Disproportionate Share Hospital Payments

When DSH payment provisions were enacted, they were intended to offset the costs of uncompensated care provided by community hospitals and other hospitals caring for a disproportionate share of low-income individuals, including uninsured patients and patients covered by Medicaid. Because Medicaid's reimbursement levels were low and because these hospitals also tended to serve few privately insured individuals, they were unable to shift or otherwise subsidize the costs of uncompensated care.

From the late 1980s to the mid-1990s, the number of uninsured individuals increased and the total costs of uncompensated care climbed steadily (see Figure 4.1, Table 4.2). After passage of OBRA (Omnibus Budget Reconciliation Act) 1987 DSH provisions, DSH payments grew from approximately $400 million in 1988 to $19 billion in 1995, with the federal government's share of these payments in 1995 approaching $11 billion (Holahan et al., 1997).

The DSH funds, however, have not always been targeted to hospitals serving low-income individuals. Rather than helping safety net hospitals solve their financial problems, some states used the DSH funding to substitute for other state expenditures through intergovernmental transfers and other methods (Holahan et al., 1997). Only about two-thirds of the funding reached safety net hospitals (Coughlin and Liska, 1997; Ku and Coughlin, 1995).

Congress capped DSH payments at 12 percent of Medicaid program expenditures in 1991. In the Balanced Budget Act of 1997, future federal funding for DSH was reduced by a projected $10 billion. The savings helped Congress to finance part of the $24 billion in allocations set aside over five years for states to implement children's insurance programs (the State Children's Health Insurance Program, or SCHIP). A limited amount of SCHIP funding (up to 10 percent) may be spent on administrative costs, outreach, provider subsidies (including safety net), and direct services. Although safety net providers believe that efforts to increase the number of insured Americans are essential, these efforts are unlikely to eliminate the need for subsidies for the uninsured. Even if SCHIP is fully implemented, millions of children will remain uninsured, and the numbers of uninsured adults are likely to continue to increase.

For example, the Congressional Budget Office has estimated that states' efforts under SCHIP could result in fewer than 2 million newly-insured children by 1999, far below the 11 million children who were estimated to be uninsured in 1996. Moreover, at current rates, more than 2 million currently insured individuals will lose coverage between now and 1999. As commercial payers continue to negotiate severely discounted payment rates, mainstream providers may be forced to reduce or eliminate charity care. Thus, the availability of care for the increasing numbers of uninsured children and adults will be further concentrated among safety net providers.

Community Health Centers

Under Section 330 of the Public Health Service Act, community health centers (CHCs) have a congressional mandate to serve uninsured and underinsured individuals and families. More than 2,200 health center service sites deliver preventive and primary health care to more than 9 million people in underserved urban and rural communities. They adjust their charges according to a patient's ability to pay (Hawkins and Rosenbaum, 1997).

CHCs are governed by community boards and tailor their services to meet the specific needs of the communities and the special populations that they serve, including migrant and seasonal workers, homeless individuals, and people living with AIDS. Most CHCs are private, not-for-profit corporations. In addition to primary care and preventive services, they offer a comprehensive array of expanded services such as outreach, translation services, home visits, care management, and other support services (HRSA, 1997a).

In addition to the federal funds administered by the Bureau of Primary Health Care of the Health Resources and Services Administration, CHCs are supported by Medicaid, Medicare, federal grants,



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