According to a study released Monday by The Commonwealth Fund and published in the August issue of Health Affairs, safety-net hospitals that currently rely on politically-negotiated funding will face significant financial reversals if they fail to change their business practices before the Affordable Care Act (ACA), deficit reduction programs and a weak economy force cutbacks in subsidies.
The study shows that some safety-net hospitals (which provide a large share of care to low-income, uninsured and Medicaid populations) survived – and possibly even thrived – before the recent recession of 2008-2009.
Nancy Kane, one of the study's authors and a professor of management and an associate dean for educational programs at Harvard School of Public Health, said she and the other authors examined five years' worth (from 2003 to 2007) of financial data from 150 urban safety-net hospitals throughout the country that met at least one of the following three criteria: a threshold percentage of Medicaid discharges, a threshold percentage of minority discharges or 2007 membership in the National Association of Public Hospitals and Health Systems.
Kane said the researchers found that those hospitals directly governed by elected officials and in highly competitive markets were more profitable than other safety-net hospitals. They were financially healthy primarily because they obtained subsidies from state and local governments, such as property tax transfers or supplemental Medicaid payments, including disproportionate share payments.
Some of the directly-controlled hospitals and one of the delegated public authority hospitals the authors visited received local subsidies of between 25 percent and 35 percent of total revenues. In contrast, none of the private, nonprofit sites received local government subsidies. The site visits also revealed that private, nonprofit safety-net hospitals developed strong financial control systems and pursued strategies to attract insured patients.
Kane said the problem for these hospitals now is that safety-net hospitals are facing a new market reality. The economic downturn, slow recovery and politics of deficit reduction have eroded the ability of local governments to support the safety net. Many safety-net hospitals have not focused on effective management, cost control, quality improvement or services that attract insured patients. As a result, and coupled with new uncertainties regarding Medicaid expansion stemming from the recent Supreme Court decision on the Affordable Care Act, many are likely to face increasing financial and competitive pressures that may threaten their survival.
"If the ACA does what it says it will do, there will be a major transformation for these hospitals – it'll make a big difference to them," said Kane. "It'll be a big change and some hospitals won't make it. The big problem is that there's an estimated 23 million people that still will be uninsured even with the healthcare exchanges, and they will concentrate at these specific hospitals. It's not clear who will take care of these patients if those hospitals were to close."
Kane said to overcome declining government subsidies, safety-net hospitals governed by elected politicians must focus on cost control, quality improvement and services that attract insured patients.
"These hospitals are going to have to be very careful in the ways in which they transition. It has to be very monitored at a local level so the funding isn't pulled out too quickly," she said. "There needs to be an investment in these safety-net hospitals, like attracting good physicians, so that they can compete with other hospitals because if they can't, they won't survive."