Date: March 30, 2000
Contacts: Neil Tickner, Media Relations Officer
Kathi McMullin, Media Relations Assistant
(202) 334-2138; e-mail <>

Health Care Safety Net Strained By Shrinking Income and Growing Responsibility

WASHINGTON -- Rising numbers of uninsured patients, together with changes in Medicaid policies and cutbacks in government subsidies, are putting unprecedented pressure on the nation's health care safety net, says a new report from the Institute of Medicine (IOM) of the National Academies. It recommends a new government initiative, in the form of competitive grants, to bolster this diverse set of health care institutions that provides care to tens of thousands of the nation's poor and uninsured. The report also calls for the creation of a new government oversight body to monitor and assess the condition of safety net providers and thoroughly review the impact of federal and state policies on the system.

"In the absence of universal, comprehensive health coverage, we have come to rely on the safety net to catch some of the nation's most vulnerable populations," said Stuart Altman, professor of national health policy at Brandeis University, Waltham, Mass., and chair of the committee that wrote the report. "These health care providers fulfill a critical role, and the government must be there to help them."

In some communities the health care safety net is highly organized; in others it functions as a loose collection of institutions. At the center of this makeshift system are what the report calls the "core safety net providers" – public hospitals, community health centers, local health departments, rural health clinics, as well as special service providers such as AIDS and school-based clinics. To stay in business, many of these facilities depend on a patchwork of grants and subsidies that have become increasingly uncertain and insufficient.

Nearly one of every five Americans – an estimated 44 million – is uninsured. Between 1988 and 1998 the number of uninsured rose by almost 20 percent. A growing share of those without coverage or the ability to pay are turning to core safety net providers for treatment, the report says. These new responsibilities come at a time when many of these facilities face operating losses, largely the result of changes in Medicaid policy; an erosion of government subsidies; and an increasingly competitive health care environment.

Given these intensifying pressures, the federal government should launch a new, targeted financial initiative to support key safety net providers, the committee said. Competitive three-year grants could pay for facility improvements that would help providers strengthen their ability to survive, as well as pay for medical services provided to the most vulnerable populations. To win these grants, providers would have to demonstrate need and a commitment to caring for the uninsured.

While Congress and the administration would determine the size of this initiative, the committee estimated a minimum cost of $2.5 billion over five years. Money for this could come, in part, from the federal budget surplus and unspent funds from the federal-state children's health insurance program and other insurance expansion programs. This initiative would build upon a demonstration program established by Congress last year.

The report also recommends the creation of a government oversight body – one that is independent, nonpartisan, and expert – to assess the health care needs of the uninsured and to monitor the financial stability of the safety net. No single entity in the federal government currently has this responsibility. However, the committee did not specify an administrative home for such a body.

To avoid a loss of core safety net providers, policy-makers should explicitly consider the impact of recent changes to the Medicaid program on these facilities and the patients they serve, the committee said. Additionally, federal programs and policies intended to support the uninsured and other vulnerable populations should be reviewed for effectiveness in meeting their stated objectives.

Medicaid Managed Care

Changes to the Medicaid system have hurt many safety net providers, concludes the report. Medicaid -- the joint federal-state health insurance program for the poor -- represents the largest single revenue source for safety net providers, accounting for about one-third of their income. It has been one of the financial underpinnings of the safety net, a "silent subsidy" that helps pay overhead and frees up limited grant money to provide direct services to a greater number of the uninsured.

Over the past several years, many states have converted their Medicaid programs to managed care. Instead of paying providers for each service they perform, they are now paid a fixed amount for each patient. A competitive Medicaid managed care system has the potential to improve the quality of care, and give patients a choice of where to seek treatment, the committee said. But it also found that many core safety net providers have suffered because the new payment rates often are lower, and in some cases inadequate.

The competition created by Medicaid managed care also has led to patients being siphoned away from the safety net providers. When states began making the shift, other medical systems decided to pursue this new stream of revenue. The committee found that while patients did gain greater choice, safety net providers lost 6 percent of their Medicaid primary care patients to competitors between 1995 and 1998. Public hospitals have lost even more of their patients, mainly low-risk maternity cases. Some of the new players have since withdrawn from the Medicaid market, citing inadequate payment levels and burdensome administrative requirements. But even in cases when patients came back to safety net providers, they still suffered from lower payments and reduced revenues.

