Analysis of the Joint Distribution of Disproportionate Share Hospital Payments. Measures related to serving low-income populations


In the preceding section, we discussed potential measures to identify hospitals that serve vulnerable populations. These measures do not necessarily equate to measures of financial vulnerability. Providing services to Medicare beneficiaries who are entitled to SSI threatens a hospital's financial viability only if there is a higher cost to serving these patients than other patients that is not recognized in the payment rates (which the Medicare DSH adjustment was originally intended to address). Financial viability is also threatened if the overall payment rates under the program are inadequate to cover the costs of providing services. However, if there are no revenue shortfalls, serving Medicare/SSI beneficiaries does not add to a hospital's financial vulnerability. Thus, factors that are used to determine whether a hospital serves vulnerable populations are not necessarily measures of financial vulnerability.

Uncompensated Care

A hospital's uncompensated care load contributes to its financial vulnerability since the hospital must cover the costs of the care through other revenue. Measures of uncompensated care frequently include both charity care and bad debt. Since bad debt may result from irresponsible behavior on the part of non-poor patients, its inclusion in a financial vulnerability measure may discourage hospitals from pursuing collection from such patients. However, many hospitals do not distinguish between charity care, for which the patient is not expected to pay from the time of admission, and bad debt, for which the patient's liability for at least some portion of the bill is waived upon determination of the inability to pay. The fact that such decisions frequently wait until the patient's Medicaid eligibility is determined through the initial application process further complicates this distinction (ProPAC 1997). Moreover, a distinction may be unnecessary. One recent study of Massachusetts hospitals reported that most patients who incurred bad debt had incomes below the poverty line (Weismann et al 1999).

Medicaid Shortfalls

A hospital's Medicaid shortfall can also contribute to its financial vulnerability. A policy issue is whether using Medicaid contractual allowances in an allocation formula would distort both the distribution of payments and the incentives faced by the states. It would reward hospitals in states that have less expansive Medicaid programs and could provide an incentive for the states to reduce their Medicaid level of effort. A measurement issue is the extent to which the shortfall is attributable to the hospital's inefficiency as opposed to Medicaid payment levels. A measure of Medicaid utilization or share of gross revenues (MedPAC's recommended approach) rather than Medicaid shortfalls would address both issues. While this may be an appropriate allocation policy, it is the hospital's shortfalls from serving Medicaid patients that threatens its financial viability. Moreover, federal support is already being provided for the Medicaid population through the federal match. Thus, a measure of the Medicaid shortfall - either directly or indirectly through a measure of the generosity of the state's Medicaid program - should also be considered.

Shortfalls from state or local indigent care program

Shortfalls attributable to serving patients supported through state or local indigent care programs can also contribute to financial vulnerability. Information on these patients is generally not collected separately in national databases. The AHA survey includes patients supported by indigent care programs in the "other government" payer category, along with CHAMPUS, Title V and worker's compensation, and, in some states, state and local government health programs. In the absence of better data, MedPAC assumes that any losses a hospital reports for this category are attributable to indigent care patients (MedPAC 1998).

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