Challenges Facing the Health Care Safety Net

February 2008

The U.S. safety net provides care to individuals regardless of their ability to pay. Because the safety net is dependent on a variety of sources of revenue-including local, state, and federal funds-state and federal policies may influence uncompensated care funding and the ability of the safety net to serve vulnerable populations.

The recent closure of a Los Angeles safety net hospital and the current financial crisis at an Atlanta safety net hospital typify the challenges affecting the health care safety net's ability to provide care to the nation's most vulnerable populations. The health care safety net is composed of providers, hospitals, and community health centers (CHCs) that by mission or federal mandate provide care to individuals-often uninsured, underinsured, or Medicaid beneficiaries-who are unable to pay for medical care.1 CHCs provide primary care services, while safety net hospitals provide inpatient or emergency indigent care and often trauma or ambulance services that benefit the larger community.2 As state and federal public policymakers look to contain health care costs and expand coverage, they often reallocate funds away from the safety net. Thus, recent proposals to reduce Medicaid funding, workforce shortages, and state initiatives to increase coverage may unintentionally threaten the viability of the safety net and its ability to provide care.

CHCs face workforce shortages and care coordination challenges  

Federally qualified CHCs are required to provide select primary care services, regardless of a patient's ability to pay. Since 2002, the Bush administration has invested more than $645 million in CHCs and has expanded access to primary care to 4.5 million individuals.3 Although greater funding has increased the number of CHC sites and patients, CHC administrators find it challenging to recruit physicians to work in CHCs and note that a large portion of the allocated funds are used to recruit and compensate medical professionals.4 Moreover, although CHCs provide primary care, their patients-particularly uninsured and Medicaid patients-often do not receive necessary follow-up, diagnostic, specialty, or ancillary care, especially for mental health and substance abuse services, due to their inability to pay.5 Thus, patients with acute or emergent needs are often forced to seek care at safety net hospitals. To improve access to primary care, some safety net hospitals have also established CHCs on their campuses to provide outpatient services.

Decreased funding and competition threaten safety net hospitals

Safety net hospitals also face a variety of threats, including inadequate funding and an inability to compete for private pay patients in their primary service areas. Safety net hospitals may be public or private not-for-profit, but are characterized by their mission to provide medical services to individuals regardless of ability to pay.7 HCFO grantees, Gloria J. Bazzoli, Ph.D., of Virginia Commonwealth University, Richard C. Lindrooth, Ph.D., of the Medical University of South Carolina, and Romana Hasnain-Wynia, Ph.D., originally at the American Hospital Association's Health Research and Educational Trust and now at Northwestern University, studied the effects of the 1997 Balanced Budget Act (BBA) and market factors on the health care safety net. In particular, they studied the impact of the BBA's provisions designed to slow the growth of Medicare payments and the formation of hospital networks on hospitals, the structure of the safety net, and the quality of care provided by safety net hospitals. Bazzoli and colleagues found that hospitals that experienced financial challenges as a result of the BBA provided less uncompensated care. Moreover, the provision of uncompensated care by non-core safety net hospitals decreased and more of the provision of uncompensated care fell to safety net hospitals. 

In 2004, the National Association of Public Hospitals and Health Systems (NAPH) reported that uncompensated care accounted for 21 percent of its members' total costs, compared to the average 5.5 percent of total costs for all hospitals.8 Moreover, one half of the NAPH membership reported negative operating margins.9 While hospital administrators often try to subsidize uncompensated care through payments from privately insured patients, only about 20 percent of their revenue is generated by private payers.10 Some safety net hospital administrators are unable to compete with nearby hospitals for privately insured patients because they do not have the resources to make capital investments or market hospital services.11

Federal cuts and state expansion efforts may positively or negatively impact safety net viability

Safety net hospitals receive funding for uncompensated care from a variety of sources, including state and local governments, Medicaid, Medicare, indirect medical education (IME) payments, and disproportionate share hospital (DSH) payments.12 As both CHCs and safety net hospitals rely heavily on Medicaid as a source of revenue, state and federal legislation can impact the financial viability of the providers.13 Recently, the Centers for Medicare and Medicaid Services (CMS) proposed to reduce Medicaid spending by $11 billion dollars over the next five years.14 In an effort to reduce unnecessary costs, the rules would eliminate federal matches for graduate medical education (GME) and would restrict federal Medicaid matching funds received by government-owned hospitals to the real cost of the medical service.15 Critics of the proposal contend that such cuts would increase pressure on the safety net, decrease access to care for the poor, and jeopardize physician GME.16