Eroding Subsidies

Because of changes in federal subsidy programs, safety net providers also face the erosion of this important source of revenue. The Balanced Budget Act of 1997 phases out over five years a subsidy under which federally funded primary care health clinics often were paid for services at an above-market rate. So far, the subsidy levels have dropped 5 percent, although in 1999 Congress put a two-year moratorium on the cuts and extended the phaseout period until 2005.

Another provision of the Balanced Budget Act of 1997 cuts payments intended to assist hospitals that serve low-income patients. These reductions will total $10.4 billion over five years. At the same time, these institutions are treating more uninsured patients. For example, the report cites a study of 39 public hospitals that lost 12 percent of their Medicaid business -- the paying customers -- between 1993 and 1997, while the numbers of those without insurance rose by 6 percent. Local subsidies in some communities have increased slightly, but these increases in no way make up for other federal and state cuts, or the increased demand for services.

Safety Net Adaptations

To adapt to their changing environment, many core safety net providers have made improvements and emulated the competition -- bolstering operating efficiency, administrative and information systems, and customer service, the committee said. Some have forged new alliances or formed networks designed to make them more full-service. Another strategy has been to broaden the patient base to include those with better insurance coverage -- balancing the provider's survival against its traditional mission of serving the neediest populations. Those local health departments unable to operate under Medicaid managed care have reduced their clinic operations, concentrating instead on broader public health concerns.

The study was funded by the Health Resources and Services Administration, U.S. Department of Health and Human Services. The Institute of Medicine is a private, nonprofit institution that provides health policy advice under a congressional charter granted to the National Academy of Sciences. A committee roster follows.

Read the full text of America's Health Care Safety Net: Intact but Endangered for free on the Web, as well as more than 1,800 other publications from the National Academies. Printed copies are available for purchase from the National Academy Press Web site or at the mailing address in the letterhead; tel. (202) 334-3313 or 1-800-624-6242. Reporters may obtain a pre-publication copy from the Office of News and Public Information at the letterhead address (contacts listed above).

Office of Health Policy Programs and Fellowships

Committee on the Changing Market, Managed Care,
and the Future Viability of Safety Net Providers

Stuart H. Altman, Ph.D.* (chair)
Sol C. Chaikin Professor of National Health Policy
Heller Graduate School for Social Policy
Brandeis University
Waltham, Mass.

John G. Bartlett, M.D.*
Professor of Medicine, and
Chief, Division of Infectious Diseases
Johns Hopkins University School of Medicine

Raymond J. Baxter, Ph.D.
Executive Vice President
The Lewin Group
Falls Church, Va.

John Billings, J.D.
Associate Professor and Director of Health Research Program
Robert F. Wagner Graduate School of Public Service
New York University
New York City

Patricia A. Gabow, M.D.
Chief Executive Officer and Medical Director
Denver Health and Hospital Systems, and
Professor of Medicine
Division of Renal Disease
University of Colorado School of Medicine

Mary L. Hennrich, R.N., M.S.
Chief Executive Officer
CareOregon Health Plan Inc.

Sandral Hullett, M.D., M.P.H.*
Executive Director
West Alabama Health Services Inc.

Thomas G. Irons, M.D.
Professor of Pediatrics, and
Associate Vice Chancellor for Health Sciences
East Carolina University School of Medicine; and
Greenville, N.C.

Joyce C. Lashof, M.D.*
Associate Chair of the Editorial Board
UC Berkeley Wellness Letter, and
Professor Emerita
School of Public Health
University of California

Patrick H. Mattingly, M.D.
Senior Consultant
Picker Institute

Carolina Reyes, M.D.
Associate Director
Division of Women's Health Policy and Research, and
Maternal-Fetal Medicine Attending Physician
Department of Obstetrics and Gynecology
Cedars-Sinai Medical Center
Los Angeles

Cheryl J. Roberts, J.D.
Director of Managed Care
Virginia Department of Medical Assistance Services

Stephen A. Somers, Ph.D.
President and Chief Executive Officer
Center for Health Care Strategies Inc.
Princeton, N.J.

Ann Zuvekas, D.P.A.
Senior Fellow
Center for Health Services Research and Policy
School of Public Health and Health Services
George Washington University Medical Center
Washington, D.C.


Marion Ein Lewin, M.A.
Study Director

* Member, Institute of Medicine