Environmental Scan to Identify the Major Research Questions and Metrics for Monitoring the Effects of the Affordable Care Act on Safety Net Hospitals. E. Potential Effects of the ACA on Safety Net Hospitals

The expansion of Medicaid and the availability of subsidized coverage through health insurance marketplaces will generally increase the demand for medical care at safety net hospitals and reduce the amount or proportion of care provided by these institutions to uninsured persons. The most recent estimates from the Congressional Budget Office (CBO) predict that there will be 25 million fewer uninsured persons by 2023 compared to what would have happened without health reform, and that Medicaid will account for about half of the newly insured (CBO 2013). Increased demand could potentially come from both newly insured patients who used safety net hospitals when they were uninsured, as well as newly insured patients who previously had little or no health care utilization.

The extent of the increase in demand for care at safety net hospitals will vary considerably depending on a number of factors, but especially on the size of the increase in the insured population in the community. States and communities vary considerably in the size and proportion of their population uninsured prior to the ACA, due to differences in local socioeconomic characteristics, variations in the local economy that affect enrollment in private insurance coverage, and differences in state Medicaid eligibility policies (Buettgens and Hall 2011).

Even within states, communities will vary in terms of how many uninsured people gain coverage. Many safety net hospitals will continue to serve large numbers of uninsured people. CBO estimates that about 31 million people will remain uninsured by 2023; the size of the uninsured population will vary across communities for a number of reasons (CBO 2013). An especially important consideration will be the size of the uninsured immigrant population in the community: undocumented immigrants are barred from enrolling in Medicaid or receiving subsidized coverage in the health insurance marketplaces, whereas legal immigrants are permitted to purchase subsidized coverage and are eligible to enroll in Medicaid if they have been in the country for at least five years. Communities that have relatively large undocumented immigrant populations will therefore continue to have large uninsured populations (Hoefer et al.
2011).

Safety net hospitals may be able to increase demand from newly insured patients to the extent that they are able to assist and encourage uninsured patients to enroll in Medicaid or private insurance coverage, which they become eligible for on January 1, 2014. Many safety net hospitals have considerable experience in providing application assistance and enrolling eligible individuals in Medicaid and CHIP, but it is unclear whether additional support will be needed to facilitate private insurance enrollment through the health plan marketplaces (Snyder et al. 2012). The rate of “churning”—the extent to which people switch back and forth from public and private coverage because of changes in their eligibility status—could also pose a challenge to safety net hospitals in their ability to track patients and bill insurers for services.

The extent of the increase in demand for care will also depend in part on decisions that states make in implementing the reforms. Of particular importance is whether state governments decide to expand Medicaid coverage to adults— which is no longer mandatory, based on the Supreme Court’s 2012 decision on the constitutionality of the ACA. As of this writing, 30 states including the District of Columbia have decided to proceed with the expansion, 15 states currently oppose expansion, and 6 are undecided (Kaiser Family Foundation, State Health Facts). Moreover, a number of states that have decided not to expand Medicaid have large numbers of uninsured people who might otherwise have gained insurance coverage through the Medicaid expansions. Thus, the decision not to expand Medicaid in a state is likely to substantially limit the increase in demand for care at safety net hospitals.

Another potentially mitigating factor that may affect the size of the increase in demand at any specific hospital is whether the hospital is included in qualified health plans as an “essential community provider.” The ACA requires that qualified health plans sold in the marketplaces have a “sufficient number and geographic distribution of essential community providers (which includes public and nonprofit hospitals), where available, to ensure reasonable and timely access to a broad range of such providers for low-income, medically underserved individuals.” Although this generally includes safety net providers, not all safety net providers need to be included in plan networks, and states will still have considerable discretion in identifying the specific providers that must be included in a qualified health plan. For example, under the “safe harbor” standard, CMS requires that plans include a minimum of 20 percent of available essential community providers in their network, whereas only 10 percent of available essential community providers are required under the “minimum expectation” requirement (CMS-CCIIO 2013). Movement by some health plans toward narrower network insurance products could further serve to exclude some safety net hospitals, especially those that are perceived to be high cost (Christianson et al. 2011b). Exclusion from plan networks would seriously affect safety net hospitals’ ability to retain and attract patients who are newly insured through the health insurance marketplaces.

Increases in patient revenue from Medicaid and private insurance may not be entirely commensurate with increased demand for care. Revenue from Medicaid patients might be limited to the extent that states have or will cut back on reimbursement and benefits (Bachrach et al. 2012). Medicaid reimbursement levels to hospitals and physicians have historically been low compared to Medicare and private payers. According to the American Hospital Association (AHA), hospital payment-to-cost ratios (payments for services as a percentage of the cost of providing services) average 88.7 percent for Medicaid, compared to 128.3 percent for private payers (AHA 2010). The recession of 2007–2009 and state budget problems have led to further reductions in Medicaid reimbursement rates to hospitals, including 33 states that cut rates in 2010 (Smith et al. 2010). Increased revenue from privately insured patients also depends on the payment rates that plans sold in the new state-based marketplaces negotiate with hospitals.

