Podcast: A Disproportionate Share: A Complex Patchwork of Supplemental Payments

FULL TRANSCRIPT

00;00;01;00 – 00;00;07;26
Michael Shen
At the start of the COVID pandemic, the financial struggles of safety net hospitals became painfully apparent.

00;00;07;26 – 00;00;15;09
Reporter
As new cases of the coronavirus surge in the state of Florida, The Safety Net Hospital Alliance of Florida is stressing the importance of safety net hospitals.

00;00;15;09 – 00;00;22;15
Michael Shen
In the last episode, we explored how safety net hospitals provide essential care for those most in need. And today,

00;00;22;16 – 00;00;30;06
Reporter
Leaders in health care say providers serving communities with health and income disparities need lawmakers and the governor to support them financially.

00;00;30;07 – 00;00;33;12
Michael Shen
We’re going to talk about how we pay for that essential care.

00;00;33;12 – 00;00;36;23
Reporter
And I recognize that they were not receiving their fair share of funding.

00;00;36;23 – 00;00;39;29
Michael Shen
Care that’s oftentimes under compensated.

00;00;40;00 – 00;00;47;00
Spokesperson
They do not get the support they need to take care of the people that we expect them to take care of.

00;00;47;02 – 00;00;54;29
Michael Shen
Care for low income people delivered in large part through our safety net system.

00;00;58;07 – 00;01;29;24
Michael Shen
You’re listening to a three part series, “The Story of America’s Safety Net Hospitals and How We Pay for Them” from Health Affairs. I’m Michael Shen, a primary care doctor in New York City’s public hospital system. Today, part two, we’ll look at the complex patchwork of supplemental payments that keeps our safety net hospitals just above water. This is “A Disproportionate Share.”

00;01;31;15 – 00;01;58;08
Michael Shen
I think the first step to understanding how we pay for safety net hospitals is to understand some basics about hospital financing, which can get a little complicated. Let’s say you’re a hospital. What are some of the costs to staying open? Well, most of your money goes to paying your staff their wages. You also have to purchase medical supplies, pay for administrative overhead and pay facility costs just to keep the lights on.

00;01;58;28 – 00;02;26;13
Michael Shen
To do this, hospitals, like any business, must generate revenue. As a hospital, the vast majority of the money you make comes directly from patient care. When a hospital takes care of a patient, they send a bill to the payer, which is the patient’s insurance. And different payers pay all sorts of different rates for the same care. In general, people are covered by either the government through Medicare and Medicaid or by private commercial insurance.

00;02;27;04 – 00;02;49;25
Michael Shen
So what about people who have no insurance? Well, currently 8% of Americans are uninsured. These folks technically have to pay the hospital back themselves out-of-pocket. But given how pricey American health care is, that usually isn’t guaranteed for a hospital. And so uninsured care is one source of what we call uncompensated care.

00;02;49;26 – 00;02;58;04
Reporter
Uncompensated care is looking at care that you’re not reimbursed for, plus Medicaid shortfalls.

00;02;58;04 – 00;03;03;14
Michael Shen
To get a better sense of safety net hospital financing, I spoke to Beth Feldpush.

00;03;03;15 – 00;03;07;22
Beth Feldpush
Senior Vice President for Policy and Advocacy at America’s Essential Hospitals.

00;03;07;22 – 00;03;25;07
Michael Shen
America’s Essential Hospitals is a group that represents over 300 safety net hospitals across America, and these hospitals deliver a lot of uncompensated care, which is when a hospital treats someone but doesn’t get paid enough or at all to cover the cost.

00;03;25;14 – 00;03;38;05
Beth Feldpush
So we represent about a 10th of American hospitals, but our members average uncompensated care amount is 53 million compared to 8 million for the average U.S. hospital.

00;03;38;07 – 00;03;52;05
Michael Shen
So a lot of that amount comes from providing uninsured care, but the rest is actually what we call Medicaid/Medicare shortfall, which is because government insurance almost always falls short of paying for the full cost of care.

00;03;52;06 – 00;04;04;23
Beth Feldpush
The last data that I saw, Medicaid and Medicare, say, paid an average of 85 to 90% of a hospital’s costs of caring for patients. So not the entirety of the cost.

