Uncompensated Care, Area Disadvantage Impair Safety-Net Margins

Safety-net hospitals with the highest levels of uncompensated care and area socioeconomic disadvantage have lower margins compared to other safety-net providers, according to a recent study out of Boston Children’s Hospital.

The study published last week in JAMA Network Open examined the operating margins of 4,219 safety-net hospitals. Researchers found that some safety-net criteria were associated with operating margin performance and hospital financial stability more so than others.

Safety-net hospitals are, generally, facilities that treat a disproportionate share of populations with low access to healthcare, including Medicaid and uninsured patients. However, safety-net status may also be defined based on the location of the hospital, its provision of essential services (e.g., inpatient psychiatric, substance use, and burn care), patient demographics, hospital finances, and community investment.

Hospitals that meet some or all of these criteria are typically eligible for government financial assistance through the Disproportionate Share Hospital (DSH) program. However—and complicating the safety-net definition matter further—individual states can set DSH payment distribution policy through state Medicaid programs.

Researchers from Boston Children’s explained in the study that there is significant variation in determining how hospitals receive Medicaid DSH payments. A recent study in Health Affairs also found that almost a third of Medicaid DSH payments were allocated to hospitals that did not meet a given definition of a DSH facility, and a small percentage went to hospitals that met none of the DSH definitions.

“Many hospitals rely on these payments for fiscal stability, and planned reductions to federal DSH funding over the coming years may further complicate these distribution patterns and financially strain [safety-net hospitals],” the researchers wrote.

Their study found that safety-net hospitals with both the highest levels of uncompensated care and the highest levels of undercompensated care or area disadvantage had the lowest median operating margin. In contrast, neither critical access hospital (CAH) and sole community hospital (SCH) status nor higher numbers of essential community services were linked to operating margin performance.

The study defined area disadvantage by Area Deprivation Index (ADI), a measure that ranks neighborhoods by relative socioeconomic disadvantage and includes factors such as income, education, employment, and housing quality. Undercompensated care was defined using the Medicare DSH index, which represents the sum of a hospital’s proportions of patients with Medicare Supplemental Security Income among all Medicare patients plus those with Medicaid insurance among all non-Medicare patients.

According to the study, the top quintiles of ADI (−3.9 percentage points), DSH index (−6.2 percentage points), and uncompensated care (−3.4 percentage points) were independently associated with a lower operating margin.

Hospitals in the top quintile of uncompensated care, DSH index, and ADI also had higher levels of financial instability.

The findings spell trouble for healthcare’s safety net since many safety-net hospitals, by most definitions, have higher levels of uncompensated care, undercompensated care, and area disadvantages.

“Given the role these hospitals serve for their communities, the implications of such closures would include outsized impacts on patient care among disenfranchised and systematically marginalized communities,” the study stated. “Even if they remain in operation, hospitals with poor financial health have poorer safety and quality outcomes.”

Incorporating quantitative safety-net hospital measures into government financial assistance programs such as DSH may better capture both financial risk and community support, researchers said. Shifting from traditional cut-off to scaled models for assistance distribution could also better support the safety net, they added.

“Targeting funds to hospitals with the greatest safety net mission has the potential to improve the financial health of institutions charged with providing the most care to marginalized groups,” the study concluded.