Toward a High Performance Health Care System for Vulnerable Populations: Funding for Safety-Net Hospitals Prepared for the Commonwealth Fund Commission on a High Performance Health System Deborah Bachrach, Laura Braslow, and Anne Karl Manatt Health Solutions March 2012 THE COMMONWEALTH FUND COMMISSION ON A HIGH PERFORMANCE HEALTH SYSTEM Membership David Blumenthal, M.D., M.P.P. Jon M. Kingsdale, Ph.D. Chair of the Commission Consultant Stuart Guterman Samuel O. Thier Professor of Executive Director Medicine and Professor of Health Gregory P. Poulsen, M.B.A. Vice President for Payment Care Policy Massachusetts General Senior Vice President and System Reform Hospital/Partners HealthCare System Intermountain Health Care The Commonwealth Fund and Harvard Medical School Neil R. Powe, M.D., M.P.H., M.B.A. Cathy Schoen, M.S. Maureen Bisognano, M.Sc. Chief, Medical Services Research Director President and Chief Executive Officer San Francisco General Hospital Senior Vice President for Institute for Healthcare Improvement Constance B. Wofsy Distinguished Research and Evaluation Professor and Vice-Chair of Medicine The Commonwealth Fund Sandra Bruce, M.S. University of California, San Francisco President and Chief Executive Officer Rachel Nuzum, M.P.H. Resurrection Health Care Louise Y. Probst, R.N., M.B.A. Senior Policy Director Executive Director Vice President for Federal Christine K. Cassel, M.D. St. Louis Area Business Health and State Health Policy President and Chief Executive Officer Coalition The Commonwealth Fund American Board of Internal Medicine and ABIM Foundation Martín J. Sepúlveda, M.D., FACP IBM Fellow and Vice President Michael Chernew, Ph.D. Integrated Health Services Professor IBM Corporation Department of Health Care Policy Harvard Medical School David A. Share, M.D., M.P.H. Vice President John M. Colmers, M.P.H. Value Partnerships Vice President Blue Cross Blue Shield of Michigan Health Care Transformation and Strategic Planning Glenn D. Steele, Jr., M.D., Ph.D. Johns Hopkins Medicine President and Chief Executive Officer Geisinger Health System Patricia Gabow, M.D. Chief Executive Officer Alan R. Weil, J.D., M.P.P. Denver Health Executive Director National Academy for State Health Glenn M. Hackbarth, J.D. Policy Consultant George C. Halvorson Chairman and Chief Executive Officer Kaiser Foundation Health Plan, Inc. THE COMMONWEALTH FUND, among the first private foundations started by a woman philanthropist— Anna M. Harkness—was established in 1918 with the broad charge to enhance the common good. The mission of The Commonwealth Fund is to promote a high performing health care system that achieves better access, improved quality, and greater efficiency, particularly for society’s most vulnerable, including low-income people, the uninsured, minority Americans, young children, and elderly adults. The Fund carries out this mandate by supporting independent research on health care issues and making grants to improve health care practice and policy. An international program in health policy is designed to stimulate innovative policies and practices in the United States and other industrialized countries. COVER PHOTO © Dann Tardif/Corbis TOWARD A HIGH PERFORMANCE HEALTH CARE SYSTEM FOR VULNERABLE POPULATIONS: FUNDING FOR SAFETY-NET HOSPITALS PREPARED FOR THE COMMONWEALTH FUND COMMISSION ON A HIGH PERFORMANCE HEALTH SYSTEM Deborah Bachrach, Laura Braslow, and Anne Karl Manatt Health Solutions March 2012 ABSTRACT: Safety-net hospitals play an indispensable role in providing care to vulnerable populations. Yet, in the current economic environment, many safety-net hospitals face dire financial circumstances and struggle to provide care to growing numbers of low-income, uninsured, and Medicaid patients. This report, written on behalf of the Commonwealth Fund Commission on a High Performance Health System, examines the funding streams on which safety-net hospitals rely and suggests strategies—not simply to sustain these hospitals but to stimulate and reward high performance. These strategies include: increasing Medicaid rates (in states that have unreasonably low rates) to safety-net hospitals with the highest shares of Medicaid and uninsured patients and lowest shares of privately insured patients, contingent upon meeting performance benchmarks; targeting Medicaid and Medicare disproportionate share hospital payments to hospitals that serve uninsured patients; and supporting safety-net hospitals’ access to the capital they need to implement large-scale delivery system reforms. Support for this research was provided by The Commonwealth Fund. The views presented here are those of the authors and not necessarily those of The Commonwealth Fund or its directors, officers, or staff, or of the Commonwealth Fund Commission