Public Hospitals—a Prescription for Survival

Public hospitals are disproportionate providers of health care to America's indigent and minority populations. These institutions face an increasingly hostile environment, marked by budget reductions, rapid growth of Medicaid managed care, and an ideology that promotes privatization of the safety net. To survive, public hospitals must overcome problems of financing, quality, and governance that weaken their competitiveness in the changing marketplace. Priority reforms include governance restructuring, management upgrades, new hospital and physician relationships and increased workforce flexibility. Also needed are effective advocacy and more research on safety-net care. For supporters of public hospitals, openness to change is crucial: health care for millions of Americans may hang in the balance. A HISTORICAL PERSPECTIVE Public hospitals traditionally have provided a disproportionate share of medical care to America's indigent populations. These institutions originated as early American almshouses, designed more as welfare and correction centers than as health care providers New York's first poorhouse, founded in 1736, is the ancestor of present-day Bellevue Hospital. The Regional Medical Center in Memphis can be traced to Tennessee's first hospital, founded in 1829. Over time, most U.S. cities developed at least one public hospital, while some came to possess entire systems. New York City and Los Angeles County developed especially large public hospital infrastructures—eleven and six acutecare hospitals, respectively, plus long-term care and primary care facilities. These systems were subsidized largely by local and state contributions until 1965, when the creation of Medicare and Medicaid infused federal aid. Urban public hospitals have come to serve a predominantly minority clientele as the demographics of their cities have changed. For example, in 1995, minorities accounted for 89.6% of outpatient visits and 88.1% of admissions at the New York City Health and Hospitals Corporation (HHC). Nationwide, the number of public hospitals has declined. Of 6,467 acute-care hospitals in 1995, 1,360 operated under some form of government ownership, according to the American Hospital Association. That compares with 1,700 public hospitals in 1978. Relatively few public hospitals fit the stereotype of the large, urban institution. Instead, most were small, rural facilities in 1995. Fewer than one-third were located in the inner city and even fewer—about 290—had more than 200 beds. The 100 largest public institutions averaged 581 beds. In their role as provider of last resort, public hospitals deliver a large volume of Medicaid and uncompensated care. In one national sample of hospitals surveyed in 1994, 38% of the payer mix was Medicaid and 27% was uncompensated care. Additional financial stress stems from the public sector's tendency to concentrate on services that are less profitable than those emphasized by voluntary and forprofit hospitals. Public hospitals often provide regional trauma services and extensive outpatient services, and heavily emphasize substance abuse and HIV-related treatment and obstetrical care. Also consonant with their mission, public hospitals deliver culturally competent care, which incorporates attention to social service, child welfare, and other not-strictly-medical needs that affect the health status of disadvantaged patients. At the same time, these institutions tend not to have developed—or retained—services that are considered more profitable, such as cardiac surgery, high-volume subspecialty care, diagnostic imagery, and other high-technology procedures. For instance, HHC provides 40% of New York City's HIV-related care, yet it does not own a single Magnetic Resonance Imager. The HHC's Bellevue Hospital performed 74 coronary artery bypass grafts in 1993, compared with 601 at adjacent New York University, a not-for-profit institution. No other New York public hospital performs cardiac surgery. THE CURRENT ENVIRONMENT FOR THE PUBLIC HOSPITAL In recent years, several trends have converged to pose significant threats to public hospitals. A report by the California Healthcare Association predicted that these trends would lead to the closure or conversion of up to half of that state's safety-net hospitals by 2005. While experiences vary from state to state, the following developments are affecting public hospitals nationwide. Reductions in Government Funding Public hospitals have been threatened disproportionately by federal and state government decisions that Medicaid is no longer affordable at current funding levels. Many of these hospitals derive 50% or more of their revenues from Medicaid, compared with an average of less than 14% for all U.S. hospitals. The proportion of hospital days attributable to Medicaid at a random selection of large, urban institutions is displayed in Table 1. Note that some urban voluntary hospitals also are highly dependent on Medicaid. Table 1: Percentage of Medical Hospital Days at Selected US Urban Hospitals, 1994 Percent of Days Medicaid Martin Luther King Jr. General Hospital, Los Angeles 62.5 Woodhull Medical & Mental Health Center, NY 66.8 North General Hospital, NY (Voluntary Hospital) 63.0 Jackson Memorial Hospital, Miami 56.1 Cook County