Safety-net health systems provide essential care to low-income people in the United States, including those who are uninsured. Although the Affordable Care Act (ACA) has reduced the number of uninsured persons, an estimated 28 million to 31 million Americans will remain without health coverage even after full implementation.1,2 Inpatient, emergency, and ambulatory services for this population — as well as for millions of other patients, particularly Medicaid beneficiaries — continue to be provided by safety-net health systems.
In many communities, safety-net organizations are the sole providers of critical services such as inpatient behavioral health. However, the ACA has set in motion a number of payment reforms that create a more uncertain financial outlook for these systems. Safety-net providers must navigate these changes along with rapid shifts affecting all health systems, such as the growing emphasis on ambulatory, community-based care.
The Institute of Medicine defines “core safety-net providers” as providers who by mandate or mission offer access to care regardless of a patient’s ability to pay — and whose patient population includes a substantial share of uninsured, Medicaid, and other vulnerable patients.3 By this definition, safety-net providers are distinguished by their commitment to provide care to people with limited or no access to care.4
In aggregate, safety-net providers have low operating margins and often rely on subsidies to offset the costs of uncompensated care. For example, in 2014, members of America’s Essential Hospitals, an organization of safety-net health systems, averaged a 0% operating margin, as compared with the 6.4% average operating gain for all U.S. hospitals.5,6 In 2014, among the members of America’s Essential Hospitals, approximately half of all inpatients who were discharged and patients who had outpatient visits were uninsured or Medicaid patients (Table 1).
Although the safety net encompasses public hospitals, community health centers, and providers of specialized services, such as school-based clinics, our focus here is on health systems that are anchored in hospitals. In this report, we examine how the coverage provisions of the ACA are affecting safety-net health systems, characterize the responses of these systems to payment reform, and chart future directions in scaling up improvements and innovation in delivery systems.
INSURANCE EXPANSION AND SAFETY-NET FINANCING
The ACA has created both opportunities and challenges for safety-net providers as they adapt to a post-reform environment. The most direct effect of the ACA on the safety net has been the decrease in the number of uninsured adults — by approximately 20 million from 2010 through early 2016. These reductions have been driven by Medicaid expansion, health insurance marketplaces, the employer mandate to provide health insurance, and a provision permitting young adults to remain on a parent’s health insurance plan until 26 years of age. Expansions in health coverage in the U.S. health care system as a whole were projected in 2014 and earlier to increase revenues from newly insured patients while reducing the proportion of uncompensated care.7
Preliminary analyses have shown that hospitals have had a financial benefit from the ACA coverage expansion, with an overall decrease in uncompensated care from $34.9 billion in 2013 to $28.9 billion in 2014 nationwide.8 In anticipation of these changes, the ACA also included provisions to reduce Medicaid and Medicare Disproportionate Share Hospital (DSH) allotments, which provide supplementary income to hospitals that treat uninsured or underinsured patients. Reductions in Medicare DSH allotments, which began in fiscal year (FY) 2014, are estimated to total $22.1 billion by FY 2019.9 Meanwhile, Medicaid DSH cuts have been delayed until FY 2018. Medicaid DSH payments totaled $18 billion in 2014 and are scheduled to be reduced by 16% in FY 2018, gradually increasing to a cut of approximately 55% by FY 2025.10
Even after full implementation of the ACA coverage expansions, an estimated 28 million to 31 million people will remain uninsured and will continue to rely on the safety net for care. Hence, for some safety-net providers, the expansion in coverage may not be sufficient to offset reductions in federal payments for uncompensated care. In one study,11 researchers examined the potential effect of the ACA Medicaid DSH reductions on the financial stability of public hospitals in California. When the high number of people who will remain uninsured, low Medicaid reimbursement rates, and inflation in medical costs were factored in, the researchers estimated that the unmet costs of uncompensated care would be between $1.38 billion and $1.54 billion by 2019.