on a High Performance Health System. This and other Fund publications are available online at www.commonwealthfund.org. To learn more about new publications when they become available, visit the Fund’s Web site and register to receive e-mail alerts. Commonwealth Fund pub. no. 1584. CONTENTS List of Exhibits ................................................................................................................... iv About the Authors ................................................................................................................v Preface................................................................................................................................ vi Executive Summary .......................................................................................................... vii Introduction ..........................................................................................................................1 Distinguishing Features of Safety-Net Hospitals .................................................................1 Patient Population ..........................................................................................................2 Services ..........................................................................................................................5 Ability to Cross-Subsidize .............................................................................................5 Payer Mix of Safety-Net Hospitals, Post-2014 ..............................................................7 Medicaid ..............................................................................................................................8 Current Medicaid Payment Policies Threaten the Viability of Safety-Net Hospitals ...8 Developing Sound Medicaid Payment Policies, Targeting Safety-Net Hospitals .........9 Disproportionate Share Hospital Payments .......................................................................15 Medicare Disproportionate Share Hospital Payments .................................................16 Medicaid Disproportionate Share Hospital Payments .................................................18 Funding for Capital ............................................................................................................21 Conclusion .........................................................................................................................25 Appendix: Section 1115 Waivers ......................................................................................27 Notes ..................................................................................................................................32 iii LIST OF EXHIBITS Exhibit 1 Count of Hospitals by State and Hospital Medicaid Mix, Selected States, 2009 Exhibit 2 Count of Medicaid Discharges by State and Hospital Medicaid Mix, Selected States, 2009 Exhibit 3 Payer Mix by Hospital Medicaid Payer Mix Category, Selected States, 2009 Exhibit 4 Inpatient Payer Mix, All Hospital Discharges, Selected States, 2009 Exhibit 5 Difference in Commercial and Medicaid Discharges, Medicaid Share of Total Hospital Discharges, Selected States, 2009 iv ABOUT THE AUTHORS Deborah Bachrach, J.D., is special counsel at Manatt, Phelps & Phillips, LLP, where she advises states and other policymakers on implementation of federal health reform and Medicaid reform strategies. She is also a frequent commentator on health reform implementation, Medicaid payment, and purchasing strategies. Until 2010, Ms. Bachrach was the Medicaid director and deputy commissioner of health for the New York State Department of Health. In this capacity, she was responsible for coverage, care, and payment policies for over 4 million children and adults enrolled in New York’s Medicaid and Child Health Insurance Programs. She holds a law degree from the New York University School of Law. Laura Braslow, M.P.A., is an advisor at Manatt Health Solutions, a division of Manatt, Phelps & Phillips, LLP, where she specializes in providing data management support, research design, and policy analysis to hospitals, health plans, governmental entities, and other health care stakeholders. Most recently, Ms. Braslow was founder and principal of Righteous Research, a research design and data analysis firm providing public policy research for nonprofit and academic clients. She holds a master’s degree in public administration from the Robert F. Wagner Graduate School of Public Service at New York University. Anne Karl, J.D., is an associate at Manatt, Phelps & Phillips, LLP, where she advises providers, Medicaid managed care plans, and commercial health insurers on a variety of regulatory and transactional matters in the health care industry. She