Outlook 2014: Public hospitals

Government-owned hospitals—heavily dependent on Medicaid funding—will face a bifurcated financial landscape in 2014 as they struggle to survive amid declining reimbursements and the financial penalties attached to the quality-improvement initiatives in the healthcare reform law.

Public hospitals in states that expanded Medicaid to cover all adults earning up to 138% of the federal poverty level are likely to see their financial pictures improve somewhat because they will see an increase of patients with health coverage.

Public hospitals in states that have yet to expand, on the other hand, will likely face the same environment in 2014 as they experienced in 2013—cutbacks in per-patient payments by Medicare and Medicaid without a corresponding increase in the number of paying clients among the low-income populations in their service territories.

See a slideshow of the people to watch in 2014

“When you think about public hospitals, you really have to think about public hospitals in two different types of states,” said Stephen Zuckerman, a senior fellow at the Urban Institute, a Washington-based, nonpartisan policy think tank. “The ones that are in states that are expanding Medicaid will see a lot more paying customers.”

Public hospitals received a minor reprieve from Congress when it voted to delay for two years the start of disproportionate-share hospital payment cuts that would total $18 billion by 2020. Under the Patient Protection and Affordable Care Act, DSH payments to public hospitals were to be reduced as states expanded their Medicaid programs.

“We dodged a bullet for 2014,” said Dr. Bruce Siegel, president and CEO for America's Essential Hospitals, formerly known as the National Association of Public Hospitals and Health Systems. “We've got some breathing room on that, and I think that's good news for the safety net in America.”

Public hospitals are generally under financial stress since they perform far more uncompensated care than for-profit or other not-for-profit systems. That leaves public hospitals with fewer resources to make the investments needed to meet CMS requirements under its Value-Based Purchasing Program, which penalizes or rewards hospitals based on their performance on a set of quality standards. Another incentive program, the Hospital Readmission Reduction Program, will soon penalize hospitals up to 2% of Medicare reimbursements if they fail to bring down 30-day readmission rates.

Those programs could take a huge hunk of revenue out of public hospitals in 2014. “Public hospitals, a lot of people believe, could be not particularly well-situated to make sure that they hit those readmission targets,” Zuckerman said. “Public hospitals tend to be located in areas where there's less community-based care that patients can hook up with once they are out of the hospital.”

That leaves public hospitals with the option of accepting the penalty, which will exacerbate their reimbursement woes. Or they can lose money a different way—by investing in care coordination efforts that reduce readmissions, which increases costs while lowering payments under the fee-for-service reimbursement system.

Despite the challenges, Zuckerman said it was unlikely the changes would lead to a wave of closures among government-owned hospitals. “There's always a risk of public hospitals closing, but I think the communities and the states that they're in just don't want to see that happen and are always able to work something out,” he said.

Some public hospitals in areas where redundancies exist are likely to cope in the coming year by consolidating with neighboring facilities. Yet some may respond to the financial pressures by increasing their participation in accountable care organizations, recognizing they must eventually adapt to the new reimbursement environment.

“There are a lot of things going on in the healthcare system now,” Zuckerman said. “And public hospitals can be a part of them.”

Follow Steven Ross Johnson on Twitter: @MHsjohnson