Furthermore, safety-net providers could face competition for newly insured patients, particularly for persons with private coverage through health insurance marketplaces. The concentration of uninsured or high-risk patients with costly or complex conditions who are cared for by safety-net providers could increase as newly insured persons seek other sites of care.12,13 Further study is needed to understand the accessibility effects of Medicaid and marketplace plans that shift considerable costs to the patient in order to keep premiums lower.14
The net effect of insurance expansion on a particular safety-net system depends on a multitude of factors, the most important of which is the decision of the home state to expand Medicaid. In states that expand, the federal government will finance 100% of the Medicaid costs of persons who became eligible for Medicaid in the period from 2014 through 2016. That share will gradually decrease to 90% in 2020, and it will then remain at that rate in perpetuity. Thus far, 31 states and the District of Columbia have expanded Medicaid and 19 states have not; this has led to a divergence of payer mix in hospitals located in expansion states (where Medicaid utilization increases and utilization by uninsured patients declines) as compared with nonexpansion states (where the trend is essentially stable).
Figures 1 and 2 show this phenomenon in a set of 48 safety-net health systems that were members of America’s Essential Hospitals from 2009 to 2014. The 48 health systems were those that responded to the survey each year (annual response rate, 81% to 95%). Similarly, an analysis of hospital discharge rates in 16 expansion states, as compared with nonexpansion states, showed increases in inpatient stays by Medicaid patients and decreases in inpatient stays by uninsured patients beginning in 2014.13
Safety-net providers that are located in nonexpansion states face the risk of reductions in federal subsidies, such as DSH payments, for uncompensated care while continuing to carry a large share of uninsured patients. In some nonexpansion states such as Texas, financial pressures on safety-net systems are further augmented by state reductions in Medicaid DSH allocations.15 The implications of DSH reductions may be most stark in states such as Georgia, which is not expanding Medicaid but which also allocates DSH funds across a broad swath of hospitals, instead of more narrowly targeting these funds to safety-net hospitals. Therefore, some observers have noted that ACA-related decreases in DSH allocations may provide an opportunity to better triage funding toward safety-net hospitals that need it the most.16,17
In February 2016, the Medicaid and Children’s Health Insurance Program Payment and Access Commission issued a report to Congress on Medicaid DSH payments.10 The commission pointed out major data limitations but concluded that there was little meaningful relationship between the magnitude of state DSH allotments and important factors such as the number of uninsured persons in a state. The report concluded, “DSH allotments and payments should be better targeted toward the states and hospitals that serve a disproportionate share of Medicaid and low-income patients and that have disproportionate levels of uncompensated care.” A first step could be changing eligibility criteria to further concentrate DSH funding among so-called deemed DSH hospitals, which serve a particularly high share of low-income patients.
HEALTH SYSTEM RESPONSES TO PAYMENT REFORM
In addition to expanding health coverage, the ACA included a variety of provisions to advance health care payment reform. Many of these payment models operate through Medicare. For example, the Hospital Readmissions Reduction Program, Hospital-Acquired Condition Reduction Program, and Hospital Value-Based Purchasing Program all create incentives for providers to deliver higher-value care through payment adjustments that are based on quality and efficiency.
Since nearly all hospitals receive Medicare payments, these reforms are not specifically targeted toward safety-net health systems. However, studies of all three programs have shown that safety-net hospitals face a higher risk of being penalized through reductions in payments than other hospitals.18-21 For instance, the Hospital Readmissions Reduction Program has come under scrutiny for potentially unfairly penalizing safety-net systems for factors that contribute to readmissions but that may be beyond their control, such as patients’ socioeconomic status.22,23
Alternative Payment Models
Safety-net health systems have also responded to the shift to alternative payment models such as bundled payments and accountable care organizations (ACOs). ACOs are networks of providers that take responsibility for the quality and costs of care for a defined population of patients.24 The model has proliferated rapidly, with an estimated 750 such arrangements currently in place, mostly through Medicare and private payers. As of 2016, Medicaid ACOs have been launched in 8 states and are being developed in 10 more.25 For example, in Oregon, the Centers for Medicare and Medicaid Services (CMS) allocated $1.9 billion over 5 years to ACOs that accept full financial risk for their attributed Medicaid population.26 The state of Oregon agreed to reduce its per capita Medicaid spending growth from a historical 5.4% annual rate to 3.4%. It is on track to meet this target, which would result in net savings to CMS.
