The Effects of Financial Pressures on the Hospital Safety Net

1. 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).

2. 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)

3. 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?

4. 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

5. 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

6. 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

7. 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

8. 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

9. Findings from Uncompensated Care (UC) Analysis

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

11. Effect of Medicare and Medicaid Financial Pressure on UC *p<.10 **p<.05 *** p<.01 n.s.= not significant

12. Findings from Staffing Changes Analysis

13. Figure 1: Trends in Patient Adjusted Admissions and Nurse and Other Employees: 1995-2001 140 120 Adjusted Patient Admission 100 Total FTE RN 80 1995=100 Total FTE LPN 60 40 Total All Nurses 20 0 1995 1996 1997 1998 1999 2000 2001 Year Changes in Adjusted Admission and Staffing Over Time

14. 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.

15. 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

16. 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.