Based on the information provided by the California Public Hospital Association, the FFY 1998 DSH payments reported by the state to CMS included both state fiscal year (SFY) 1997 supplemental DSH payments and SFY1998 base and supplemental payments (Table 8.3). The DSH payments were supported by $1.3 billion in intergovernmental transfers, so that the net gain to hospitals was $1.1 billion. The state retained $162.8 million of the funds (the difference between the federal share and the "new" DSH amounts).
Source: California Public Hospital Association
Among the acute care hospitals in our analysis file, 82 hospitals received $2.2 billion of the Medicaid DSH payments reported for FFY 1998. Eighteen acute care hospitals that are missing from our database received $125 million in DSH payments; specialty hospitals and institutions for mental disease accounted for the remaining DSH payments ($112 million). The multiple payments within the same FFY affected our analysis results. Depending on the hospital's fiscal year end, it may report SFY1997 payments only or both SFY 1997 and 1998 payments. We did not have the resources to examine how significant a problem this might be. In the aggregate, the hospital-level financial data showed slightly lower total Medicaid DSH payments and IGTs than the state's FY1998 data. The "new" DSH estimate is slightly higher. It appears that most hospitals are reporting multiple SFY payments, which has the effect of portraying the Medicaid DSH payments as being higher than they are on average over several years. If we had constructed our baseline using only the SFY 1998 payments, the federal share of Medicaid DSH payments would have been $1,001.8 million, or about 10 percent lower than the amount used in the baseline for our simulations.
1.Source: CA hospital annual financial data for report periods ended in 1998
2.Source: CA Public Hospital Association
In Table 8.5, we report the results of our analysis of the current distribution of DSH payments across classes of California hospitals. Most hospital classes in the table are self-explanatory. The safety net hospitals are those with at least 20 percent of their inpatient days attributable to low-income patients (Medicare SSI, Medicaid, local indigent care programs, self-pay and charity care days based on our HCUP analysis). Hospitals are classified into groupings based on their margins net of Medicare and ''new" Medicaid DSH funds. Financial risk (Medicaid shortfalls, bad debt and uncompensated care) totaled $2.4 billion, or $134 per adjusted day. The dollar-weighted total margin net of DSH payments was -0.4%.
- Financial risk was concentrated in the large urban hospitals (79%). Rural hospitals bore only 3% of the financial risk.
- County hospitals bore 33% of the financial risk and had a -8.8% total margin net of DSH payments.
- Although the major teaching hospitals (those with 250 or more residents) bore 19% of the financial risk, they also had higher margins net of DSH payments (2.5%). Factors such as the Medicare indirect teaching adjustment and non-operating revenues are likely to be contributing to their relatively higher margins. Hospitals with smaller teaching programs had negative margins.
- On average, hospitals with less than 20 percent of their adjusted patient days or revenues attributable to low-income patients had positive margins while those with a higher proportion of low-income patients had negative margins. However, about a quarter of the safety net hospitals (45 of 198) had margins that were 5% or higher. The two safety net hospitals with margins greater than 25% had negative financial risk: their combined net revenues for Medicaid patients and uncompensated care exceeded the estimated costs of that care by an average of $169 per day.
In total, 269 of the 313 hospitals in the CA analysis file received DSH funds from either Medicare or Medicaid or both programs. The joint new DSH funds (Medicare DSH payments and Medicaid "new" DSH payments) totaled $1.69 billion and resulted in total margins of 6.0%. Overall, the ratio of DSH payments to financial risk was .70.5
- The ratio of DSH to financial risk was only .10 for rural hospitals compared to .72 for urban hospitals.
- Facilities owned by county or local government (not including hospital districts) received 39% of the funds. Medicare DSH payments to these facilities had far less impact on their average margin (increasing it from -8.8% to -6.6%) compared to Medicaid DSH payments (which increased margins to 9.0%).
- Facilities owned by hospital districts did not make intergovernmental transfers to fund the Medicaid DSH program. They bore 7% of the financial risk but received only 4% of the new DSH funds, primarily from the Medicare program. Both their ratio of DSH to financial risk (.31) and average margin including DSH payments (3.4%) was considerably lower than other hospitals.