The amount of patient revenue from Medicaid and private payers can also be affected by whether reimbursement favors certain types of services over others. Historically, hospital payment in Medicaid has generally favored (that is, covered more of the cost of) inpatient over outpatient care (Ginsburg and Grossman 2005). This could be a problem if initiatives to increase use of primary care and outpatient care services—and to decrease use of inpatient care—are not accompanied by a realignment of financial incentives for outpatient versus inpatient care. Some states, including New York, have increased outpatient rates relative to inpatient rates in their Medicaid programs (Quinn and Courts 2010).

Some policy analysts also have raised concerns that revenue from new, privately insured patients might be limited to the extent that some services are not covered or will require high cost-sharing on the part of patients (Witgert and Hess 2012). Although qualified health plans in the marketplaces are required to offer “essential health benefits” agreed upon by the state and federal government, states and health plans still have flexibility in defining benefit packages based on benchmark plans in the state. The level of coverage of certain services, such as inpatient mental and behavioral health, may be of particular importance to safety net hospitals that often provide such services. Most private plans include deductibles and co-pays that could limit direct revenue from private insurers. However, cost-sharing subsidies are available for lower-income enrollees in marketplace plans. In addition, with more advanced information and billing systems, many safety net hospitals have become adept at collecting cost-sharing amounts and bad debt from privately insured patients (Felland and Stark 2012).

Most safety net hospitals receive substantial amounts of revenue from DSH payments in order to at least partially offset the costs of uncompensated care to uninsured people. On average, Medicaid DSH payments accounted for 24 percent of unreimbursed care for members of the National Association of Public Hospitals (Zaman et al. 2012). Revenue from DSH has become critical to most safety net hospitals’ financial viability, as most of these hospitals also serve a high proportion of Medicaid patients, where direct reimbursement for these services is insufficient to cross-subsidize care for the uninsured.

Beginning in 2014, the ACA will reduce both Medicare and Medicaid DSH payments to hospitals. Medicare DSH payments will be cut 75 percent in 2014, although these funds will be redistributed in order to provide additional payment to hospitals that continue to experience high levels of uncompensated care. Medicaid DSH cuts will be reduced somewhat more gradually, to 50 percent by 2019. The rationale for the reductions in Medicare and Medicaid DSH payments is that increases in patient revenue through insurance coverage expansions will dramatically reduce the amount of uncompensated care that hospitals provide and, therefore, the need for supplemental payments.

The 2006 Massachusetts health reform law was similar to the ACA in that insurance coverage expansions were accompanied by reductions in subsidies from the state’s uncompensated care pool. Despite 98 percent of the state’s population being insured, increases in patient revenue were insufficient to offset the loss of state subsidies, and many safety net hospitals—including the two major safety net hospitals in Boston—sustained operating losses as a result (Kane et al. 2012; Tu et al. 2010)

Whether other safety net hospitals experience similar losses as a result of cuts in DSH will depend on a number of factors. Chief among these will be whether the state expands Medicaid coverage to adults up to 138 percent of the federal poverty level. Without additional Medicaid enrollees among those who already make up a large percentage of safety net hospital patients, it could be extremely difficult for these hospitals to offset the loss of DSH revenue through increases in privately insured patients alone. The National Association of Public Hospitals estimates that without Medicaid DSH subsidies, average margins of their member hospitals would decrease from 2.3 percent to –6.1 percent (Zaman et al. 2012). This estimate (which is based on 2010 data) does not account for the potential increases in revenue that safety net hospitals may see in states which opt to expand eligibility for the Medicaid program. On the other hand, the methodologies that states have used to distribute DSH funds in the past have varied, and some have been much less effective in targeting payments to the safety net hospitals most in need (that is, those with the greatest uncompensated care costs) (GAO 2008). In addition, the Medicaid DSH cuts will not be evenly distributed across states. The ACA requires a DSH Health Reform Methodology (DHRM) to target higher reductions in states with the lowest uninsured rates and the lowest levels of care provided to Medicaid and uninsured patients and in states that have not previously targeted DSH payments to hospitals with a high volume of Medicaid patients. Realizing that the DSH reductions could have serious consequences for safety net hospitals in states that are not expanding Medicaid coverage, CMS recently proposed a DHRM methodology only for 2014 and 2015—when the DSH reductions are relatively small—and is postponing decisions about the larger reductions scheduled for subsequent years (CMS 2013).

