4, Groups 2 and 3 both had significantly lower Medicare share and significantly higher Medicaid share. The Medicaid difference was especially pronounced when Groups 1 (31.5 percent) and 3 (23.6 percent) are compared with Group 4 (14.5 percent).

Uncompensated care provision in 1996. As one would expect, in 1996 Group 1 provided the greatest amount of uncompensated care per hospital, averaging $47.7 million in hospital costs (Exhibit 1). Group 1 hospitals also had the highest uncompensated care burden, representing 22.5 percent of their hospital expenses, and provided about 39 percent of the uncompensated care in their markets. Group 2 provided less than half that amount of uncompensated care, but this value ($14.2 million) was second-highest among the four hospital groups. Although Group 3 provided about two-thirds the annual amount of un-compensated care as Group 2 ($8.9 million versus $14.1 million, respectively), this translated into a much higher per bed amount of uncompensated care provision given Group 3’s smaller bed size. Finally, Group 4 provided the lowest levels of 1996 uncompensated care as measured per hospital ($3.0 million) or per hospital bed ($13,436), on average.

Public health and specialty services. Prior research has identified a set of hospital services that are frequently used by uninsured and poor patients.¹⁷ Exhibit 1 reports these as public health and specialty services. Generally, the data on services indicate that Groups 1 and 2 safety-net hospitals were significantly more likely to provide these services in 1996 relative to non-safety-net hospitals (Group 4), with the exception of emergency departments (EDs) and inpatient substance abuse services for Group 1. Comparing Groups 3 and 4, we find that the 1996 provision of public health and specialty services was quite similar across the two groups, with the exception of childbirth services, which Group 3 hospitals were less likely to offer, and AIDS services, which Group 3 hospitals were more likely to offer.

Changes In Operational Status

Top Identifying Safety-Net Hospitals Study Data And Methods Characteristics Of Safety-Net... Changes In Operational Status Changes In Service Offerings Operational And Financial... Discussion And Policy... NOTES

 
As financial pressures mount for hospitals, they may undertake major organizational changes that affect their core operations, including closure, merger, or conversion to alternative service lines. Exhibit 2 reports these types of changes between 1996 and 2002 for the four hospital groups. Generally, these data indicate that the vast majority of hospitals in each group continued operation without major changes. Around 87–93 percent of hospitals in each group continued to operate as acute care hospitals through the study period. Group 2 had a relatively high rate of merger, and Group 3 had higher rates of closure and other service conversions, compared with Group 4. However, the percentages of hospitals falling into these categories were all in single digits, which implies that few institutions in each hospital group were affected.

Top Identifying Safety-Net Hospitals Study Data And Methods Characteristics Of Safety-Net... Changes In Operational Status Changes In Service Offerings Operational And Financial... Discussion And Policy... NOTES

Operational And Financial Changes

Top Identifying Safety-Net Hospitals Study Data And Methods Characteristics Of Safety-Net... Changes In Operational Status Changes In Service Offerings Operational And Financial... Discussion And Policy... NOTES

 
Beginning with Group 1, these hospitals experienced slower growth in many types of hospital use relative to Group 4 hospitals (Exhibit 4). Specifically, Group 1 had significantly smaller increases in inpatient admissions and ED visits relative to Group 4. Group 1 also did not experience an increase in births, as Group 4 did.¹⁸ The only area of comparability between Groups 1 and 4 was outpatient visits, which increased at similar rates. The smaller increases in many areas of hospital use for Group 1 relative to Group 4 likely explain the slower growth in hospital staffing in Group 1. The percentage of inpatient days covered through Medicare increased significantly for Group 1 hospitals, which implies that their increased inpatient admissions, outpatient visits, and ED visits might have come from Medicare patients.

Patterns of change in staffing and hospital use were comparable between Groups 2 and 4. Group 2 had growth in the number of births, inpatient admissions and days, outpatient visits, and ED visits, and the magnitudes of these increases were similar to Group 4. Group 2 hospitals maintained the number of beds instead of experiencing the slight reductions of Group 4, and both Groups 2 and 4 increased staffing at comparable rates. Uncompensated care grew significantly for Group 2, but at a lower rate than experienced by Group 4. Comparable to Group 1, though, Group 2 began at a higher base amount of uncompensated care in 1996, so the absolute annual increase is higher for Group 2 than Group 4. However, Group 2 hospitals, like those in Group 1, experienced a decline in uncompensated care burden, as the annual increase in the amount of uncompensated care was half the annual increase in total expenses. Group 2 experienced financial outcomes similar to those of Group 4, with annual expense increases of similar magnitude to annual revenue increases. The average total margin change for Group 2 was negative, but this was not significantly different from zero or from Group 4’s reported change.

