The Effects of Financial Pressures on the Hospital Safety Net

Gloria J. Bazzoli, Ph.D. (VCU)Richard C. Lindrooth, Ph.D. (MUSC)Romana Hasnain-Wynia, Ph.D. (HRET)Ray Kang (HRET)

Research supported by the RWJF Health Care Financingand Organization program (#42596).

Study Context US hospitals provide large amounts of

uncompensated care; as reported by Hadley and Holahan (Health Affairs 2/12/03):

$23.6 billion in 2001 represented 66% of total annual care available to uninsured

In late 1990s and early 2000s, substantial financial pressure existed for the industry:

Medicare margins fell from: 11.7% in 1997 to 5% in 2001 to -1.9% in 2003 (effect of 1997 Balanced Budget Act)

One third of hospitals have negative total margins in 2001 to 2003 (effect of BBA and private sector pressures)

Research Questions

What operational changes did safety net hospitals make to get by in this environment:

to what degree did they cut back on mission (i.e., uncompensated care)?

did they make changes that affected quality of care?

Conceptual Framework Hoerger (JHE 1991) provides a good foundation

for examining these questions: Modeled non-profit hospitals as maximizing quantity

and quality of services subject to realizing a target profit level.

Exogenous shocks from private or public sector affect achievement of target profit.

Reaction: cutback on quantity and quality.

We examine two areas where cutbacks may occur:

Quantity changes: provision of uncompensated care Quality changes: reductions in nurse staffing levels

Identification of Safety Net Hospitals Applied the approach developed by Zuckerman

et al. (Health Affairs, July/August 2001)

They examined two constructs:

percent of hospital resources devoted to indigent care (% of expenses uncompensated); and

a hospital’s local market share of uncompensated care.

They grouped hospitals by safety net status based on whether they are high or low on the two constructs

Key Financial Pressure Measure Used similar approach to Hadley et al. (Inquiry

1989) to measure potential profit/loss hospital could incur if it made no operational changes in face of revenue change:

FPIi = [(MCPCi,1997 – MRPCi,1998) * MCRADJ i,1997]/ TOTEXP

i,1997

Measured for both Medicare and Medicaid

Study Data 1995 UC data used to identify safety net hospitals

Created 1996 to 2001 panel of hospitals: AHA Annual Survey of Hospitals CMS Medicare cost reports BHPr Area Resource File UDS files on federally qualified community health centers InterStudy HMO data (allocated to service areas) State reported data on Medicaid managed care

Samples consisted of around 1,000 to 1,600 urban community hospitals with complete data

Empirical Approach All analyses took advantage of panel data to

estimate effects of financial pressure on hospital decision-making.

FPI as measured in prior slide for 1998 interacted with year dummies to assess response over time to initial pressure from 1997 Balanced Budget Act

Interact FPIs with high HMO share (75th percentile of HMO distribution) in the uncompensated care analysis to capture private sector pressure

Findings from Uncompensated Care (UC) Analysis

Changes in Average Hospital UC (measured in 1996 $; millions)

Hospital SNH Category 1996 $ 2000 $ % Change

Core SNH – Overall $41.5 $50.3 21.2%

Core SNH: High HMO market share $54.6 $60.7 11.1%

Voluntary SNH – Overall $9.9 $12.3 23.9%

Voluntary SNH: High HMO market share $11.0 $11.9 8.1%

Non-SNH – Overall $3.3 $4.0 20.1%

Non-SNH: High HMO market share $2.6 $3.1 19.8%

Effect of Medicare and Medicaid Financial Pressure on UC

Core Safety Net Hospitals

Voluntary Safety Net Hospitals

Medicaid Financial Pressure

Medicare Financial Pressure

Medicaid Financial Pressure

Medicare Financial Pressure

Overall -** -** (but transitory)

n.s. n.s.

Markets with high HMO MS

-** -* (but transitory)

-*** n.s.

*p<.10 **p<.05 *** p<.01 n.s.= not significant

Findings from Staffing Changes Analysis

Changes in Adjusted Admission and Staffing Over Time

Figure 1: Trends in Patient Adjusted Admissions and

Nurse and Other Employees: 1995-2001

0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999 2000 2001

Year

1995=100

Adjusted PatientAdmission

Total FTE RN

Total FTE LPN

Total All Nurses

Effects of Medicare Financial Pressure on Staffing Levels

Non-safety net hospitals that faced greater Medicare financial pressure:

reduced RN staffing per adjusted patient day more so than non-safety net hospitals with low financial pressure.

However, this effect was not apparent in safety net hospitals.

Implications of Findings Our results suggest that safety net hospitals were more

likely to reduce uncompensated care than make decisions that could adversely affect quality (e.g., cut staffing levels) during the study period.

Persistent nursing shortage may have been a factor – safety net hospitals did not want to lose highly trained staff; kept them even at high cost

Also, safety net hospitals may have already had low nurse to patient ratios and did not want to cut further

Safety net hospitals may find it easier to calibrate mission activities to changing margins; making operational decisions that may adversely affect quality can have longer term effects that are hard to erase

Implications of Findings Some big cuts in public payments loom on the

horizon; FY 2007 presidential budget called for:

$36 billion in hospital Medicare payment cuts over 5 years

$35 billion reduction in federal Medicaid support over 10 years

Overall, our findings suggest that these changes might further limit availability of hospital safety net care for those in need.