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Strengthening the Health Care Safety Net

Hospital-based Services


Gloria J. Bazzoli, Ph.D., Research Professor, Institute for Healthcare Services Research and Policy Studies, Northwestern University, Evanston, IL.

Dennis P. Andrulis, Ph.D., Research Professor, Department of Preventive Medicine, State University New York (SUNY) Health Sciences Center at Brooklyn, Brooklyn, NY.

This session provided an overview of funding streams that support the delivery of inpatient and hospital-based outpatient services to the uninsured and vulnerable populations. It described the evolution of disproportionate share hospital (DSH) payment programs under both Medicaid and Medicare, including caps established by the Balanced Budget Act of 1997 (BBA). Strategies for funding hospital uncompensated care were identified, and special challenges faced by public hospitals and academic medical centers were discussed.

The increasingly competitive health care marketplace is reducing providers' ability to care for those without financial resources. The indirect subsidies—or "cost-shifts"—whereby providers use revenues from insured or otherwise paying clients to cover the expenses of serving the poor, are being squeezed out of the system. Physicians who derive a major share of their practice revenues from managed care are less willing or able to provide charity care. Religious-affiliated hospitals and other nonprofit institutions that provide a significant amount of free care also are experiencing reduced access to capital as a result of increased pressure by for-profit competitors and reduced payments from other third-party payers.

Dr. Bazzoli began by discussing historical trends in hospital uncompensated care. Between 1990 and 1997, despite growth in the number of uninsured, hospital uncompensated care remained relatively stagnant. This was due, in part, to an unequal dispersion of uncompensated care across hospitals and markets, and increasing concentration of uncompensated care in certain hospitals over time.

Dr. Bazzoli explained that safety net hospitals can be classified into three major categories related to the degree of market share of indigent care and the degree of uncompensated care burden. There are safety net hospitals with a high market share of indigent care that represent a small share of hospital costs. There are also safety net hospitals with a high uncompensated care burden that make up a small share of the indigent served. Then there are those safety net hospitals that have a high market share of indigent care with a corresponding high degree of uncompensated care burden. Hospitals with low market share and low burden of indigent care are not classified as safety net hospitals.

Dr. Bazzoli reviewed the patchwork of resources that make up the health care safety net, including:

  • Net revenues from patient care and from non-operating revenue sources.
  • Direct subsidies specific to indigent care such as tax appropriations, DSH payments, State/Federal program support for special populations (e.g., Ryan White), and grants and charitable contributions.
  • Other subsidies not tied to indigent care, such as indirect medical education and general philanthropy.

She explained several factors affecting available resources for indigent care, including:

  • Private payers: Growth in managed care and payer-driven competition have reduced net revenues. New management demands from contracts may create new perceived demands on hospital resources.
  • Medicaid managed care is steering patients away from traditional safety net hospitals. Coupled with Medicaid expansions of the 1990s, both could lead to reduced net revenues.
  • The 1997 Balanced Budget Act (BBA) slowed growth in Medicare inpatient payments, and reduced hospital-based Medicare revenues in some cases for home health services, outpatient care, and skilled nursing facilities. Other effects of the BBA include reduction in Medicare DSH and graduate medical education payments and implementation of new allotments for Medicaid DSH in fiscal years 1998-2002, with limited growth thereafter.
  • In response to the effects of the BBA, the 1999 Balanced Budget Refinement Act reduced Medicare DSH cutbacks and slowed the transition to reduced indirect medical education payments.

The implications of declining hospital resources to support indigent care include a reduction in commitment to indigent care by voluntary safety net hospitals despite the growing number of uninsured. This may cause core safety net hospitals to be additionally hurt by declining revenues and subsidies, as well as potential shifts in indigent care from the voluntary sector.

Dr. Bazzoli shared that hospitals historically have participated in the safety net in various ways. Support for the hospital safety net may be wearing thin in some cases due to the convergence of market and policy factors, with core safety net providers at the highest risk. She believes the future of the hospital safety net is unclear and worthy of careful ongoing study. Dr. Bazzoli expressed several unresolved questions and concerns regarding the extent to which voluntary safety net hospitals have reduced their involvement in indigent care given the BBA and other market pressures, and the impact on core safety net providers that remain committed to indigent care.

Dr. Dennis Andrulis is Research Professor in the Department of Medicine at the SUNY Health Sciences Center in Brooklyn. He discussed State and local actions to reform the hospital-based safety net in U.S. communities.

According to Dr. Andrulis, there are two major driving forces for reassessment of the traditional hospital-based safety net: changes in the health care environment and financial considerations. Environmental changes include:

  • The movement away from institutional-based care.
  • Changes in competition.
  • Economic growth.
  • The role of government in health care.

Financial considerations include:

  • Uncertainty regarding disproportionate share allocations.
  • Reducing the use of expensive services.
  • Erosion of some Medicaid bases.
  • Reluctance to increase tax revenues.

Dr. Andrulis described what he calls three emerging safety net hospital-based scenarios:

First, there is the fully vested public sector that is committed to serving the uninsured and other vulnerable populations. Examples of fully vested hospital-based safety nets include Denver, Colorado; Alameda County, California; and Indianapolis, Indiana.

A second emerging scenario is the uncertain residual public sector that includes serving the uninsured and certain vulnerable populations, such as the homeless and prisoners. Examples of these systems include Houston, Texas; Los Angeles, California; and Washington, DC.

The divested safety net hospital-based system is the third emerging scenario, which includes a major reduction in support for the public sector services. Instead, the private sector carries out traditional public sector responsibilities. Examples of this scenario include Boston, Massachusetts; Milwaukee, Wisconsin; Tampa, Florida; and St. Louis, Missouri.

Dr. Andrulis shared some of the actions communities have taken to preserve and develop the health care safety net, including:

  • Developing public/private partnerships.
  • Effectively targeting patient care.
  • Creating organized systems of care.
  • Reducing costs.
  • Maintaining a safety net.
  • Building relationships with the community.
  • Creating political support.

Dr. Andrulis explained that these communities' actions required several considerations, including:

  • Financial decisionmaking criteria, such as single or multiple sources of support, new or existing sources, form of paying providers, and extensiveness of cost-sharing.
  • Eligibility and enrollment considerations, such as target populations and poverty levels, geographic areas, sickness or comprehensive programs, payers of last resort, enrollment periods and requirements, and immigration status.
  • Considerations in initiative design, such as ensuring dollars are available to meet need, program outreach versus need to control enrollment, education on using the system, stability of political and financial support, and the relationship of the initiative to the existing safety net.

Dr. Andrulis closed with a few questions for State and local decisionmakers to think about with regard to community health care systems:

  • Where and with whom should ultimate responsibility for safety net hospital functions reside?
  • What effect will changes in safety net hospital functions have on essential services for the community at large?
  • What should be the extent of State-local leadership and involvement in planning, directing, and monitoring services?


Andrulis DP, Gusmano MK. Community initiatives for the uninsured: how far can innovative partnerships take us? Executive Summary and Project Overview. The New York Academy of Medicine. Princeton, NJ: The Robert Wood Johnson Foundation. 2000 Apr.

Andrulis DP. The public sector in health care: evolution or dissolution? Health Aff 1997 July/Aug;16(4):131-40.

Ascension Health. The health care safety net for the poor. Federal Legislative Monograph Number 3. Ascension Health. 2000 Feb.

Fishman LE, Bentley JD. The evolution of support for safety-net hospitals. Health Aff 1997 July/Aug;16(4):30-47.

Guterman S. Putting Medicare in context: how does the Balanced Budget Act affect hospitals? Washington DC: The Urban Institute. 2000 July.

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