Although changes for Groups 1 and 2 bear similarities to those of Group 4, changes for Group 3 are different in several respects. Group 3 did not experience increases in the number of births, inpatient admissions, and inpatient days. Looking specifically at uncompensated care, Group 3 experienced significant declines in the annual amount of uncompensated care between 1996 and 2002 (3.2 percent annually), whereas the other hospital groups had increases or little change. The declines for Group 3 led to a lower percentage of hospital expenses that were uncompensated (reduction of 2.9) and lower market share of uncompensated care (reduction of 2.4). Despite cutbacks in uncompensated care, the financial performance of hospitals in Group 3 deteriorated. Their expenses grew 2.8 percent, and their patient revenues increased 3.0 percent. Overall, hospitals in Group 3 had sizable declines in total margins, averaging 3.7 percentage points between 1996 and 2002.

Discussion And Policy Implications

Top Identifying Safety-Net Hospitals Study Data And Methods Characteristics Of Safety-Net... Changes In Operational Status Changes In Service Offerings Operational And Financial... Discussion And Policy... NOTES

 
Many forces affected the hospital industry between 1996 and 2002, some creating financial stress for hospitals but others providing relief. Here we have explored how safety-net and non-safety-net hospitals were affected by these forces in terms of their uncompensated care provision, their operations and service structure, and their financial outcomes. Given our replication of approaches used by Zuckerman and colleagues, we begin by summarizing how our results compare to theirs.¹⁹ We then discuss the policy implications of our findings.

Comparison of findings. Several similarities exist between our findings and those of the earlier study. First, we found similarities in the distinguishing features of the four hospital groups in terms of ownership, bed size, teaching status, and services offered. The comparability of these findings provides assurance of the stability of hospital classifications in each group over time. In addition, as did the earlier study, we found that the vast majority of hospitals in each group did not experience major organizational changes, and, thus, most retained their commitment to general acute care. Also comparable to the prior study, we found that Groups 2 and 4 were gaining in terms of increased hospital service use, especially inpatient services, outpatient visits, and ED visits, relative to Groups 1 and 3.

There were, however, a number of differences between our findings and those of the earlier study. Most notable were changes in the provision of public health and specialty services. For most of these services, Zuckerman and colleagues found that at least one safety-net hospital group experienced a larger decline in the proportion offering a given service than did the non-safety-net group. However, in our analysis, safety-net hospitals generally maintained their level of involvement in these services, whereas participation declined in the non-safety-net group.

Another important difference in our findings relates to the changing profile of uncompensated care for different hospital groups. Zuckerman and colleagues commented about declining uncompensated care market share in Group 2 hospitals, which raised concern given the substantial role these hospitals played in meeting marketwide indigent care needs in their communities. Our study found that the uncompensated care commitment of Group 2 did not continue to deteriorate between 1996 and 2002 but that the commitment of Group 3 hospitals had now become a concern.

Policy implications. Two of the hospital groups we examined represented major safety-net providers in 1996 in terms of the dollars of uncompensated care provided ($47.7 million on average for Group 1 hospitals and $14.2 million for Group 2 hospitals). Uncompensated care provision for these groups kept pace with or exceeded the annual growth in the number of uninsured people between 1996 and 2002. In addition, these hospitals experienced a reduction in the burden that uncompensated care placed on their resources, because of relatively slow growth in uncompensated care coupled with increased demand for inpatient and outpatient care. Given their substantial 1996 involvement in indigent care, these hospital groups likely also benefited from the reversals of planned Medicare and Medicaid disproportionate-share hospital (DSH) cutbacks in the BBA. What is striking, though, is despite these favorable factors, Group 1 and 2 hospitals did not experience positive changes in their overall financial condition. On average, in 1996 Group 1 hospitals had a –0.2 percent total margin, and Group 2 hospitals had a 1.4 percent total margin (data not shown), and these did not improve by 2002.

Hospital inefficiency may be a factor in the inability in Groups 1 and 2 to generate additional profit, but the data in Exhibit 4 suggest that these institutions did not become relatively more inefficient than others in terms of their expense growth. Thus, despite an environment that was positive in many respects, hospitals in Groups 1 and 2 were unable to create additional slack or a cushion of profits that could support future indigent care provision or other organizational needs.

