In addition to the policy issues raised regarding the policies used to distribute DSH funds, the growth of Medicare and Medicaid managed care has put pressure on safety net hospitals. Many states are relying on managed care to serve their Medicaid populations (and control costs). Between 1991 and 2000, the proportion of Medicaid beneficiaries enrolled in managed care plans mushroomed from less than 10 percent to 57 percent (Iglehart, 1999; Kaiser, 2002). Under Medicaid managed care, care is moving to the outpatient setting and to hospitals that are not traditional safety net providers. As a result, safety net hospitals may lose not only the patient care payments for former patrons who obtain their care in other settings or at other hospitals, but also a portion of the Medicare and Medicaid DSH payments that they would have received if they had retained those patients.
Medicare managed care growth also affects the flow of Medicare DSH funds to safety net hospitals.6 The number of Medicare inpatient discharges eligible for direct DSH payments decreases as the number of Medicare managed care enrollees increases. If the amounts implicit for DSH in the managed care capitated rates are not passed on by Medicare+Choice organizations, there is a decline in hospital revenues.7
6. Nationally, Medicare managed care enrollment grew rapidly from 3.3 percent in 1990 to 15.4 percent in 1998 (U.S. Congress, 1999) and then has declined slightly (KFF, 2002).
7. The BBA established effective January 1, 1998 a direct pass-though payment to teaching hospitals for indirect medical education costs attributable to Medicare managed care enrollees. There is no comparable provision for DSH payments.