- For the most part, DSH payments appear to be targeted toward safety net hospitals. Safety net hospitals (those with low-income patient ratios of 20% or higher receive 96% of DSH funds. In general, hospitals with a relatively high percentage of low-income adjusted patient days or gross revenues have higher ratios of DSH to financial risk. Than hospitals that have proportionately fewer low-income patients.
- There is some evidence, however, that improvements could be made in how the funds are targeted toward those safety net hospitals that are most financially vulnerable. Three percent of DSH funds are going to hospitals that do not incur financial risk and 16% are received by safety net hospitals with total margins net of DSH that are 5% or higher.
Table 8.6 summarizes the results of selected simulations of alternative DSH allocation policies. More detailed results for these simulations are reported in Appendix D. The allocation formulae used in the simulations are:
- Simulation A: (% Non-Medicare LIP days -15%) x adjusted days x WI
- Simulation B: (% Non-Medicare LIP GR-15%) x adjusted days x WI
- Simulation C: (FR as % operating cost - 5%) x adjusted days x WI
- Simulation D: (FR as % operating cost - 5%) x adjusted days x WI x scaling factor
The simulations use Medicare payments and the federal share of DSH as the baseline. Since the state retained some DSH funds, the DSH baseline for the simulations is higher ($1.88 billion) and, as a result, overall margins are higher in the simulations than in Table 8.4 (6.7% vs. 6.0%). Simulation A concentrates DSH payments on hospitals with 15 percent of their inpatient days attributable to low-income patients (The measure is derived from HCUP data and includes inpatient days attributable to Medicaid, local government indigent care programs, and self-pay patients. It excludes Medicare SSI days and therefore is not the same measure as the one used to establish the hospital classes by proportion of low-income inpatient days). Hospitals with more than 40% low-income patient days would on average receive payments in excess of their financial risk. Six hospitals with no financial risk would receive 2 percent of DSH funds and 35 safety net hospitals with margins greater than 5% would receive 24 percent of DSH funds (Table D.1A in Appendix D).
Simulation B uses information from the financial data on gross patient revenues as the measure of low-income patient utilization and allocates funds to hospitals with gross revenues (inpatient and outpatient) of 15% or higher that are attributable to Medicaid, other government programs for low-income patients, bad debt and uncompensated care. Revenues attributable to Medicare SSI patients are not included in this low-utilization measure. Relative to Simulation A
hospitals that provide a relatively high volume of outpatient services to low-income patients are advantaged. While this is a desirable objective, it is not clear that the result is an improvement over Simulation A. For example, hospitals with no financial risk receive higher DSH payments under Simulation B. The loss of funds by safety net hospitals ($121 million) is a re-distribution between hospitals that have a high proportion of low-income inpatient days and hospitals that have a high percentage of gross revenues attributable to low-income patients and highlights the potential importance of deciding how to define safety net hospitals.
Simulations C and D allocate funds to hospitals with ratios of financial risk to operating expenses above .05. Simulation C increases the margins of hospitals with relatively high financial risk and improves the safety net hospital margins. Hospitals with 0-5% financial risk have the lowest margins. This raises an issue regarding whether a threshold should be used in the allocation policy. Simulation D uses a sliding scale in the allocation formula so that hospitals with higher financial risk receive a relatively greater proportion of funds. The formula that was used in the simulation shifts most funds to hospitals with financial risk ratios above .25. Since on average hospitals in this category already have relatively high margins and the overall ratio of DSH to financial risk is high, this particular sliding scale formula provides greater than 1:1 DSH to financial risk coverage for hospitals with the highest financial risk. This type of coverage may be needed to cover operating losses. Across the classes of safety net hospitals, the allocation improves the margins of financially vulnerable safety net hospitals; however, hospitals with total margins net of DSH in excess of 5% receive 15% of the DSH funds. The results suggest that an allocation policy that takes into account both financial risk and financial viability should be explored, e.g. an allocation based on financial risk capped at an amount that would not increase a hospital's margin above 5%-7%. Hospitals that are otherwise able to cover their financial risk through third-party revenues and other revenues would receive little or no funding.
5. We were unable to match 13 hospitals in our analysis file with CA financial data. We eliminated the hospitals so that we would have a matched set of hospitals across the simulations.