When Congress tightened federal healthcare spending in 1997, many public hospitals predicted death and disaster.
Now, five years later, some public hospitals not only continue to serve but are thriving. Others are struggling. Overall, the nation's public hospital system is severely strained by old and new demands, advocates contend.
The rising numbers of underinsured and uninsured, bioterrorism, Medicaid cuts and staffing problems all present formidable challenges for the industry.
Yet even with workforce shortages, public providers remain a critical training ground for medical students, physicians and other healthcare professionals. They offer some of the most medically advanced trauma and burn-care centers in the nation, and are uniquely positioned to carry out research specific to the increasingly low-income and indigent populations they serve. Their role in the system has never been more vital.
According to the American Hospital Association, the number of public hospitals in the country is dropping.
While the number of private hospitals in the U.S. decreased 7% to 3,759 in 1999 from 4,052 in 1980, the number of public hospitals nationwide dropped 33% during the same period to 1,197 from 1,778. For the last five years, the rate of closure or conversion has remained relatively constant, roughly 2% to 5%.
As a group, public hospitals are in a "precarious financial position," reports the National Association of Public Hospitals and Health Systems, which holds a membership of 110 of the nation's public hospitals in 26 states across some 70 systems. The organization's most recent membership survey reported that NAPH members receive more than 70% of their revenue from Medicare, Medicaid and local government subsidies. But Medicaid discharges are dropping. From 1993 to 1999, discharges declined 32%, evidence that public providers are losing market share, the NAPH reported. As payments from privately insured patients become less generous, Medicaid patients are looking increasingly good to providers.
"There has been a decline in the paying patient base for public hospitals in the last few years," says Jack Needleman, assistant professor of economics and health policy at the Harvard School of Public Health. "We see in communities in which public hospitals have been safety net providers, that the Medicaid base has been competed away as hospitals that have traditionally tried to avoid Medicaid patients are now actively seeking them. As that happens, because there are some economies of scale in the hospital business, the loss of the patients with the loss of these paying patients, the hospitals have not been able to scale down proportionately and the care becomes more expensive."
Margins for major public providers are also slipping. An Institute of Medicine report, America's Health Care Safety Net: Intact but Endangered, found that from 1992 to 1997, urban government hospitals reported a decrease in margins to 3.7% from 4.3%; public teaching hospitals' margins dropped to 1.6% from 2.8%.
When looking at the numbers, it is important to take into account the tremendous variety of public institutions constituting the system, Needleman says.
"They're really a mixed group of hospitals," he says. "Some are district hospitals, some are owned by cities, some are county, some are state hospitals. Some are academic medical centers that operate and look very much like large nonprofit academic medical centers. Others look more like city and county hospitals."
Regardless of their governance structure, historically public hospitals have steered toward a long-term trend of closures, conversions and mergers, with most occurring among the nonurban hospitals, Needleman says. But there also has been a small countertrend to either open public hospitals or convert not-for-profits or for-profit hospitals to public to keep the doors open.
Losing Medicaid money
Industry officials concerned that the nation's safety net is unraveling are calling for swift legislative action to maintain adequate federal funding.
"This is going to be a positioning year politically. There's no question we have some mounting problems," says Kenneth Thorpe, professor and chairman of the Department of Health Policy and Management at Emory University's Rollins School of Public Health. "Certainly people understand the problems, and the Democrats and Republicans running for Congress are going to raise the healthcare issue during the campaign. ... But (safety net providers) are going to have to retrench and look at the core of their services to see how they can hang in there for a little while."
Among public hospital advocates' chief concerns is the Bush administration's announcement that it will reduce federal contributions to state Medicaid budgets by $9 billion over the next five years by closing a regulatory loophole called the Medicaid "upper payment limit." In fiscal 2001, total state Medicaid spending nationwide amounted to $216 billion, of which $123 billion is the federal share. The provision funneled supplemental funding to public hospitals and safety net facilities that incurred extra costs in providing care to an increasing number of uninsured and underinsured patients. The final ruling on the matter by the Centers for Medicare and Medicaid Services will lower the maximum rate Medicaid programs can pay county hospitals and nursing homes to 100% of the Medicare rate from a previous cap of 150%.
State hospital officials argue the move by the CMS and HHS ignores a bipartisan legislative compromise enacted in fall 2000 during the Clinton administration to close loopholes in the upper payment rule that were being exploited by some states to balance their budgets.
