FINANCIAL MANAGEMENT/Financing the health safety net
City and county governments pay a substantial share of the deficits of public hospitals and clinics, and, in areas with no public hospitals, local governments contribute a significant share of the deficits run up by the uninsured in nonprofit hospitals.
But local governments are not the best resources for meeting the increasing needs of public health facilities because of the financial strain such support can cause. Federal action may be the best bet for decreasing the local government health care burden. Public hospitals typically face severe financial problems. For example, a recent study by the Urban Institute, Washington, D.C., showed that operating deficits equaled 58.9 percent of operating costs for Harris County Hospital in Houston, and 64.2 percent of operating costs for Highland Hospital in Oakland, Calif.
While many urban public hospitals do receive positive net revenues from private and public payers, those revenues are not sufficient for operating purposes. In 1996, payments from local governments gave urban public hospitals positive net revenues equal to 4.2 percent of cost, according to the Medicare Prospective Payment Commission. However, while urban hospitals on average are profitable, 24 percent run deficits even after local contributions.
Urban hospitals do make small profits on Medicare and Medicaid patients. Many are teaching hospitals and, consequently, receive payments for graduate medical education on top of Medicare payments. Disproportionate share hospital (DSH) payments (lump sum payments made directly to hospitals serving the poor) on top of payments for services from Medicaid also provide revenue.
However, the 1997 Balanced Budget Act (BBA) reduced Medicare hospital payments, particularly for graduate medical education; the BBA also reduced Medicaid payments for DSH between now and 2002. Consequently, state Medicaid programs are moving toward managed care systems, with tighter controls on payments. The National Association of Counties and its Large Urban County Caucus have sent a letter to the Senate Finance and House Commerce committees, expressing concern over cuts to public health funding, including graduate medical education and DSH payments.
Additionally, the number of privately insured Americans in managed care is growing; competition is likely to make managed care plans tough negotiators with public hospitals. Medicaid enrollment has fallen because of welfare reform and a stronger economy, while the decline in employer-sponsored coverage has slowed. Whether those trends will continue is unknown. If private and public sector coverage decreases, the number of uninsured Americans will rise, increasing the importance of and the financial burden on urban public hospitals.
To face those problems, public hospitals and local clinics will need to develop their own managed care plans to compete for Medicaid beneficiaries. They will need to reduce costs as well as improve customer service and amenities. But those measures are likely to be insufficient; more revenues will be needed.
Reforming the DSH program could provide needed revenues. While the existing program has been abused, a reformed program could provide funding, equitable distribution of funds among states, and requirements that would keep state and local levels steady. Also, city and county governments should actively participate in health care reform debates, pushing for state and federal governments to expand health care insurance to low-income citizens. More insured residents would equal less local government support.