Safety Net Activities and Hospital Profitability During the 1990s
- Presenter:
Chair: Frank Sloan; Discussant: Richard C. Lindrooth Mon June 5, 2006 13:45-15:15 Room 332
Background: Safety net (SN) hospitals in the US, also known as “hospitals of the last resort” provide health care services to the uninsured, low income, underinsured, to Medicaid beneficiaries, to patients who are “undesirable”. They have survived through a variety of direct subsidies from public funds and cross-subsidies from private payers. Both were imperiled in the 1990s with budget cuts and price competition. This study examined the financial performance of these hospitals over the 1990-2000 period. Data and Methods: We combined data (revenue, expenses, uncompensated beds size and teaching) from the Medicare Cost Report data sets with a range of hospital characteristics from the American Hospital Association Annual Survey of Hospitals for all urban general acute care hospitals in the US. We created a set of safety net measures including a factor characterizing the socio-economic status of the population living in the hospital’s service area (using Medicare patient origin data and the 1990 and 2000 census), the proportion of Medicaid patients and the uncompensated care burden (the proportion of a hospital’s expenses accounted for by uncompensated care). We then modeled revenue, expenses and profit margin as a function of time varying hospital and market characteristics (outputs, the competitiveness of the hospital market, HMO penetration) year dummies and interactions (with the year dummies) using hospital fixed effects specifications. We also tested for the potential endogeneity of the percent Medicaid and the uncompensated care burden using a 2SLS specification Finally, we estimated a logistic regression for the probability a hospital had a negative profit margin in a given year, as a marker of financial distress. Results: Profit margins were consistently lower at safety net hospitals but the gap between these profit margins and those of non-safety net hospitals did not increase during the 1990s. These differences are primarily due to lower revenue although expenses are somewhat higher as well. The models show essentially the same pattern. Hospitals with higher levels of safety net measures tend to have somewhat lower profits but the gap did not change significantly over the decade. Implications: Hospitals with higher safety net measures have consistently tended to have lower profit margins and as profit margins have slid may be the ones in the greatest distress. There is a need to focus subsidies properly to ensure the survival of the safety net in an environment where budget constraints and price competition are likely to persist and even to increase.