00;04;04;24 – 00;04;14;19
Michael Shen
That’s a loss of about 10 to 15% for those patients. And for most hospitals, that’s balanced out by the fact that private insurers pay more than the cost of care.

00;04;14;20 – 00;04;22;22
Beth Feldpush
Commercial payers were picking up more of that share, so commercial payers paid about 140% of the cost of caring for a patient.

00;04;22;22 – 00;04;31;19
Michael Shen
And when a hospital uses those extra funds from private insurance to offset the cost of uncompensated care, that’s called cost shifting.

00;04;31;23 – 00;04;41;00
Beth Feldpush
Sort of like our own salaries, right? We don’t get, you know, a portion of it for groceries and a portion of it for housing. It all goes into your bank account and then you use it for what you need it for.

00;04;41;04 – 00;04;56;26
Michael Shen
So you can imagine that a hospital with a favorable payer mix, one that’s predominantly private insurance, is going to make a lot of extra money from the care they provide and have better financial margins at the end of the year. But for safety net hospitals,

00;04;56;26 – 00;05;13;12
Beth Feldpush
You can see how if you are a hospital who has upwards of 70 or 80% government payers, that you can’t cost shift very well with just that slim amount of private insurance that you have. So your financial challenges are just tougher from the beginning.

00;05;13;21 – 00;05;24;00
Michael Shen
And this is why safety net hospitals in America are barely staying afloat. After paying the costs of delivering care, they have very little left over.

00;05;24;02 – 00;05;42;27
Beth Feldpush
Essential hospitals have slimmer operating margins than other U.S. hospitals. In 2020, the average U.S. hospital had an operating margin of 7.7%. But for our members, essential hospitals, they had an average margin of 3.2%. So less than half of the average U.S. hospital.

00;05;42;28 – 00;05;55;27
Michael Shen
And I was curious what the margins of my hospital were, New York City Health and Hospitals. So I spoke again to Matt Siegler. You might remember him from the first episode. He’s our Senior Vice President of Managed Care and Patient Growth.

00;05;55;27 – 00;06;04;18
Matt Siegler
You know, I think last year we’re a $10 billion institution and we had, you know, a less than 1% margin. I mean, we just run razor thin.

00;06;04;18 – 00;06;21;22
Michael Shen
And there’s another number that can also give you a picture of how precarious the situation is for safety net hospitals. That number is called “cash on hand.” It basically represents how long a hospital can run if all revenue were to cease, for example, like in a natural disaster.

00;06;21;23 – 00;06;29;20
Beth Feldpush
So, you know, I have a member hospital who often has kind of single digits, less than ten days cash on hand.

00;06;29;22 – 00;06;48;24
Michael Shen
I know my hospital has about 30 days, cash on hand. And just for comparison, it wouldn’t be crazy for a wealthy hospital to have 3 to 6 months of cash on hand. Now, one of my motivations for even making this podcast was wondering just how my hospital provides the crucial care it does with such little room for error.

00;06;49;12 – 00;06;56;07
Michael Shen
And Matt says it’s all about doubling down on the safety net mission and basic hospital operations.

00;06;56;08 – 00;07;23;19
Matt Siegler
Being a safety net hospital as much as possible should not let you drift into the space of, well, we don’t have to have as high expectations of ourselves. Right? We don’t have to have kind of basic supply chain ordering process down, right? We’re allowed to have a little bit of, you know, inefficiency and things. I think we have to hold ourselves to an even higher standard in safety at hospitals and public institutions because we’re accountable to the communities that we serve.

00;07;23;19 – 00;07;26;05
Matt Siegler
And we have a thinner margin to work with.

00;07;31;13 – 00;07;49;13
Michael Shen
So at this point of the series, I’m going to jump into some of the more nitty gritty ways that we pay for safety net care. And what’s really interesting to me is that to even make these thin margins happen requires layers and layers of supplemental payments from the government, and it gets really confusing.

00;07;49;16 – 00;08;11;08
Beth Feldpush
I often describe seeking financing as sort of a Jenga tower of financing. So it’s these layers sort of built up, they’re stacked up on one another. It’s not always, always the best built structure. And in fact, you know, we think like, who would ever put this many pieces together? Why? Why can’t you just pay what they need to be paid?