Safety net hospitals often receive other subsidies from state and local governments to help cover operating costs and care to the uninsured. For NAPH member hospitals, these subsidies account for almost one-third of care provided to uninsured persons (Zaman et al. 2012). Public hospitals operated by county or city governments often receive local property and/or sales tax revenues—in some cases, raised specifically for the hospital through special tax districts or voter initiatives. Some states also assess fees on health care providers, payers, or others to establish pools from which funds are allocated to safety net providers to help cover their uncompensated care costs. Often, these state and local funds are eligible for matching supplemental payments from the federal government. Hospital revenues from these sources tend to fluctuate, however, due in part to how the funding mechanisms are structured, and provider taxes are under growing federal scrutiny (Felland and Stark 2012). In California, revenues from state sales tax and vehicle licensing fees are distributed to counties to help cover the expense of caring for uninsured people; most of these funds go to the core safety net hospitals.

Strained state and local budgets are resulting in reductions of these subsidies in some areas, and there is concern that there will be further reductions based on the assumption that they are less necessary due to the insurance coverage expansions (Felland et al. 2010).

Potentially, the largest and most direct effect of the ACA on safety net hospital costs and expenses will be to reduce the amount of uncompensated care, although, as described above, the extent to which a hospital’s total amount of “unfunded” care is reduced (including the costs of providing services to Medicaid patients that are not fully reimbursed) will depend on the amount of reduction in public subsidies and other factors that affect patient revenues.

Other costs and expenses may increase, at least in the short term, to the extent that hospitals need to expand capacity to accommodate the expected increase in demand, especially for outpatient services. For safety net hospitals positioning themselves to participate in integrated delivery systems, health information technology may need to be upgraded in order to perform the functions needed to coordinate care of patients with other providers, collect and analyze indicators of quality of care, and implement decision-support systems for chronic disease management (Andrulis and Siddiqui 2011). To compete with other hospitals for the newly insured patients, especially privately insured patients, investments and upgrades in both facilities and staffing may be needed (Lewis et al. 2012). Making the necessary short-term investments to position themselves for delivery system reforms and to compete for newly insured patients may be difficult for many safety net hospitals, which often have neither sufficiently high margins nor cash reserves to fund such investments without some public support (Ku et al. 2011). However, such investments—especially in health information technology and care coordination processes—could lead to lower costs in the longer term.

The ACA also may increase some regulatory requirements on safety net providers (AcademyHealth 2011). For example, the law requires that nonprofit hospitals perform community health needs assessments at least every three years and develop strategies to meet these needs. In addition, new requirements for tracking and reporting on quality indicators, such as inpatient readmission rates, could increase costs for data collection. To avoid financial penalties from Medicare that are associated with high readmission rates, safety net hospitals will also have to make investments in care processes, such as discharge planning and care coordination with ambulatory care providers. Because of the nature of the patient population—which often includes many homeless and mentally ill persons and patients with low compliance with medical regimens—many safety net providers are concerned that the risk-adjustment methodologies for the quality measures do not adequately account for the risk profile of their patients (Berenson and Shih 2012).

How safety net hospitals are affected by and respond to health reform will depend in part on a number of factors related to the local delivery system. The most important of these local delivery system factors include system capacity, competition between providers, and payment and delivery system reforms.

As mentioned above, safety net hospitals include not only public hospitals, but also many academic medical centers and private hospitals. These distinctions may be less meaningful and important than in the past, as many safety net hospitals—regardless of ownership—have pursued similar strategies in recent years of reducing costs, expanding into more affluent areas and services to compete for more privately insured patients, and often minimizing their safety net “image” (Cunningham et al. 2008).

Nevertheless, differences in ownership and type of safety net hospitals may still have some relevance for how they adapt to health reform. Public hospitals—many of which are controlled by state and/or local governments and are more dependent on federal, state, and local subsidies—are likely to be more constrained by their governance requirements and mission in how they respond to payment and delivery system reforms. Politically influential labor unions for hospital staff can also prevent streamlining of operations and staff in order to reduce costs (Christianson et al. 2011a). Although such constraints would seem to make them less competitive with other hospitals, Kane et al. (2012) found that public hospitals governed directly by elected officials were more profitable than safety net hospitals with other governance structures (for example, governed by a politically appointed board). Nevertheless, many local governments have seemingly helped their public hospitals by turning direct management over to an independent governing body to separate strategic and operational decision making from local politics (Felland and Stark 2012). Public hospitals may also be well positioned for changes related to health care reform, as they are usually one of the largest Medicaid providers in the community and often the only place for critical services such as trauma, burn, mental health, and neonatal intensive care units. In addition, many public hospitals have strong connections with FQHCs that can serve as the basis for increased collaboration and formation of integrated delivery systems.

