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 Financing
and 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 decisionmaking.
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
Core SNH – Overall
Core SNH: High HMO market share
Voluntary SNH – Overall
Voluntary SNH: High HMO market share
Non-SNH – Overall
Non-SNH: High HMO market share
1996 $
2000 $
% Change
$41.5
$50.3
21.2%
$54.6
$60.7
11.1%
$9.9
$12.3
23.9%
$11.0
$11.9
8.1%
$3.3
$4.0
20.1%
$2.6
$3.1
19.8%
Effect of Medicare and Medicaid
Financial Pressure on UC
Overall
Core Safety Net
Hospitals
Voluntary Safety Net
Hospitals
Medicaid
Financial
Pressure
Medicaid
Financial
Pressure
Medicare
Financial
Pressure
-**
-**
Medicare
Financial
Pressure
n.s.
n.s.
-***
n.s.
(but transitory)
Markets with
high HMO MS
-**
-*
(but transitory)
*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
140
120
Adjusted Patient
Admission
1995=100
100
Total FTE RN
80
60
Total FTE LPN
40
Total All Nurses
20
0
1995
1996
1997
1998
Year
1999
2000
2001
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.