Hospital, Chicago 47.8 Source: Office of Research & Demonstration, Health Care financing Administration, 1995. This Medicaid dependence is a result of several factors. Urban public hospitals generally are located in inner-city areas with many welfare and Medicaid recipients. These recipients often alternate between periods on Medicaid and periods without insurance. When they lack insurance, the public hospital is the only facility that is legally obligated to treat them, regardless of ability to pay. When these patients have Medicaid coverage they could go elsewhere, but often they continue to frequent the institutions where they feel most welcome. Even with Medicaid coverage, they have not always felt accepted by voluntary and proprietary hospitals. Note, for instance, the segregation of Medicaid patients from commercially insured patients on the obstetrical services at several New York hospitals. Conscious policy decisions also may underlie the hospitals' Medicaid dependence. Given the prospect of federal matching dollars, many states and even cities have crafted their public hospital budgets around the Medicaid and Medicare Disproportionate Share Hospital (DSH) programs, which help subsidize institutions with heavy publicly funded caseloads. In California, hospitals can dramatically increase their DSH payments by boosting the number of Medicaid inpatient days they provide. For at least 10 years, New York State and city policymakers essentially developed safety net policies through the vehicle of a relatively generous Medicaid program that allowed for the federal matching of earmarked state and city dollars via complex funding pools eligible for DSH contributions. The net result was increased funding for public hospitals—and increased dependence on Medicaid as the primary payer. The budget cuts from Medicaid reform proposals considered by Congress in 199596 would have had grave consequences for public hospitals—a 25% reduction clearly means more for a hospital with a 65% Medicaid payer-share than for one with a 10% share. The proposals also would have lead to the loss of Medicaid entitlement for millions of recipients, with an unquantified impact on public hospitals. Proposed state cuts could be even more troublesome, however, if they trigger concomitant losses in federal participation. For example, the cuts proposed by New York Gov. George Pataki would have led to significant budget reductions in New York's public hospitals (see Table 2). Table 2: Impact of Proposed NY Governor's Budget on HHC Hospitals for the State Fiscal Years 1995 & 1996 Reduction in Millions Bellevue Hospital Center $ 61.0 Jacobi Medical Center 38.3 Coler Memorial Hospital 7.7 Coney Island Hospital 21.3 Elmhurst Hospital Center 32.7 Goldwater Memorial Hospital 12.4 Harlem Hospital Center 46.9 Kings County Hospital Center 63.2 Lincoln Medical & Mental Health Center 43.4 Metropolitan Hospital Center 38.4 North Central Bronx Hospital 23.7 Queens Hospital Center 30.6 Woodhull Medical & Mental Health Center 34.5 TOTAL $454.2 Source: Healthcare Association of New York State, 1995. Changes in state Medicaid DSH payment policies also have adversely affected hospitals. In Tennessee, DSH payments effectively ended with the introduction of TennCare, that state's Medicaid managed care program, and "bridge" funding that was to replace it has been used instead to cover unanticipated TennCare deficits. In Los Angeles, DSH payments were a boon to public hospitals until the county began shifting them to private hospitals that increased their MediCal (California Medicaid) admissions. In 1991, 14 private hospitals in L.A. County received this funding; by 1994 the number had grown to 25. Table 3 shows how the allocation of these dollars has changed over a relatively brief period. Table 3: DHS Payments to Hospitals in Los Angeles County (Dollars in Millions) 1991-1995 1991-92 1994-95 Private Hospitals $98.0 $230.0 County Hospitals $387.0 $253.0 Source: Los Angeles Times, Wednesday, November 1, 1995. Local support for public hospitals has declined as well. Tampa General Hospital, for example, now receives no specially earmarked dollars from local government. The Los Angeles County system has seen the locally contributed share of its budget fall from 27% in 1988 to 5.8% in 1996. For officials in Los Angeles and some other localities, this trend reflects their view that assuring access to medical care is essentially a federal or state obligation. Some local funding declines have been balanced by increases in state or federal support, but it appears that municipal hospitals now depend on local government less than ever before. The Growth of Medicaid Managed Care Managed care is promoted as a painless way to contain Medicaid spending while offering the prospect of improved quality and continuity of care. In just one year, from 1993 to 1994, Medicaid managed care grew nationally by three million enrollees. By 1994, 43 states and the District of Columbia had begun some form of Medicaid managed care. Tennessee moved 25% of its population (1.2 million people) into TennCare on a single day, January 1, 1994. In New York City, Medicaid managed care enrollment grew by 58.5% from January to September 1995. The growth of Medicaid managed care in New York City and the United States is shown in Figures 1 and 2.