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Survival Tactics by Safety Net Providers May Mean Less Free Care

By John Reichard, CQ HealthBeat Editor

August 12, 2008 -- The free clinics, hospitals, and community health centers that provide care to people without insurance or other financial means are having to respond to a tougher health care marketplace by adopting the strategies of their more well-heeled competitors, in some cases curtailing free care as a result, according to a new study.

These "safety net" providers "are adopting some of the same strategies being used in the private sector to attract higher-paying patients and changing their 'image' as a safety-net provider," said the study, led by researcher Peter Cunningham of the Washington, D.C.–based Center for Studying Health System Change.

Based on interviews in 2007 with hundreds of local doctors, hospital executives, and other health care experts in a dozen randomly selected cities around the United States, the study advised policy makers to expand insurance coverage or increase subsidies to safety net providers as a way of offsetting growing market pressures.

A Tougher Marketplace
Changes in the larger health care marketplace are forcing the change in tactics, said the study, which was posted Tuesday on the Web site of the policy journal Health Affairs. It was funded by the Robert Wood Johnson Foundation, a philanthropic organization.

Providers are trying to outdo each other with investments to build up highly profitable services, a "new medical arms race," the study authors noted. In years past the arms race was more likely to consist of hospitals competing with other by adding more profitable technology-driven services, but now doctors are more likely to be involved in the competition, the study suggested.

In almost all of the communities studied, "we found that physicians are stepping up efforts to build their own diagnostic and ambulatory surgery centers and, therefore, are becoming less dependent on hospitals as their workshops," the study said. Doctors are providing more ancillary services to boost their revenues and at the same time, "the growth of single-specialty medical groups has allowed physician practices the scale needed to offer services that are more profitable."

Hospitals have fought back by creating joint ventures with doctors to hold onto at least some of the revenues they would otherwise lose. They've built new facilities to house specialty services. And they've built new facilities in or relocated to suburban areas "to attract high-income and well-insured patients."

These added capital investments are harder for providers to recoup with price increases because the consolidation of insurers gives payers more power to control rates. That means some hospitals have to "allocate greater portions of their current and future profits to service growing debt, which in turn means that fewer funds are available to support indigent care."

Impact on the Safety Net
As these pressures grow, there are signs that providers are less willing to provide uncompensated care. Outlays for uncompensated care are rising but demand is growing too as the uninsured population swells. The number of uninsured increased 13 percent annually between 1996 and 2005, the study said.

American Hospital Association data show that uncompensated care costs grew 28 percent over the past decade after adjusting for inflation, but uncompensated care costs as a percentage of total hospital expenses dropped almost seven percent. "Hospitals' efforts to limit growth in uncompensated care may be occurring indirectly, by concentrating their expansion activities in more affluent communities and by downsizing or eliminating certain unprofitable services, such as inpatient psychiatric units," the study said.

Most safety net providers reported increasing demand for their services, particularly by patients who were uninsured or covered by Medicaid. The closure of other local facilities, a rise in the number of uninsured, and a growing refusal among other providers to accept uninsured or Medicaid patients were among the factors driving growing demand.

Some safety net providers reported that uninsured patients "were showing up with more serious health problems than in the past, which they interpreted as another indication of worsening access in the community."

"Access to specialty care continues to be the most serious and growing problem in most communities, with mental health, surgical, dental, and vision care frequently cited as the most difficult to obtain."

Safety net providers said they were providing more uncompensated care but most still had balanced budgets or eked out small profits. Safety net hospitals had total profit margins averaging 0.5 percent. Similarly, margins for facilities belonging to the National Association of Public Hospitals grew from 0.7 percent in 2001 to 1.2 percent in 2004. But margins for safety net hospitals were well below the hospital industry average of 4.9 percent in 2005.

New Strategies
In three of the communities studied, major safety net hospitals restricted non-emergency care for patients outside the local area. In one community, "queuing for appointments based on insurance coverage was another tactic being used by the safety net hospital . . . with private insured patients waiting the least amount of time for an appointment and uninsured patients waiting the longest."

In some communities, safety-net providers managed uncompensated care costs more tightly by "more rigorously applying a sliding fee schedule, becoming more aggressive in collecting out-of-pocket payments from uninsured patients, verifying income,, and offering discounts to patients who pay up front."

Some safety-net providers sought to attract more privately insured patients by investing in areas of expertise such as neurological and trauma care treatment services. Centers to treat strokes also were an area of emphasis. In some cases, community health centers marketed their primary care services more aggressively to attract privately insured patients. Among their marketing pitches were that they coordinated care more carefully and offered more advanced health information technology than private doctors' offices.

In some cases, hospitals said they wanted to shed their images as a safety net provider to attract a wider range of patients.

Policy Implications
"Expanding insurance coverage is the most direct way to relieve some of the financial pressure on safety-net providers," the study advised. It also suggested that subsidies such as federal Medicaid payments to "disproportionate share" hospitals could be increased. Payments to those hospitals, which treat an unusually large number of patients with little or no coverage, "have essentially been flat since 1998," the study said.

Regulation also could help. "For example, heightened public concern about the community benefit activities of tax-exempt hospitals has prompted some states to enact laws that require minimum standards of charity care provision by hospitals."

Keeping the balance between the mission of safety net providers to serve the poor and assuring their financial viability "has been tenuous for some time, but is becoming even more so in a marketplace that is becoming more competitive and profit-driven," the study concluded.

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