A service of the California Health Care Foundation

Safety-Net Hospitals Face Funding Cuts on Two Federal Fronts

Representatives of California’s safety-net hospitals say the devil is in the details concerning the federal government’s plans to reduce funding for hospitals caring for a disproportionate share of low-income patients.

The Affordable Care Act will reduce by at least half the amount of Medicaid money set aside to help safety-net hospitals provide uncompensated care for patients with no insurance and no cash. Hospitals serving a high percentage of uninsured, low-income patients — or disproportionate share hospitals — are reimbursed at a higher rate by Medicaid. The federal government pays about $20 billion a year in DSH payments.

In California, 21 public hospitals receive approximately $1.1 billion a year in DSH funding. Private DSH hospitals in California receive additional DSH funding from the state, but that, too, will be reduced.

The reductions make sense, hospital officials agree, because more people will become paying customers under ACA. But exactly how those reductions are made will be critical, according to representatives of California’s safety-net hospitals.

“While we do expect that many patients currently seen in public hospital systems will gain coverage through the expansion of Medi-Cal and the exchange, recent estimates suggest that roughly three million people in California will remain uninsured even after full implementation of reform,” said Erica Murray, senior vice president of the California Association of Public Hospitals and Health Systems. Medi-Cal is California’s Medicaid program.

“Along with these projections, what remains unknown is how individual hospitals’ payer mixes will change as a result,” Murray said. “We anticipate that a significant portion of the remaining uninsured will continue to be served by public hospital systems. Therefore it is extremely important how the Medicaid DSH cuts are structured and implemented, in order to ensure that the remaining dollars go to the hospitals where they will be needed most.”

CAPH represents 19 public hospitals and systems — including University of California teaching hospitals — in 15 counties where more than 81% of the state’s residents live. The CAPH network is the principal fabric of the state’s safety net.

DSH cutbacks begin relatively modestly with about $500 million in national reductions in 2014. Reductions increase each year growing to expected cuts of $5.6 billion in 2019 and $4 billion in 2020.

“Looking ahead to when the DSH cuts jump dramatically, we must make sure that those cuts are in fact justified by similarly dramatic reductions in uncompensated care,” Murray said.

Undocumented Immigrants Left Out of ACA

Some of that DSH money for uncompensated care is used to pay for care for undocumented immigrants. ACA excludes undocumented immigrants from subsidized coverage and state insurance exchanges, but the federal law that requires hospitals to care for all patients, regardless of their immigration status or ability to pay is not changing.

“Undocumented immigrants are part of the problem but really they’re a fairly small part of the overall picture,” said Jan Emerson-Shea, vice president of the California Hospital Association.

“Our best guess is that roughly about 10% of the uncompensated care we provide is for undocumented immigrants,” Emerson-Shea said.

“Undocumenteds are not the biggest problem facing hospitals. Our biggest problem is constant underfunding on Medicaid,” Emerson-Shea said.

Both Emerson-Shea and Murray said changes in funding will not change how hospitals in California deal with uninsured low-income patients — citizens and immigrants with or without documents.

Hospital officials hope improvements in payment systems and more-efficient delivery will reduce costs across the board, including those related to caring for uninsured patients.

“For several years, California’s public hospital systems have been preparing for health care reform by working to transform their delivery systems to be more efficient,” Murray said.

She cited several examples, including working to ensure people have access to primary and preventive care through medical homes, rather than through hospital emergency departments. Public hospitals are “engaging in literally hundreds of other projects across public hospital systems to improve the quality and efficiency of services,” Murray said. 

“These improvement efforts are already benefitting all patients, and they will continue up through and after health care reform implementation,” Murray said.

Medicare Changes Could Also Hit Safety-Net Hospitals

In addition to Medicaid funding cuts, changes in the way Medicare reimburses hospitals — through what is known as “value-based purchasing” — could affect safety-net hospitals. Beginning in October, Medicare will adjust hospital reimbursements to reflect hospitals’ performance in a number of clinical and patient satisfaction areas. A recent study published in the Archives of Internal Medicine suggested safety net hospitals often do not score well in patient satisfaction and could suffer financially as a result.

In an op-ed piece accompanying the Archives of Internal Medicine report, Katherine Neuhausen, a Los Angeles physician, and Mitchell Katz, director of the Los Angeles County Department of Health Services, warned that the double whammy of DSH cuts and Medicare payment changes could push some safety-net hospitals into insolvency.

Their editorial on Medicare value-based purchasing said, in part:

“Safety-net hospitals that are already drained by the DSH reductions are likely to lose additional funds under this program, leaving them without any capital to launch initiatives to improve quality and patient experience. Over time, VBP could worsen the disparities between prosperous non-SNHs (safety net hospitals) and struggling SNHs. It would be a tragedy if the combined stressors of the DSH cuts and VBP trigger the closures of SNHs.”

Categories: Insight, Medi-Cal, Medicare, The Health Law

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