The Role of Local Governments in financing Safety Net Hospitals

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Background

Public hospitals that provide a substantial amount of care to the indigent usually collect patient revenues that fall short of their operating costs. The gap between internally generated—or operating—revenues and expenses has forced safety net public hospitals to rely on federal, state, and local subsidies to remain viable. Because the existence of these hospitals is considered critical to ensuring access to health care for uninsured and underinsured populations, it is important to learn how sizable and secure these subsidies are.

Most policy analysis on the financing of health care for lower-income households has focused on changes in the Medicaid program and on additional payments made by the federal government and the states for indigent care. Much less information has been collected on how localities (generally counties) support the safety net. This study examines how safety net hospital systems in three large urban areas—Houston/Harris County, Texas; Oakland/Alameda County, California; and Miami-Dade County, Florida—are struggling with how to fund hospital care for people who lack health coverage. The study covered the Harris County Hospital District (HCHD) system in Houston/Harris County, composed of the Lyndon Baines Johnson and Ben Taub Hospitals; Highland Hospital in Oakland/Alameda County; and Jackson Memorial Hospital in Miami-Dade County. Each of these hospitals provides a significant portion of the safety net services within its local area. For example, the HCHD system provides more than 75 percent of all charity care in Harris County, Highland Hospital provides more than half of the charity care in Alameda County, and Jackson Memorial Hospital provides close to 80 percent of the charity care in Miami-Dade County.

The study sites were selected to reflect a mix of important challenges to the goal of providing affordable health care for the indigent. Previous Urban Institute analyses of safety net providers throughout the nation concluded that providers that simultaneously faced several threats to their viability were in the most serious trouble. The three county health systems chosen for more intensive analysis here are those that confronted most or all of the four forces identified as important in these earlier case studies: demand for safety net services, the shift to managed care in Medicaid, commercial market competition, and financial support from the federal and state governments (Norton and Lipson 1998).

Demand for safety net services: The demand for safety net services is growing in many communities for several reasons. The uninsured rate is climbing because of shifts in the mix of jobs (e.g., toward retail trade and part-time and temporary work, where health coverage is less prevalent) and increases in health insurance premiums. The problem of uninsurance is compounded by the needs of people with special health care problems arising from HIV/AIDS, homelessness, substance abuse, and other causes.

Medicaid managed care: Medicaid managed care is a threat to safety net providers as nontraditional providers expand into the Medicaid market, leaving safety net providers with fewer paying patients. Moreover, capitation payments—fixed monthly payments that cover the cost of all care stipulated in the contract—often exert more pressure to cut costs on Medicaid providers than a fee-for-service system does.

Commercial market competition: Increased penetration of managed care in the private market has resulted in heightened price and nonprice competition. This competition is both threatening the private-pay patient base of safety net providers, which is often small but is nevertheless important, and driving down payment rates.

Federal and state financial support: Federal and state assistance to safety net providers can help cover the revenue shortfall arising from the combination of below-market payments by Medicaid and the cost of serving the uninsured. Some states provide higher levels of support than others for hospitals through programs such as the Medicaid disproportionate share hospital (DSH) program.

Taken together, these factors suggest that the stress on safety net providers, and the need for local support for indigent care, will be greater where there are a large number of uninsured people, a substantial penetration of Medicaid managed care, a high level of market competition, and a relatively low level of federal and state support. The sites selected for this study meet all or most of these criteria.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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