00;08;11;08 – 00;08;15;09
Michael Shen
But all of those pieces are incredibly important to the hospitals.

00;08;15;11 – 00;08;27;23
Beth Feldpush
It all gets patched together to help these hospitals make their mission. But if you start to pull bricks or planks out of that structure, you can only take so many out before the whole thing crumbles down.

00;08;27;29 – 00;08;49;21
Michael Shen
So we already talked about how Medicaid and Medicare pay less than the cost of care. Remember that in the last episode we established that Medicaid was always a structurally disadvantaged program. And one of the ways that plays out is that Medicaid tends to pay the least out of all insurance coming in at about 70% of what Medicare generally pays.

00;08;50;03 – 00;08;54;06
Michael Shen
And these shortfalls are something that the original policymakers realized.

00;08;54;07 – 00;09;08;26
Beth Feldpush
Acknowledging that those Medicare and Medicaid payment rates are low, over the years, the government has instituted various types of supplemental payments in both Medicare and Medicaid to try to close that gap.

00;09;09;04 – 00;09;16;18
Michael Shen
In the 1980s, they created the Disproportionate Share Hospital program, which will refer to as DSH payments.

00;09;16;19 – 00;09;28;06
Beth Feldpush
So under the Medicare program, there are Medicare disproportionate share payments, and those are payments for hospitals that have that larger share of low income individuals.

00;09;28;06 – 00;09;36;22
Michael Shen
These extra funds from Medicare go to hospitals with high proportions of people in need so that they can cost shift better. Medicaid also has a DSH program.

00;09;36;22 – 00;09;49;26
Beth Feldpush
Same purpose as Medicare DSH, just calculated a slightly different way, but also helps cover that payment gap between lower payment rates for Medicaid based payments and cost.

00;09;49;26 – 00;10;06;15
Michael Shen
And so this is basically policymakers saying we know that the base payments of Medicaid don’t pay much at all. So we’re going to add on this DSH payment as supplemental funding to get reimbursement just that much closer up to the cost of care. But they also realize that even Medicaid DSH is,

00;10;06;20 – 00;10;12;24
Beth Feldpush
Still not enough. So beyond that, there are other supplemental payments, such as upper payment limits.

00;10;12;24 – 00;10;22;15
Michael Shen
The upper payment limit, or UPL, is basically a policy that says that states can look at how much less Medicaid is paying than Medicare and provide funds to make up that gap.

00;10;22;15 – 00;10;26;24
Beth Feldpush
Which help bring Medicaid payments closer to Medicare costs.

00;10;26;25 – 00;10;49;07
Michael Shen
So already, as you can see, we have so many different little Jenga blocks that we’re piecing together to make up this tower of funding for safety net hospitals. To review, there’s the Medicare DSH. There’s Medicaid DSH. And then there’s UPL payments. And then there’s payments for another pretty essential function of safety net hospitals. And that’s teaching.

00;10;49;08 – 00;11;15;00
Beth Feldpush
Because we know that teaching hospitals incur higher costs, and as I mentioned, essential hospitals do a lot of training for tomorrow’s workforce. So also under Medicare, they rely a lot on either direct graduate medical education payments, which pay directly to train new physicians or indirect medical education payments, which just reflect kind of higher costs that teaching hospitals have.

00;11;15;16 – 00;11;22;28
Beth Feldpush
There’s some inefficiencies sometimes in that teaching. So those indirect costs are also important to help cover that spread.

00;11;22;29 – 00;11;37;21
Michael Shen
I think it’s worth it to mention here that rural hospitals and critical access hospitals also get their own specific forms of supplemental funding. And so with all these different little blocks coming together, how fragile is that tower?

00;11;37;21 – 00;12;06;09
Beth Feldpush
One of our policy challenges is when Congress goes to make cuts to programs. So they’re looking for funding for something new. And so they’re looking to see where they can cut back. They’ll often take kind of small haircuts from different programs, thinking that they’re not making big changes. But for our hospitals that are reliant kind of on that crazy tower of payments and piecing it together, you know, they’re impacted by all of those little cuts.

00;12;06;09 – 00;12;13;02
Beth Feldpush
And it’s like pulling out bricks from that Jenga tower. And you can only pull so many of them out before the whole thing falls over.