Moreover, state's efforts to increase coverage through the expansion of existing public programs-such as Medicaid and SCHIP-may either detract from safety net funding (as some states redirect Medicaid funds to coverage initiatives) or relieve pressure on the safety net by decreasing the number of uninsured requiring safety net services. Which impact is more likely remains to be seen. Some coverage expansion efforts, for example, are targeted to specific populations, such as children and women, and may exclude individuals who rely on safety net services for care. HCFO grantee Anthony T. Lo Sasso, formerly of Northwestern University and now at the University of Illinois at Chicago, examined whether the safety net "crowded out" (replaced) either public or private insurance for children below the age of 14 and childless adults between the ages of 18 and 64.  He found that there was minimal crowd out of children, likely due to SCHIP and Medicaid, and that there was some crowd out of childless adults for CHC services, but less so for safety net hospital services. (For more complete research findings, please view 

Growing number of uninsured will likely increase demand for safety net services

The number of uninsured is expected to increase as more people are unable to afford private insurance and federal policymakers limit eligibility and funding for public insurance.17 As such, the demand for safety net care, including prescription drugs, mental health, dental care, and specialty services, is likely to increase.18 Without the ability to cope with financial and workforce constraints, the safety net may not be able to provide care to a growing percentage of the U.S. population. As Marion E. Lewin and Raymond J. Baxter note, "Health care reform and insurance expansion are again front-burner issues for states and the federal government. As part of that laudable goal, states and communities must look at ways to ensure that the poorest and most vulnerable citizens are not left worse off than they were, as a result of these changes."19

The following selected grants from HCFO's portfolio may help inform policymakers about how community and policy factors influence the safety net. For other grants related to health care costs see

Title: The Impact of Pay for Performance on Hospitals that Care for Minorities and the Poor
Institution: Harvard University School of Public Health
Principal Investigator: Ashish Jha, M.D., M.P.H.
Duration: February 2008 - July 2008

The researchers will examine the impact of financial incentives to improve quality on hospitals that care for minority or other underserved populations.  The Centers for Medicare and Medicaid Services have implemented pay for performance (P4P) demonstrations, and are considering implementing P4P nationally.  However, the impact of P4P has not been widely evaluated.  Hospitals that care for underserved populations may have greater potential for quality improvement; conversely these facilities lack the tools and resources to improve quality and compete for the additional resources.  The researchers will examine changes in quality for hospitals in the Medicare Premier P4P Demonstration that serve disadvantaged populations (minority and poor); these changes will be compared with changes in hospitals in the demonstration that do not serve disadvantaged populations and with hospitals that serve disadvantaged hospitals not in the demonstration (and not subject to P4P).  The objective of the project is to provide more information about the impact of P4P on hospitals that serve disadvantaged populations, and help policymakers to design incentive systems that encourage higher quality care without disproportionately harming hospitals that care for these populations. 

Title: Effects of the Balanced Budget Act and Market Forces on the Health Safety Net
Institution: Virginia Commonwealth University
Principal Investigator: Gloria J. Bazzoli, Ph.D.
Duration: September 2001 - August 2004

The project assessed the effects of the 1997 Balanced Budget Act (BBA) and other important market factors on the U.S. hospital safety net. Specifically, the researchers examined: the local structure of the hospital safety net by examining the changing roles and involvement of hospitals in safety net care, the operation of safety net hospitals by studying staffing intensity, and the outcomes of care for indigent patients as measured by selected quality of care indicators. The discussion below summarizes policy relevant findings in each of these areas.

