Safety-Net Hospitals Brace for Cut to Federal Subsidies

Hospitals that treat a disproportionately large number of patients who cannot pay for some or all of their care, known as safety-net hospitals, have relied on subsidies provided by the federal government to help defray costs for more than 20 years. But that funding is set to decline starting in 2014 with the full implementation of the Affordable Care Act, the federal health care reform legislation now known as Obamacare.

The assistance is known as DSH payments, for disproportionate share hospital, and the program is critical to keeping the hospital's finances in the black, said Michael Harristhal, vice president of public policy and strategy at Hannepin County Medical Center in Minneapolis. "That's been a very important part of our total revenue stream," he said.

Harristhal said that the annual revenue for his medical center, Minnesota’s largest safety-net hospital, approaches $700 million, and about $30 million of that comes from the DSH program. Even though those payments amount to less than 5 percent of the hospital's revenue, he said they help Hennepin break even.

The $11 billion DSH program provided $75 million to Minnesota hospitals last year, including children's hospitals in Minneapolis and St. Paul, the University of Minnesota Medical Center and Regions Hospital in St. Paul.

The federal healthcare law won't eliminate DSH payments altogether, but it cuts them by half over five years. The reductions begin in 2014, the same year the law requires most Americans to obtain health insurance or pay a penalty. The theory is that hospitals will need fewer DSH subsidies because they'll be treating a reduced number of patients who lack insurance.

University of Minnesota health economist Lynn Blewett said the state's own history may provide some reassurance to safety net hospitals.

"We did some work a number of years ago with the MinnesotaCare program and saw as MinnesotaCare expanded, levels of uncompensated care were reduced," Blewett said. "So there is some evidence that as you get more people covered, that there should be less need for free care provided by hospitals."

Still, Blewett said, there is great uncertainty about how large a cut Minnesota's safety net hospitals will face.

The law calls for cutting half a billion dollars from the DSH program starting in about a year, but the Obama administration has yet to decide which states will see the largest cuts.

Scott Leitz, the assistant commissioner of Minnesota’s Department of Human Services, said state hospitals will still need help. The department estimates there will be 200,000 people in Minnesota who lack health insurance in 2016, either by choice or through exemptions in the health law. The state may need to reallocate the DSH payments, he said.

"We'll have to make an analysis around who is seeing the uninsured, and are we allocating the dollars today properly or do we need to make any changes," Leitz said.

For now, safety net hospitals can only wait to find out how much of their own safety net will survive.