00;12;13;02 – 00;12;18;20
Michael Shen
And I also wondered what would be the actual practical fallout of taking away some of those bricks.

00;12;18;21 – 00;12;30;12
Beth Feldpush
So if you took away Medicaid DSH, just Medicaid DSH, our members average margins would drop from 3.2%, positive 3.2%, to -0.1.

00;12;30;14 – 00;12;54;19
Michael Shen
So safety net hospitals are really just living on the edge. And as I was interviewing Beth, I kind of had this realization, like if you just look at the numbers, when you add the hodgepodge of Medicaid payments together, the base payment plus the supplemental DSH, plus the UPL, Medicaid actually ends up paying the same or even a little more than Medicare for the same services.

00;12;55;00 – 00;13;16;22
Matt Siegler
And my mind is saying, well, why don’t you just, like, pay, you know, like reasonable rates for Medicaid, and hospitals and safety net providers hop through all these hoops in order to justify, you know, serving communities in need. Like, it just doesn’t make sense to me.

00;13;17;00 – 00;13;21;12
Beth Feldpush
Yeah, you are correct. It does not make any sense. Yeah.

00;13;22;01 – 00;13;27;01
Michael Shen
So why doesn’t Medicaid just pay a little bit more and save everyone the trouble?

00;13;27;19 – 00;13;53;23
Beth Feldpush
So when the Medicaid program was established, even historically, the payment rates were very low, lower than Medicare, lower than commercial insurance. And so right from the start, we baked into the payment system this notion that it’s okay to pay less for care delivered to poor patients. And in our country, because of a history of systemic racism, poor patients are often patients of color.

00;13;54;15 – 00;13;58;28
Beth Feldpush
So it also was acceptable to pay less for services delivered to patients of color.

00;13;58;29 – 00;14;06;07
Michael Shen
And it kind of all just goes back to this notion in the law of who is deserving and undeserving of health care.

00;14;06;15 – 00;14;15;08
Beth Feldpush
And we have not broken that cycle on the payment policy, not even some 50, 60 years later now.

00;14;15;08 – 00;14;20;18
Michael Shen
And the fragility of funding has a real impact on the ground for these hospitals.

00;14;20;21 – 00;14;48;23
Beth Feldpush
Those inequities continue to be baked into the system. So if you have a hospital that’s reliant on these lower payments for low income patients or people of color, you’re not going to have a facility perhaps that’s as upgraded or modernized as other hospitals if you don’t have the funding to put into your capital improvements or infrastructure or even the latest medical technology, then you can’t afford to build it.

00;14;49;01 – 00;14;52;08
Michael Shen
And this also makes it harder for safety nets to attract health care workers.

00;14;52;08 – 00;15;09;05
Beth Feldpush
Because they often can’t compete with salaries from some better financed health systems. You know, I think there’s not many of us that would want to come work for an organization whose financial vitality and even longevity is kind of up and at question every day.

00;15;10;04 – 00;15;31;01
Michael Shen
And this is just my opinion, but I think that the most regrettable results of poorly financing our safety net is really a cultural one that, in the American mind, the image of a safety net is now a place you don’t really want to be. But it’s so ironic to me because safety net hospitals are much more than that.

00;15;31;16 – 00;15;35;27
Michael Shen
They’re the ones that catch the American people when they fall through the cracks.

00;15;36;06 – 00;15;51;26
Beth Feldpush
And so we have created a cycle where, because of the history of this, we decided as a society this was okay to bake in these inequities so that poor patients and patients of color go to poor hospitals with worse facilities.

00;15;52;04 – 00;16;19;11
Michael Shen
And that, that’s what I was seeing when I was a medical resident going between the wealthy hospital and the safety net that sit right across the street from each other. In my mind, it was a modern day form of segregation, segregation that is silently and structurally built into our health insurance system and the way that we deliver care in America.

00;16;22;02 – 00;17;02;26
Michael Shen
In our final episode, are DSH payments at risk of being cut? We’ll talk about some of the very real policy challenges to funding safety net hospitals and also take a look at the future. What kinds of solutions are out there? Thanks for listening. This is “A Disproportionate Share.” See you next time.