Structure of the Hospital Safety Net

The results demonstrate that certain hospitals reduced their indigent care involvement during the late 1990s and will likely continue to do so in the future. Specifically, the researchers found that uncompensated care was declining in hospitals that were not core safety net institutions to the market. Although not part of the core, the contributions of these hospitals add up, and thus, their cutbacks have a meaningful impact on core safety net institutions. They also found that non-safety net hospitals were cutting back on public health and specialty services commonly used by uninsured and poor patients, which may signal that these hospitals intend to reduce their future involvement in charity care activities. Finally, they found that voluntary safety net hospitals that felt greater fiscal pressures from Medicare BBA experienced particularly sharp declines in their provision of uncompensated care and that this effect varied by hospital market conditions. Overall, the findings of the study, in conjunction with those of other recent studies, suggest that the hospital safety net continues to be intact but is increasingly strained as indigent care becomes concentrated in a small set of core facilities. The policy implications from this analysis are that continued targeting of public support to hospitals that demonstrate a commitment to indigent care provision is justified as is continued scrutiny of not-for-profit hospital participation in local health safety nets.

Operation of Safety Net Hospitals

The researchers' analysis in this area suggests that non-safety net hospitals most susceptible to the provisions of the BBA experienced a decline in staffing ratios about twice the rate of non-safety net hospitals that were least susceptible to the BBA. The researchers were unable to detect an effect of the BBA on staffing at safety net hospitals. Thus, the BBA may have exacerbated the nursing shortage at non-safety net hospitals that are heavily reliant on Medicare patients because the financial effects of BBA resulted in lower wages, which in turn affects the supply of nurses. Safety net hospitals did not respond to the provisions of the BBA by cutting staffing, and this is likely due to the fact that about one-third of safety net hospitals are public.

Quality of Care in Safety Net Hospitals

A final area of inquiry relates to changing hospital quality of care for patients of safety net and non-safety net hospitals. Preliminary anaylsis found some evidence that core safety net hospitals had lower quality than non-safety net hospitals. They found no evidence that hospitals subject to greater financial pressure from Medicare had lower quality before or after the implementation of BBA. Nor did they find evidence that the relative quality of care at core safety net hospitals relative to non-safety net hospitals changed after BBA. The implications of these findings are that BBA did not adversely affect quality of care at safety net hospitals or hospitals most vulnerable to BBA financial pressure. The lower quality observed in core safety net hospitals may require more study, though, and potential intervention to assure the population served by these hospitals receives high quality care.

Title: The Safety Net and Employer-Provided Health Insurance
Institution: Northwestern University
Principal Investigator: Anthony T. LoSasso, Ph.D.
Duration: October 2001 - March 2004

There is extensive literature on the extent to which public health insurance coverage through Medicaid induces less private health insurance coverage. However, little is known about the effect of other components of the health care safety net in crowding out private coverage. The researchers' goal was to examine the impact of the health care safety net on the health insurance coverage of children. They conducted an individual-level analysis of health insurance coverage using data from the Current Population Survey for the years 1990-2000 combined with a long panel of state level data on hospital uncompensated care and free and reduced price care offered by Federally Qualified Health Centers (FQHCs). They focused on two distinct groups for the analyses: children aged 14 and under and single, childless adults aged 18 to 64.

Because measures of the safety net are likely to be confounded with insurance coverage, the researchers used an instrumental variables approach in estimating the impact of the safety net on health insurance coverage. The instruments for the measures of the safety net included measures of tax appropriations and state and local support received by hospitals and FQHCs, state Disproportionate Share payments, state uncompensated care pool dollars, and the amount of state budget surplus or deficit. They also controlled for Medicaid eligibility of sample members with standard techniques. By additionally including state fixed effects the researchers avoided the bias that occured in previous cross-sectional designs because of unobserved differences across states that resulted in, for example, high levels of both uninsurance and safety net dollars. Including state fixed effects let them restrict the analysis to the within-state variation in health insurance coverage and the health care safety net measures.

When the researchers omitted state fixed effects, they observed that high levels of hospital uncompensated care were associated with statistically significantly higher levels of uninsurance and lower levels of both public insurance and private insurance. Their results implied that a one standard deviation increase in hospital uncompensated care per population (a 46 percent increase) would be associated with a 3 percentage point increase in the uninsurance rate among children. However this result, which generally conforms to prior findings, did not control for unobserved state heterogeneity. When the researchers included state fixed effects, their results provided mixed evidence on the extent of crowding-out. Hospital uncompensated care does not appear to crowd-out health insurance coverage and health center uncompensated care appears to crowd-out private coverage for adults and, in some specifications, children.