Performing well in these new financial arrangements often requires grappling with long-standing challenges with adequate access to care, particularly primary care and behavioral health, and ensuring that care is integrated across providers and delivery settings. Expanding access requires increasing efficiency and patient throughput, adding capacity, partnering with other systems, or some combination thereof. For example, Harris Health System in Houston opened multiple primary care clinics and added capacity for approximately 50,000 encounters in 2014.15
However, adding capacity and partnering with other systems often adds to the complexity of coordinating patient care. Efforts in this domain have often focused on making improvements in the delivery of primary care (as with the patient-centered medical home model of care) and in integrating services through information technology and care management. In some ways, safety-net systems have natural advantages with respect to coordination of care. Fred Cerise, MD, the Chief Executive Officer of Parkland Health and Hospital Systems in Dallas, has described a safety-net system as being “an ACO before ACOs existed.” In other words, the realities of caring for a vulnerable population with few resources spurred delivery-system transformation.27 For example, at Parkland, an emphasis on team-based care spanning inpatient and outpatient settings contributed to the development of a physician-led diabetes program. This program has established universal standards of care such as standardized protocols for insulin titration and has implemented the standards with electronic decision support and regular provider feedback. Similarly, Montefiore Medical Center, a safety-net institution in the Bronx, New York, created a care management organization in 1996 in response to patients’ needs. This organization involves telehealth, house calls, and a centralized contact center to help patients navigate the health system.28
Other Value-Based Payment Reforms in Medicaid
The multibillion-dollar Delivery System Reform Incentive Payment (DSRIP) program is a pay-for-performance approach to Medicaid financing.29 The first DSRIP initiatives were approved in California, Texas, and Massachusetts in 2010 and 2011, followed by New Jersey and Kansas in 2012, New York in 2014, and New Hampshire in 2016. Washington State is awaiting approval to implement its program.
Although the exact structure and requirements of each DSRIP program differ from state to state, these programs generally encourage the development of infrastructure and system redesign (e.g., expansion of primary care and integration with behavioral health) to improve outcomes across populations of patients.30 In states with DSRIP waivers, funding flows to health care providers when performance targets (e.g., reducing avoidable hospitalizations) on specific projects to reform care are met.29 For example, the New Jersey DSRIP waiver, which includes all acute care hospitals in the state, offers its hospitals a menu of 17 potential projects under 8 priority health conditions such as cardiovascular disease and substance abuse.
Meanwhile, in April 2016, CMS announced sweeping new regulations for managed care plans that contract with state Medicaid programs to provide benefits to enrollees.31 Managed care arrangements have grown rapidly in recent years and now cover approximately 73% of all Medicaid beneficiaries, as compared with 10% approximately 25 years ago.32,33 The new CMS rules, the first since 2002, address improvements in accountability and quality of care, modernizing regulatory requirements, and ensuring protections for beneficiaries.34 Most notably, the regulations specify a medical-loss ratio requiring that at least 85% of the revenue of managed care plans be spent on medical care. Major implications for provider systems include time and travel standards to measure adequate access to care. These regulations also allow for short-term Medicaid funding of inpatient treatment for mental illness and addiction disorders.
Given the broad shift toward value-based payment in the health care marketplace, safety-net systems and Medicaid managed care plans are likely to pursue deeper collaboration. For example, Cook County Health and Hospitals System in Chicago launched a Medicaid plan in 2013 to cover many of its previously uninsured patients and contribute to the overall financial health of the system, according to hospital executives.35 The challenges of integration of safety-net systems and Medicaid managed care plans are manifold and parallel those in non-Medicaid plans, such as maintaining adequate capital reserves.36 However, in order for value-based payment initiatives to succeed, state Medicaid agencies, at a minimum, must address obstacles to timely sharing of information about beneficiaries with health systems, and these agencies may help to play a convening role in risk-bearing arrangements such as ACOs.
SCALING UP DELIVERY-SYSTEM IMPROVEMENT AND INNOVATION
Coverage expansion and payment reform under the ACA have provided an impetus for transformation of the safety-net delivery system. Improvement of the delivery system encompasses the following changes: increasing capacity, particularly in ambulatory care; extracting efficiency gains through streamlined operations and procurement; better coordinating care, both within systems and across safety-net providers in a given community; investing in information technology and other infrastructure; and retaining existing patients and attracting new ones.37 The ability to respond to the evolving policy milieu often depends on local factors such as the stability of funding sources, a political commitment to safety-net systems, and the competitiveness of the market for health care services.