The role of private hospitals in the safety net varies. In some communities—especially those with large public hospitals—private hospitals play a secondary, though still important, role in providing services to uninsured and other low-income populations. In communities without public hospitals, they often serve as the primary safety net hospital. Private hospitals receive Medicare and Medicaid DSH payments if they serve a certain volume of low-income patients, but are not directly supported by local tax revenue or controlled by local or state governments. This gives them more flexibility in altering their governance and mission—and to limit “low-revenue” patients and services—although they must still demonstrate that they are providing “community benefit” in order to maintain their tax-exempt status. Private safety net hospitals that are part of a larger hospital system in the community are often cross-subsidized by other hospitals in the system that serve a much higher number of privately insured patients. Hospitals that are part of larger systems can also have lower costs for supplies and higher payment from privately insured persons because of the greater negotiating leverage of the hospital system (Bachrach et al. 2012).

Academic medical centers are similar to private hospitals in terms of their safety net orientation. They are often the major safety net hospital in a community, including the main provider of tertiary, quaternary, and other highly specialized services to Medicaid and uninsured persons, as well as trauma treatment, burn care, and organ transplants for all people in the community. As prestigious institutions, they are better able to negotiate higher payment rates from health plans than public hospitals.

Academic centers have multiple missions of teaching, research, and providing care to vulnerable patients in the community; balancing them has become increasingly difficult in recent years. Academic activities such as research and teaching are often at odds with the improved efficiency, productivity, and lower costs needed to prepare for reform (Coughlin et al. 2012). Although many academic medical centers have traditionally been located in inner-city areas close to low-income populations, some are more aggressively expanding in ways intended to attract more lucrative services and patients. For example, although community and political pressures prevented the University of California at San Diego—the city’s largest safety net hospital—from closing their main campus in a low-income neighborhood, the university is relocating some services to more affluent areas and substantially expanding tertiary and quaternary services in more affluent suburban areas as well as areas outside the state (Tu et al. 2013).

How successfully safety net hospitals can adapt to the reforms will depend on the financial performance of the hospitals before reform, as well as the preparations they have made in anticipation of reform. In particular, the TEP identified the scope of future pension obligations of safety net hospitals that offer defined benefit plans—especially the large county- or city-run public hospital systems—as an important factor that could affect their ability to adapt and respond to health care reform because of the impact on both cash reserves and credit ratings (HHS/ASPE 2013).

Hospitals in a stronger financial position prior to reform will have more resources to make the necessary expansions in capacity to meet the increase in demand for care and compete for newly insured patients. For example, Alameda County Medical Center in northern California has made a financial turnaround and, assisted by funding from a local bond measure, is rebuilding its facilities and expanding primary and specialty care both on its campus and throughout the community (Tu et al. 2012). Safety net hospitals have also been preparing for reform by streamlining operations to control costs, upgrading infrastructure (especially electronic medical records and other health information technology), and developing partnerships with other hospitals and providers in the community in anticipation of delivery system reforms (Coughlin et al. 2012; Felland and Stark 2012). Some hospitals are using performance improvement strategies, such as the LEAN method, to identify waste, improve efficiency, and improve employee and patient satisfaction, patient safety, and quality of care (Eslan 2011).

Improvements in health information technology are especially important for improved efficiency, the ability to track and report on key quality indicators as required by many payment and delivery system reform models, decision support for chronic disease management, and improved billing processes in order to maximize reimbursement. Expanding capacity for primary care, increasing patient flows and referrals from primary care providers, and improving the “patient experience” have also been identified by some hospitals as key to competing and thriving during health reform.

Under the state’s Bridge to Reform Medicaid waiver, California safety net hospitals have been particularly immersed in health care reform preparations. In addition to the DSRIP payments to help hospitals expand their capacity and improve care processes and health outcomes, the hospitals are involved in implementing low-income health programs (Harbage and Ledford 2012). These county-based programs provide Medicaid-like benefits to low-income, uninsured people as a way to help identify who will become eligible under an expanded Medicaid program in 2014, provide care early to reduce pent-up demand and strains on provider capacity, and build patient loyalty to safety net providers. As part of this effort, safety net hospitals are focused on expanding their own primary care capacity and coordinating with community health centers, as a key focus of the program is to establish PCMH and increase the availability of primary care (Felland and Cross 2013).

Based on the above discussion, it will be important to monitor the effects of health care reform and other changes in the delivery system on (1) hospitals’ financial performance and viability, (2) whether they maintain their mission to serve uninsured and other vulnerable populations, and (3) the quality of health care they provide.