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In 2006, well before the recession began, U.S. hospitals provided more than $28.8 billion worth of uncompensated care1 — a burden that fell more heavily on some hospitals than on others. Hospitals that provide a large proportion of their inpatient care to the uninsured are called "safety-net" hospitals. Public safety-net hospitals typically shoulder the highest burden of all. Although only 2% of U.S. hospitals are members of the National Association of Public Hospitals and Health Systems (NAPH), they account for 25% of the country's uncompensated inpatient care.2
Safety-net hospitals are typically found in areas in which the uninsured are concentrated — inner-city neighborhoods and economically depressed rural communities. Unlike prosperous hospitals with a large base of paying patients, safety-net hospitals have little capacity to recoup their costs for uncompensated care by charging higher fees. As a result, most safety-net hospitals have negative operating margins (median, –3.0%3).
In addition to providing charity care, many safety-net hospitals support medical education and vital but unprofitable services for their community. In many cities, large safety-net hospitals anchor their region's disaster-response plan. When such hospitals are forced to close or to curtail key services, the spillover effects can reach far beyond the uninsured.
In 1981, the federal government allowed states to decouple their Medicaid payment rates from Medicare payments. To blunt the effect on safety-net hospitals, Congress directed the states to make supplemental Medicaid payments to facilities that provide a "disproportionate share" of care to Medicaid beneficiaries and the uninsured. When most states ignored their obligation to make "disproportionate-share hospital" (DSH) payments, Congress enacted the Omnibus Budget Reconciliation Act of 1987, which deemed certain hospitals to be DSH providers and established methods to force states to make DSH payments to those hospitals. Still, the states dragged their feet.
Matters changed in 1989, when enterprising budget experts discovered that they could claim federal DSH funds without expending general state funds. The hospitals that were slated to receive DSH funds were asked (or, sometimes, directed) to contribute the required state share; the state would then use this money to draw down a large federal matching payment. The hospitals would get their contributions back and perhaps a bit more, but the states often kept the lion's share of the federal payment. Some states even "recycled" a portion of their retained federal DSH funds and used it to draw down additional federal Medicaid dollars. With the DSH system effectively serving as a money pump that pulled federal funds into state coffers, the program experienced explosive growth. Between 1990 and 1996, federal DSH payments ballooned from $1.4 billion to more than $15 billion annually.
In 1991, Congress sought to restrict states' ability to tap provider funds in order to claim federal matching funds by enacting the Voluntary Contribution and Provider-Specific Tax Amendments. This law also capped the amount a state could spend on DSH payments. But it did little to slow recycling. Many states simply targeted their DSH payments to selected hospitals, paying them well above their costs for uncompensated care and then recovering most of the money for the state's treasury.
To hinder this practice, Congress restricted states from making DSH payments in excess of a hospital's unreimbursed costs — not prohibiting recycling, but making the practice more costly for hospitals. In 1997, Congress and the Clinton administration cut federal DSH payments by 5% and limited their further growth. Despite these efforts, recycling persisted until the Centers for Medicare and Medicaid Services (CMS) began scrutinizing the practice on a state-by-state basis. By 2006, recycling had largely stopped.
Today, 50 states and the District of Columbia have DSH programs. Annual federal payments vary widely — from $200,000 (in Wyoming) to more than $1.5 billion (in New York), and they vary widely on per capita amounts and payments per uninsured citizen (see table). Ironically, early adopters of recycling and other now-outlawed schemes locked in large federal payments that persist to this day.
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Notwithstanding the program's flaws, DSH funds that reach safety-net hospitals are vital to those hospitals' survival. A 1999 NAPH analysis showed that without DSH funds, these institutions would have had a –7% margin on operations.5 Even with DSH funds, safety-net hospitals face an uncertain future. In 2007, the Agency for Healthcare Research and Quality calculated that the median operating margin for patient care in public safety-net hospitals was –6.7%.3
In recent years, the CMS has repeatedly sought to eliminate the DSH program. Pronouncing it an inappropriate institutional subsidy, the agency proposed to reform the program by urging states to use their DSH funds to expand Medicaid eligibility or subsidize private insurance coverage for the poor. Tennessee tried this strategy in 1994, redirecting its DSH funds to expand Medicaid eligibility. Within months, safety-net hospitals were forced to curtail or eliminate vital programs. Faced with widespread disruptions of care, Tennessee reinstituted the DSH program.
In December 2008, the Congressional Budget Office (CBO) proposed that the DSH program be converted into a state block grant. In exchange for budgetary flexibility, the CBO would cut each state's DSH allocation by 10% and index subsequent increases to inflation, minus 1%.
In our view, both the CMS and CBO approaches are misguided. With the number of uninsured Americans growing rapidly, cutting DSH funding would be foolish. Ending it could be disastrous. Instead, we believe that four changes to federal law would allow the program to achieve its original purpose.
First, DSH funding should be restricted to truly disproportionate providers. The legislative clause that deems certain hospitals to be DSH facilities should be revised so that DSH payments can be made only to these facilities.
Second, the flexibility that is given to states to designate special classes of DSH providers should be eliminated. Federal law requires that DSH payments within a class be reasonably related to a hospital's proportion of care to low-income patients, but loopholes allow states to favor certain hospitals (especially state-owned hospitals) over those providing a greater proportion of uncompensated care. DSH payments should be based on a single, uniform method.
Third, to receive DSH funding, a hospital should be required to operate an emergency department and participate in its state's trauma system — services that are vital to the public's health.
Fourth, large DSH hospitals that anchor their region's disaster plan should receive supplemental funds, provided that they meet strict performance and readiness criteria. A portion of current federal DSH funds — perhaps 10% — should be held back and awarded for this purpose through competitive grants.
By allocating federal funds to hospitals that need them most, the reforms we propose would go a long way toward correcting the program's deficiencies. Our proposals do not correct historical inequities in the allocation of DSH funds among the states. Attempts to do so would probably trigger a legislative battle that would doom any chance for reform.
Until fundamental health care reform is achieved, millions of low-income Americans will remain dependent on safety-net facilities for care. Everyone — insured and uninsured alike — benefits from the specialized services, medical education, and trauma and disaster care that many safety-net hospitals provide. Today, DSH providers are needed more than ever. The program is broken, but it can and should be fixed.
Mr. Spivey reports receiving consulting fees from various public hospitals including Grady Health Systems, where Dr. Kellermann is an emergency physician. No other potential conflict of interest relevant to this article was reported.
Source Information
Mr. Spivey is a principal at Spivey/Harris Health Policy Group, Washington, DC. Dr. Kellermann is a professor of emergency medicine and associate dean at Emory University School of Medicine, Atlanta.
References
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