Many states, some of which began applying for funds from the Medicaid loophole as early as the 1990s, increased their federal matching rate by overpaying county-owned providers, then improved their financial position additionally by requiring facilities to fund the excess to use for nonhealth purposes.
"The loopholes that were closed last year in the regulations were those discovered by states that were, in some cases, trying to take advantage of the Medicaid program to fund and build bridges and (repair) potholes and balance budgets," says Larry Gage, president of the NAPH.
But in closing these loopholes, both Congress and the Clinton administration recognized that many states, particularly California, had been using the loophole for legitimate purposes to assist public hospitals, he says.
"They carved out public hospitals as a separate category and specifically adopted the 150% limit to take account of that," Gage says.
However, the 150% cap that's being abolished is not a loophole, he says. "It's a policy."
"It was intentionally adopted as a policy, which is now, of course, being rescinded or repealed really before it's gone into effect," he says. "(The Clinton administration) put this into the regulation with the intention that safety net and public hospitals would benefit from it."
The CMS' final ruling eliminating the 150% upper payment limit for states will become effective on March 19. States that relied heavily on the provision will be given two to eight years to phase out the federal funding. The use of this loophole had grown rapidly in the past year, according to HHS, which reported that 25 states approved plans to take advantage of the loophole, accounting for nearly $2 billion in increased Medicaid costs in fiscal 2000 alone.
"We know that some states have come to rely on these funds over a period of years," HHS Secretary Tommy Thompson said in a written statement on the matter. "Other states have recently discovered this mechanism and want to use it to refinance their state budgets. We believe this regulation strikes the right balance."
In an August 2001 press briefing on Medicaid Flexibility and Expansions, CMS Administrator Thomas Scully said the loophole was "the biggest public policy outrage I have ever seen in the history of government finance.
"I love the Medicaid program. I love helping poor people. I hate financing scams, and this is what this is," he said, explaining the payment mechanism to reporters.
In its final decision, the CMS said the ruling, which "further restricts a loophole," would not harm public hospitals or states that had relied on the higher payment because they will be granted significant transition periods. Alabama, Michigan, New Mexico and North Carolina, which have a long history of using the loophole, will be given five years to make the transition to the new 100% cap. California and Illinois, which have depended on the loophole to heavily fund programs for the states' uninsured and underinsured, will have eight years to transition.
David Carvalho, counsel for the Cook County Bureau of Health Services, which oversees 591-bed Cook County Hospital in Chicago, says Illinois will be relatively unaffected from a bottom line perspective, and that funding mechanisms for the hospital will be redesigned to take the cutbacks into account. The legislation "wasn't going to have a substantial financial impact until 2005," he says. Subsidies from the local county government to provide care for the uninsured and underinsured have allowed the largest public hospital in Illinois to remain open.
Denise Martin, chief executive officer and president of the California Association of Public Hospitals and Health Systems, which represents more than two dozen public hospitals in the state, says California's safety net system will be financially devastated by the loophole's closing. Martin says the state is estimated to lose $1 billion in federal funding during the eight-year transition and at least $300 million each year after that.
California was the first state of take advantage of the loophole, in 1989. Faced with a meltdown of its emergency room and trauma system in Los Angeles, supplemental Medicaid programs were developed to keep the city's county hospital infrastructure solvent. In 1999, California's 23 public hospitals handled 11 million emergency room and outpatient visits, Martin says.
"It's a very tenuous period for public hospitals in California," Martin says. "We're very concerned about what the viability is when you rely on funding sources that are diminishing while your pressures to serve people are increasing."
Los Angeles' public health system, in particular, is facing a crisis because of declining revenue, growing budget deficits and increasing demand for services.
The Los Angeles County Department of Health Services is the second-largest public health system in the nation, serving the county's 10 million residents. The system is the major open-door provider for more than 2.5 million people without health insurance--the highest concentration of uninsured in the nation--and provides 85% of all uncompensated medical care in the county.
Two federal bailouts in 1995 and 2000 were required to sustain the system, which has an annual budget of $2.6 billion for its six hospitals, 20 healthcare centers and 100 clinics. During fiscal 1995-1996, the system reported a $655 million budget deficit and applied for a federal waiver for its Medicaid program to infuse money into the program over five years.
The system applied for and was granted a waiver extension in 2000, but with time running out on the second waiver, the health services department is projecting "serious budget deficits" starting in fiscal 2003.