Among innovations in delivery systems, perhaps the most promising are efforts to address the social needs of patients who are served by safety-net institutions.38 For example, Hennepin Health, a Minnesota safety-net ACO, comprises a public health department, a county hospital, a community health center, and a nonprofit health plan. This ACO showed favorable initial results in managing the cost and quality outcomes of a small Medicaid population.39 The intensive, collaborative approach to high-risk patients combines medical care with delivery of social services such as housing support and vocational counseling. More generally, improved integration across city and state agencies could help generate a more holistic approach to people’s needs, whether they are patients in the health care system or clients who need housing support or social services such as Supplemental Nutrition Assistance Program benefits.40
Although such bright spots may be growing, policy aimed at expanding these approaches must confront technology and workforce limitations in safety-net systems.41 Succeeding in new delivery-system arrangements may require up-front seed investment for information technology, hiring, and training. Financial pressures and regulatory flexibility, as in some instances of Medicaid DSRIP waivers, have already begun to shape the restructuring of the health system among safety-net providers. In many cases, this has led to a shift in the center of gravity of safety-net systems from inpatient capacity to ambulatory care — and particularly primary care. Yet, although federally qualified health centers received an infusion of funding under the ACA, safety-net health systems, which also often operate ambulatory clinics, face a more uncertain financial future.42,43
Persistent financial challenges up the ante for safety-net health systems to prioritize higher-value care delivery. Generally, financial strategies distill down into increasing revenue or reducing costs.15 On the revenue side, for example, the Virginia Commonwealth University system is diversifying its payer mix to increase the proportion of commercially insured patients. It is augmenting clinical services such as oncology and a transplantation program around this strategy. Efforts to reduce the cost structures of health systems, particularly fixed costs associated with inpatient services, could also help mitigate the effect of declining governmental subsidies. Several systems have pursued gains in efficiency by addressing clinician productivity and adopting process-improvement approaches. Denver Health is perhaps the best-known example of a safety-net system that disseminated a “lean” approach, derived from the Toyota Production System, across its enterprise. The former Chief Executive Officer of Denver Health, Patricia Gabow, attributed approximately $170 million in savings (from 2006 through 2012) — and a considerable increase in patient-satisfaction rankings — to the lean approach. Improving patient satisfaction, in turn, can help safety-net systems stay competitive in health care markets with multiple options for newly insured patients.
More could be done to align the incentives for community health centers with those for safety-net hospitals. For example, health centers could move toward value-based payment models that blunt the financial rationale for increasing the volume of visits. Approximately 17% of Medicaid and uninsured patients received care at federally qualified health centers in 2014.44 Given the considerable overlap in populations served, several hospital-based systems such as San Francisco General Hospital and Boston Medical Center are exploring tighter partnerships with neighboring community health centers.42 States such as Colorado, Oregon, and New York are moving toward a regionalized approach to care for Medicaid beneficiaries. This approach seeks to lower the regulatory barriers to such collaboration.
Beyond Medicaid, the municipalities of San Francisco, Los Angeles, and New York City, as well as the state of Massachusetts, have all organized direct-access programs for uninsured people seeking care, including undocumented immigrants. These programs also require new arrangements for care coordination among various types of safety-net providers. Federal policy could build on these local and state initiatives by judiciously permitting additional flexibility in blending funding streams toward increasingly seamless care for both Medicaid beneficiaries and uninsured persons.
Understanding the effect of the ACA on the safety net will require additional study, particularly of the local dynamics of changes in insurance status and the financial ramifications for health systems. Yet federal and state policymakers may have to make major decisions, such as how to rationalize DSH funding, with imperfect information. Downstream of these decisions, local policymakers are already confronting difficult choices about the character — and even the continued existence — of certain safety-net health systems. The challenge at all levels of policy development is to guide improvement in delivery systems while preserving the essential services provided by safety-net health systems in communities across the United States.
The views in this report are those of the authors and do not necessarily reflect the views or policies of New York City Health and Hospitals.
From New York City Health and Hospitals (D.A.C., J.E.C., R.M.W.), New York University School of Medicine (D.A.C.), and New York University College of Global Public Health ( J.E.C.) — all in New York.
For the full list of references, click here.
This Health Policy Report originally appeared in The New England Journal of Medicine and then in NEJM Catalyst on November 18, 2016.