Less crowd-out for hospital uncompensated care may be plausible given that most hospital uncompensated care pays for big ticket items rather than more routine care that individuals may think of when making coverage decisions. Most of the arguments about the exogeneity of their uncompensated care measures suggest that their estimates should overstate the extent of crowd-out. Similarly, the likely potential endogeneity concerns about their instruments would also suggest that they should overstate the extent of crowd-out. That the researchers did not find strong evidence of crowd-out suggests that the effects may be small if present. Further study of the determinants of uncompensated care provision is called for, and would shed light on the validity of potential instruments for uncompensated care.

Title: Uninsured in America: Individual and Community Factors
Institution: University of Washington
Principal Investigator: Barry Saver, M.D.
Duration: March 1999 - February 2001

Does an individual's community have an impact on the decision to purchase health insurance in the private market? A team of University of Washington researchers examined whether community-level characteristics, such as unequal income distribution, segregation in housing, and availability of safety net services, affect the decision to purchase private health insurance, as well as access to care of uninsured persons. Access was measured using estimates of services available to uninsured or vulnerable populations in the community (e.g., the community's "safety net"), as well as whether the availability of safety net services influences low-income individuals' and families' decisions about whether or not to purchase individual insurance. In addition, the researchers estimated the probability of purchasing individual insurance, delaying or not obtaining care, utilizing outpatient services, and having a regular source of care. They used the Community Tracking Study Household Survey, along with data from HCFA, the American Hospital Association, the Census Bureau, the Area Resource File, the Urban Institute's "Assessing the New Federalism" project, and George Washington University data on the percent of medically underserved persons served by federal and state funds or programs. The project's objectives were to: 1) assess how individual, community, and state-level factors affect the decision to remain uninsured or to purchase individual health insurance and whether those factors explain lower rates of individual insurance purchased by minorities; and 2) describe access problems experienced by the uninsured.

1 "What is a Safety Net Hospital?" National Association of Public Hospitals and Health Systems.
2 Regenstein, M., and J., Huang. "Stresses to the Safety Net: The Public Hospital Perspective." Kaiser Family Foundation, June 2005. Also see
3 Lee, C. "Community Health Clinics Flourish, but Doctors are Few." Washington Post, June 19, 2007. Also see
4 Ibid.
5 Cook, N., et al. "Access to Specialty Care and Medical Services in Community Health Centers." Health Affairs, Vol. 26, No. 5, September/October 2007.
6 Regenstein, M., and J., Huang. "Stresses to the Safety Net: The Public Hospital Perspective." Kaiser Family Foundation, June 2005. Also see
7 "What is a Safety Net Hospital?" National Association of Public Hospitals and Health Systems.
8 "How are Safety Net Hospitals Financed? Who Pays for 'Free Care?'" National Association of Public Hospitals and Health Systems, September 2004.
9 Zaman, O., et al. America 's Public Hospitals and Health Systems, 2004: Results of the NAPH Annual Hospital Characteristics Survey, Washington, DC: National Association of Public Hospitals and Health Systems, 2006.
10 NAPH Annual Survey of Members, 2004.
11 Dewan, S., and K., Sack, "A Safety-Net Hospital Falls into Financial Crisis." The New York Times. January 8, 2008. Also see
12 Regenstein, M., and J., Huang. "Stresses to the Safety Net: The Public Hospital Perspective." Kaiser Family Foundation, June 2005. Also see
13 Ibid.
14 Trapp, D. "Medicaid's Rule Changes are Drawing Fire," American Medical News. (November 19, 2007), Also see
15 Ibid.
16 Ibid.
17 "States Promoted Broader Coverage for Children in 2007, but Report that a Declining Economy Coupled with Lack of SCHIP Reauthorization and New Federal Rules Now Compromise Efforts to Reduce the Number of Uninsured." News Release, Kaiser Family Foundation, January 28, 2008. Also see
18 Lewin, M., and R., Baxter. " America 's Health Care Safety Net: Revisiting the 2000 IOM Report." Health Affairs, Vol. 26, No. 5, September/October 2007.
19 Ibid.