"The system that we have now is not sustainable with our current funding structure," says John Wallace, director of intergovernmental relations for the health services department. "We're going to go through a round of administrative cuts and try to save as much money on the administration side before we look at direct patient care and cutting services."
Last fall, the California Medical Association, the state's physician trade group, released a report calling for public support of ER and trauma care as an essential public service. In an age of bioterrorism, public commitment appears easier to come by. The federal government recently announced it will give state health departments $125 million to direct hospitals in setting up plans to respond to infectious disease outbreaks or bioterrorism attacks (Feb. 4, p. 8).
"If one says trauma care is a public good and not a market good, it takes a fundamental rethinking then of what is the basis for paying for medical care," says Philip Lee, a senior adviser at the University of California-San Francisco's Institute for Health Policy Studies who also served as U.S. assistant secretary for health during the Clinton administration. "If it's a market good, we'll say, `Well, the market will take care of it. Tough luck, there's a terrorist attack.' But if it's a public good, we'll say, `We'll invest and this is what it's going to take.' And it's going to take billions of dollars."
Closing, building, replacing
To survive in an increasingly tight market, local governments have passed public hospitals to private providers as funding decreases. The most common conversions for public hospitals have been from public ownership to not-for-profit ownership, Needleman says.
"It's a trend that has continued," he says. "The number of for-profit conversions has also declined."
In April 2001, the District of Columbia's financial oversight board voted to shut down inpatient care at 250-bed District of Columbia General Hospital, turning over management of its outpatient and emergency departments to an alliance between Greater Southeast Community Hospital, George Washington University Hospital and Children's National Medical Center. Massachusetts' former public provider, Boston City Hospital, survives through a 1996 merger with Boston University Medical Center. California's San Luis Obispo County is preparing to close its 123-year-old hospital. Philadelphia is the largest city in the nation without a public hospital.
But for all the public hospital closures, some county systems are building new infrastructure to meet demand. Officials at Texas' Montgomery County Hospital District argue that private hospitals aren't doing an adequate job of serving the region's growing population, and that a public facility may be the only way to address the problem (Dec. 24-31, 2001, p. 20).
Illinois is replacing Chicago's 80-year-old Cook County Hospital, which had the world's first blood bank and the country's first trauma center, with a state-of-the-art 464-bed facility. Built by county government at a cost of $551 million, the John H. Stroger Jr. Hospital of Cook County will begin receiving transferred patients in late summer or early fall.
Cook County, like its public hospital counterparts nationwide, is a classroom for the nation's doctors, medical students and nurses. According to the NAPH, 79% of the organization's acute-care facility members are designated teaching hospitals; nearly half are academic health centers (those teaching hospitals with four or more residency programs). In their markets, NAPH members also train nearly 30% of residents.
"The public hospital has historically been, for the past century, not only the training ground for doctors but also the place where new techniques and new science was elaborated," says Quentin Young, M.D., who trained at Cook County from 1947 to 1952 before returning in 1972 to be chairman of the hospital's department of medicine for the next decade. "It is a valuable, ongoing, educational and scientific role for the public hospitals."
Young, a past president of the American Public Health Association, has spent more than 50 years as a leading advocate of public health. During the 1960s, Young was instrumental in the city of Chicago's efforts to establish community medical clinics to treat low-income patients and the poor. Cook County now has 31 outpatient clinics that support the public hospital.
Advocates contend that the future and strength of the U.S. public hospital infrastructure lies in the cooperation between large inpatient facilities in the urban core and their community-based clinic counterparts.
"One of the first things people tend to cut are the clinics because you have to have trauma care and burn care, and you need to take care of the seriously ill and injured," says Ron Anderson, CEO of 708-bed Parkland Hospital in Dallas, where nearly 30% of the population is uninsured. "Politicians see it's easier to close clinics, but the truth is those are where the gains are long term by keeping the community healthier."
The federal government seems to agree. Bush's 2003 budget proposal included a $114 million increase in spending on community-based health centers.
Anderson, who has served as Parkland's CEO since 1982, says real reform in the public hospital and safety net system will come from a shift not only in systems' thinking, but also the public's.
"As long as people see this as just an issue for the poor, we're not likely to see reform," he says. "If the middle class understands these institutions serve them as well and train their doctors, maybe they'll pay attention."