Analysis of the Joint Distribution of Disproportionate Share Hospital Payments. What Is a Safety Net Hospital?


Federal policymakers, states and researchers have used a broad range of definitions to characterize safety net hospitals. While the definitions vary, a common theme is that safety net hospitals provide a disproportionate amount of care to vulnerable populations. Which hospitals are ultimately identified as safety net providers has important implications for evaluating whether DSH payments are well targeted: Is the purpose to help relieve hospitals financial burden of caring for low-income populations? Help hospitals in financial distress? Protect low- income Medicare and Medicaid beneficiaries’ access to care? Compensate hospitals for providing care to the uninsured? Help states and local governments in areas with high levels of need? Encourage selected hospital behavior such as providing special services—teaching, emergency room care, trauma care and the like? Or, perhaps, the purpose is some combination of these. A summary of the key dimensions to describing a safety net hospital and how policymakers and researchers have defined safety net hospitals is provided in Table ES.1.

An important distinction of safety net hospitals is that they provide care to vulnerable populations. Unfortunately, there is no general agreement on which groups should be considered vulnerable. The Institute of Medicine’s recent report, America’s Health Care Safety Net, adopted a broad definition of vulnerable populations—including the “uninsured, Medicaid and other vulnerable patients” (IOM 2000). The other vulnerable groups included homeless persons, persons with HIV, substance abusers, and the mentally ill.

A major issue is whether low-income patients with insurance should be included in the definition of vulnerable (IOM, 2000). The principal argument for excluding low-income Medicare patients (i.e., those that are entitled to SSI) and Medicaid patients is that they have insurance and thus have access to the health care system. The uninsured, by definition, have no insurance, and generally have very limited ability to pay for their care. The arguments for counting Medicaid patients as a vulnerable population is that, despite having insurance, Medicaid patients have complex health care needs and often have trouble gaining access to health care services because of the historically low program payment rates. Further, their low- income and complex health care needs make them a vulnerable population. An alternative to an “all-or-nothing” policy would be to include shortfalls (the difference between the costs and the amounts received) from Medicaid and local indigent care programs.

Another distinguishing feature of safety net hospitals is that they provide a disproportionate amount of care to vulnerable populations. A key issue in quantifying the amount of care is whether it should be based on the volume of care provided to vulnerable populations or the uncompensated cost of that care. While the Medicare and Medicaid DSH programs identify a safety net hospital primarily on the volume of low-income patients it serves, another common strategy, especially in the research literature, is to designate safety net hospitals by their level of uncompensated care costs—that is, the costs of charity care and bad debt.

Another important issue is how to decide whether the care to vulnerable populations is disproportionate to that provided by other hospitals. Medicare uses a national benchmark while Medicaid compares hospitals to others in the same state. MedPAC recommends that a threshold be set so that between 50-60 percent of hospitals would qualify for Medicare DSH payments.

Table ES.1
Safety Net Hospitals: Key Dimensions and Definitions
Dimension Research and Policy Definitions
Legal Mandate or Mission Clinton Health Care Proposal: Legal mandate and in area of high need Gaskin and Hadley: Mandate or mission driven or high share of low- income discharges
Vulnerable Populations Medicare DSH formula: Medicaid and Medicare/SSI recipients 
Basic Medicaid DSH formula: Three available options, which can be used separately or jointly 
Medicare DSH formula 
Medicaid recipients only or 
Low-income populations including Medicaid and indigent persons 
Medicaid DSH option: states free to establish own criteria for vulnerable populations 
IOM: uninsured, Medicaid, and other populations such as people with HIV or mental illness.
Disproportionate Amount of Care Volume of care: 
Medicare DSH Formula: threshold volume of Medicaid and Medicare SSI patients depending upon selected hospital characteristics such as size and location 
Federal Medicaid DSH minimum standards: 
Hospital’s Medicaid inpatient rate at least 1 S.D. above state mean Medicaid inpatient rates 
Hospital’s “low-income use rate” (Medicaid and charity care patients(1)) >25% 
Many states pay DSH to other hospitals as well 
Costs of uncompensated care: 
Top 10% of hospitals providing most bad debt and charity care (Baxter and Mechanic 1997) 
Top 10% of hospitals with highest ratio of bad debt and charity care to operating expense (Fishman 1997) 
Ratio of hospital’s uncompensated care to hospital’s total costs >10% (Cunningham and Tu 1997) 
Type of care: 
Provision of certain types of services (e.g. ER, trauma, burn) as indication of safety net hospital
Level of Aggregation National — Hospital-type
State — Market level

1.  Low income use rate is the sum of two ratios. The first is the share of the hospital’s total revenue for patient services that are paid by Medicaid or state/local subsidies. The second is the percent of total hospital charges for inpatient services accounted for by the net (of state and local subsidies for inpatient care) amount of charity care provided to inpatients.

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