In the meantime, the other two hospital groups we examined experienced changes over our study period that suggest that their involvement in indigent care will likely decline in the future. Group 3 hospitals had sharp reductions in uncompensated care during the study period. In addition, their total margins fell significantly, which suggests that they are unlikely to expand their capacity to provide increased indigent care in the future. Although Group 4 hospitals increased their uncompensated care provision over the study period, they curtailed a number of public health and specialty services, and this may set the stage for future reductions in indigent care. Thus, the increased safety-net involvement of Group 4 hospitals between 1996 and 2002 might have been a temporary manifestation.

Overall, these findings suggest that hospitals will either maintain or reduce their future commitment to indigent care provision if current conditions are maintained. However, the future is likely to bring a number of changes, especially in light of large federal deficits and the resulting discipline embodied in recent presidential budget proposals. One positive change for the hospital safety net in the president’s budget is completion of the 2001 commitment to add or expand 1,200 community health centers, which provide primary and preventive care.²⁰ This could reduce demands on the hospital safety net in communities where the uninsured rely on emergency rooms for nonurgent care and could also lessen preventable hospitalizations.²¹ However, a potentially large negative change would be the president’s proposed cuts in Medicaid funding of around $60 billion over the next ten years.²² Given the strain that Medicaid is already placing on state budgets, state governments are unlikely to fill this funding gap, and this will likely mean cutbacks in Medicaid eligibility for optional groups and also constraints on provider reimbursement. These cuts would have a large effect on two of the safety-net groups we examined: Group 1 hospitals, which have about one of every three patients covered by Medicaid; and Group 3 hospitals, where the number is around one of four. Certainly, there will be much ongoing debate on the fiscal year 2006 federal budget that will yield many policy proposals. The implications of these various proposals for the future of the hospital safety net need to be carefully explored.

Editor's Notes

 
Gloria Bazzoli (gbazzoli{at}vcu.edu) is a professor in the Department of Health Administration, Virginia Commonwealth University, in Richmond. Ray Kang is a research assistant at the Health Research and Educational Trust in Chicago, Illinois; Romana Hasnain-Wynia is senior director of evaluation and health services research there. Richard Lindrooth is an associate professor in the Department of Health Administration and Policy, Medical University of South Carolina, in Charleston.

This research was funded by the Robert Wood Johnson Foundation’s Changes in Health Care Financing and Organization (HCFO) Program, Grant no. 042596.

NOTES

Top Identifying Safety-Net Hospitals Study Data And Methods Characteristics Of Safety-Net... Changes In Operational Status Changes In Service Offerings Operational And Financial... Discussion And Policy... NOTES

 

