Hospital Profitability and Safety Net Activities

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 1990-1999 period.

Data and Methods: We combined data (revenue, expenses) from the Medicare Cost Report 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 two safety net activities for each hospital: a) a safety net index characterizing the socio-economic status of the population living in the hospital's service area; and b) the proportion of Medicaid patients. In a sensitivity analysis we included yet another dimension of SN hospitals-the uncompensated care burden (proportion of a hospital's expenses accounted for by uncompensated care). We restricted the use of uncompensated care to sensitivity analysis because of limitations with data availability. Our dependent variables are total profit margin which tests hospitals survival and total expenditure which we use as a surrogate for quality. Logged form of expenditure and profit margin were modeled 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 and a two stage least square (2SLS) specification to control for omitted variable bias and possible endogenity of Medicaid.

Results: Descriptive and ordinary least square regression suggests a consistent inverse relationship between profit margins and safety net activities. A closer examination using hospital fixed effect specification, however, provides little evidence of negative impact of safety net activities on total margin. The socio-economic status index was negatively related to profitability but the gap between the profit margin and those of non-safety net hospitals did not increase during the 1990s. However, safety net activities decreased expenditure significantly indicating that the quality of health care provided to vulnerable population may be an issue.

Implications: There is a need to focus subsidies properly to ensure the survival and the quality of the safety net in an environment where budget constraints and price competition are likely to persist and increase.