CA Safety-Net Hospitals Stand to be Hard Hit by Federal Cuts

California safety-net hospitals are already operating on a tight budget, and a program to reduce federal subsidies could result in those hospitals facing a $1.5 billion shortfall by 2019.

California safety-net hospitals could be hit hard by a program that will reduce federal subsidies to hospitals based on the assumption that uncompensated care costs will decline with the arrival of federal healthcare reform.

The study from the UCLA Center for Health Policy Research published in the journal Health Affairs looked at the impact of pending reductions to disproportionate-share hospital payments. The federal government currently distributes $11.5 billion in DSH funds to states each year that are used to subsidize hospitals that care for a high percentage of the uninsured and patients covered through Medicaid.

The study estimates that California receives $1.1 billion in DSH payments per year—which covers about 50% of total uncompensated care costs—and that 98.5% of those funds go to 20 large county and public hospitals.

They include LAC + USC Medical Center in Los Angeles, Santa Clara Valley Medical Center, Alameda Health System, San Joaquin General Hospital, and Harbor-UCLA Medical Center. Discharge records show that 18% of patients at those hospitals have no insurance and that 41% are insured through Medi-Cal, which provides hospitals much lower reimbursement rates than private health plans.

"Hospitals that can least afford a cut are the most at risk," says Dylan Roby, one of the study's authors and director of the Health Economics and Evaluation Research Program at the UCLA Center for Health Policy Research. "Policymakers should ensure that the impending shift in federal funding does not destabilize institutions that are the backbone of public health in California."

The study notes that "decreases in uncompensated care costs resulting from the ACA insurance expansion may not match the act's DSH reductions because of the high number of people who will remain uninsured, low Medicaid reimbursement rates, and medical cost inflation."

The DSH payment cuts are part of the Patient Protection and Affordable Care Act, which presumes there will be fewer uninsured patients for hospitals to treat in the future and a reduced need for subsidies. The DSH payment reductions are on a sliding scale with cuts increasing each year. Those cuts will start with an18% reduction in funding in fiscal 2017 and increase to 41% by 2020.

Roby says California's safety-net hospitals are "already operating on a shoestring" and will find it difficult to absorb any subsidy reductions, particularly if they're based on projections instead of the reality on the ground.

Using a model that takes into account increasing healthcare costs and current DSH cuts proposed under the ACA, the study estimates that "safety-net hospitals in California could face $1.381 to $1.537 billion in residual uncompensated care costs and Medicaid shortfalls in 2019." It also estimates that 4 million state residents will remain uninsured in 2019.

If DSH funding reductions are implemented as planned, Roby said state and county health officials may have to create new sources of funding to subsidize public hospitals or redistribute existing sources of funding to hospitals that are most in need. The study suggested that "leaders of these hospitals will need to develop strategies that take into account local political environments, financial conditions, geography, and payer mix."

The California Hospital Association has been working to delay the DSH cuts until the true impact of the ACA on the uninsured population can be assessed.

"We've been actively lobbying Congress to get the DSH cuts stayed," said Jan Emerson Shea, vice president of external affairs for the CHA.