1. In particular, P.J. Cunningham and H.T. Tu, "A Changing Picture of Uncompensated Care," Health Affairs 16, no. 4 (1997): 167–175, noted that there were three major components of the health care safety net: general acute care hospitals, community health centers, and private physicians.[Medline]M.S. Marquis, J.A. Rogowski, and J.J. Escarce, "Recent Trends in Geographic Variation in the Safety Net," Medical Care 42, no. 5 (2004): 408–415, also identified hospitals as one of the five core components of local safety nets.[CrossRef][ISI][Medline]
2. Institute of Medicine, America’s Safety Net: Intact but Endangered (Washington: National Academies Press, 2000).
3. S. Zuckerman et al., "How Did Safety-Net Hospitals Cope in the 1990s?" Health Affairs 20, no. 4 (2001): 159–168.[Free Full Text]
4. Medicare Payment Advisory Commission, Financial Data Report on Medicare Providers (Washington: MedPAC, June 2004).
5. A.C. Enthoven and S.J. Singer, "Unrealistic Expectations Born of Defective Institutions," Journal of Health Politics, Policy and Law 24, no. 5 (1999): 931–939[ISI][Medline]; and L.M. Nichols et al., "Are Market Forces Strong Enough to Deliver Efficient Health Care Systems? Confidence Is Waning," Health Affairs 23, no. 2 (2004): 8–21.[Abstract/Free Full Text]
6. K.J. Devers et al., "Hospitals’ Negotiating Leverage with Health Plans: How and Why It Has Changed?" Health Services Research 38 , no. 1, Part 2 (2003): 419–446; and B.C. Strunk, K. Devers, and R.E. Hurley, "Health Plan–Provider Showdowns on the Rise," Issue Brief no. 40 (Washington: Center for Studying Health System Change, June 2001).
7. MedPAC, Financial Data Report.
8. Ibid.; and B.C. Strunk and P.B. Ginsburg, "Tracking Health Care Costs: Trends Stabilize but Remain High in 2002," Health Affairs, 11 June 2003, content.healthaffairs.org/cgi/content/abstract/hlthaff.w3.266 (12 April 2005).
9. U.S. Bureau of the Census, "Health Insurance Historical Tables," 7 December 2004, www.census.gov/hhes/hlthins/historic/hihistt1.html (12 April 2005).
10. R.J. Baxter and R.E. Mechanic, "The Status of Local Health Care Safety Nets," Health Affairs 16, no. 4 (1997): 7–23[Abstract]; J. Holahan et al., "Medicaid Managed Care in Thirteen States," Health Affairs 17, no. 3 (1998): 43–63[Abstract]; and R. Hurley and S. Zuckerman, "Medicaid Managed Care: State Flexibility in Action," Discussion Paper no. 02-06 (Washington: Urban Institute, March 2002).
11. J.F. Hoadley, L.E. Felland, and A. Staiti, "Federal Aid Strengthens Health Care Safety Net: The Strong Get Stronger," Issue Brief no. 80 (Washington: HSC, April 2004).
12. Marquis et al., "Recent Trends."
13. Baxter and Mechanic, "The Status of Local Health Care Safety Nets"; L.E. Fishman and J.D. Bentley, "The Evolution of Support for Safety-Net Hospitals," Health Affairs 16, no. 4 (1997): 30–47[Abstract]; B.H. Gray, "Hospital Ownership Form and Care of the Uninsured," in The Future of the U.S. Healthcare System: Who Will Care for the Poor and Uninsured? ed. S.H. Altman, U.E. Reinhart, and A.E. Shields (Chicago: Health Administration Press, 1998), 207–222; and J. Reuter and D.J. Gaskin, "The Role of Academic Health Centers and Teaching Hospitals in Providing Care for the Poor," in The Future of the U.S. Healthcare System, 387–404.
14. Many researchers have examined uncompensated rather than just charity care when examining hospital involvement in the safety net. Largely, this is due to issues raised by T.G. Rundall, S. Sofaer, and W. Lambert, "Uncompensated Hospital Care in California," in Advances in Health Economics and Health Services Research, vol. 9, ed. R. Scheffler and L.F. Rossiter (Stamford, Conn.: JAI Press, 1988), 113–133. Rundall and colleagues noted that differences across hospitals in the definitions and accounting practices for charity care and bad-debt expenses make it difficult to distinguish these two concepts with validity.
15. L.E. Fishman, "What Types of Hospitals Form the Safety Net?" Health Affairs 16, no. 4 (1997): 215–222.[Abstract]
16. Specifically, to derive a value of uncompensated care for hospitals with missing values, we used a prediction from a regression model that included market demographics, hospital market characteristics, hospital characteristics, and a series of state indicators as independent variables. These regressions were estimated separately for for-profit, voluntary nonprofit, and public hospitals.
17. D. Gaskin, Safety Net Hospitals: Essential Providers of Public Health and Specialty Services (New York: Commonwealth Fund, February 1999).
18. It is interesting to note that fewer Group 4 hospitals provided maternity services, as noted in Exhibit 3, but those that continued the service as reported in Exhibit 4 experienced large increases in the number of births.
19. Zuckerman et al., "How Did the Safety Net Hospitals Cope in the 1990s?"
20. Office of Management and Budget, "FY 2006 Budget Priorities: Department of Health and Human Services," December 2004, www.whitehouse.gov/omb/budget/fy2006/hhs.html (12 April 2005).
21. M. Falik et al., "Ambulatory Care Sensitive Hospitalizations and Emergency Visits: Experiences of Medicaid Patients using Federally Qualified Health Centers," Medical Care 39, no. 6 (2001): 551–561[CrossRef][ISI][Medline]; J.M. Gill and A.G. Mainous III, "The Role of Provider Continuity in Preventing Hospitalizations," Archives of Family Medicine 7, no. 4 (1998): 352–357[Abstract/Free Full Text]; and P. Cunningham, "Insured Americans Drive Surge in Emergency Room Use," Issue Brief no. 70 (Washington: HSC, October 2003), 1–6.
22. OMB, "FY 2006 Budget Priorities."

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