Early Recession Impacts on Health Care Safety Net Providers

HSC Research Brief No. 15

January 2010

Laurie E. Felland, Peter J. Cunningham, Genna R. Cohen, Elizabeth A. November, Brian C. Quinn

Although the recession drove up demand on the health care safety net as Americans lost employment and insurance coverage, the effect on safety net providers has been uneven and, in some cases, less severe than initially anticipated, according to a Center for Studying Health System Change (HSC) study of five metropolitan areas. Even prior to the downturn, many safety net providers were already treating growing numbers of uninsured patients and dealing with tighter state and local budgets. Federal expansion grants for community health centers over the preceding decade, however, had bolstered capacity at numerous health centers. Programs to connect people with primary care providers may also have helped limit the expected spike in emergency department use by uninsured individuals during the recession. Federal stimulus funding through the 2009 American Recovery and Reinvestment Act (ARRA) provided critical support for hospitals and health centers, helping to offset cuts in state, local, and private funding. The downturn also produced some unexpected advantages, including lower commercial rents and a broader pool of job applicants. Nevertheless, while safety net providers have adopted various strategies to stay financially viable, many believe the full impact of the most severe recession since the Great Depression has yet to be felt.

Federal Stimulus Aid Helps Offset State and Local Safety Net Budget Cuts

The recession that started in December 2007 proved more damaging than any economic downturn since the Great Depression. With unemployment surpassing 10 percent, many Americans lost employer-based health insurance, leaving them either uninsured or eligible for Medicaid and other public programs. At the same time, falling tax revenues created substantial gaps in state and local government budgets, reducing the resources available to fund rising Medicaid enrollment or to support providers' uncompensated care costs. Despite a recent return to economic growth, elevated unemployment was expected to persist for an extended period.

The depth of the recession was expected to create even more strain on safety net providers -- including community health centers (CHCs), free clinics, public hospitals, and nonprofit hospitals serving large numbers of low-income patients -- than typically occurs during economic downturns, as growing numbers of people sought free or reduced-cost care. However, the federal government offered states and safety net providers some relief through stimulus legislation. Enacted in February 2009, ARRA included enhanced matching funds for state Medicaid programs, additional funding for hospitals serving disproportionate numbers of low-income, uninsured, and Medicaid patients, and new grants to federally qualified health centers (FQHCs).

This study investigates the recession's impact on safety net providers and the degree to which ARRA funding helped protect the safety net from the downturn's consequences in five Community Tracking Study communities -- Cleveland; Greenville, S.C.; northern New Jersey; Phoenix; and Seattle -- between July 2008 and July 2009. These five communities differ in population size, geographic region, and uninsured rates. Each has a relatively well-established safety net, including at least one major hospital and a network of CHCs and clinics fulfilling a safety net function.

Before the recession, the fiscal outlook in 2007 was either robust or improving in three of the five communities -- Greenville, Phoenix, and Seattle -- and state governments in South Carolina, New Jersey, and Washington were either restoring Medicaid cuts from the previous downturn or working to expand public programs. By 2009, all five states were grappling with major budget shortfalls.

Growing Patient Demand

Consistent with national patterns, all five communities experienced sharp jumps in unemployment between 2007 and July 2009 -- with rates climbing 50 percent in Cuyahoga County (Cleveland) and more than doubling in the other four areas. As a result, safety net providers reported heightened demand for services from uninsured patients, including many who had recently lost their health coverage along with their jobs. Notably, many of the newly uninsured were people who had not traditionally depended on safety net providers, including residents from more affluent areas with higher incomes. Phoenix was an exception: in that community, which has a large Latino immigrant population, safety net providers' uninsured patient volume remained flat or declined as immigrants left the state in search of employment or to avoid increased scrutiny of undocumented immigrants.

Given the recession's severity, however, the effect of rising demand on safety net providers was not as dramatic as might have been anticipated in these five communities. This is partly because safety net providers were already facing growing demand before the recession, as employer-sponsored coverage declined and other providers became increasingly reluctant to treat uninsured and Medicaid patients. For example, respondents in the Newark area suggested that the recession had compounded stresses that had persisted for years due to the area's high concentrations of poor, unemployed, and uninsured residents. As one Newark hospital executive described the situation: "It's business as usual... for this community."

A rise in the uninsured rate in a community is often reflected in increased use of hospital emergency departments (EDs), which are legally required to provide at least stabilizing care to all patients regardless of their ability to pay. While safety net hospitals did report higher ED visit volumes, many respondents said the increases were not as large as expected. This may partly reflect a longer lag between when people lose coverage and when they begin appearing in EDs in significant numbers. However, some respondents pointed to pre-recession efforts to redirect uninsured and low-income patients with nonurgent needs away from EDs and toward primary care settings, particularly CHCs. These initiatives may have helped prevent a surge in ED utilization, at least in the short term.

Most CHC respondents reported both a rise in patients and in the number of services they provided. According to a recent national survey, total CHC visits grew 14 percent between June 2008 and 2009 -- more than double the increase of the prior year -- while visits by uninsured patients jumped 21 percent. This national trend generally matched what health center respondents in the five communities described, though there was variation across individual centers and communities. For instance, a New Jersey health center reported that its patient volume had doubled since the recession began, partly because nearby hospitals had closed since 2007. Other centers reported smaller or no increases because they lacked the capacity to see additional patients.

To some degree, the growth in health center utilization reflects capacity built up before the recession. Federal initiatives over the preceding decade had expanded the number of federally funded health centers from approximately 750 in 2000 to nearly 1,100 by 2008.

Additionally, the increase in uninsured patients may have been smaller than expected because of temporary federal subsidies for continuation coverage for laid-off workers -- known as COBRA coverage. ARRA included a provision to pay 65 percent of the cost of employer coverage for recently laid-off employees. COBRA enrollment increased from 19 percent to 39 percent of laid-off workers in the six months after the ARRA subsidy took effect. Many safety net respondents said they benefited from the COBRA subsidies, which helped existing patients keep their insurance coverage.

Rising uncompensated care was the most frequently cited concern among safety net hospitals in the five study communities, consistent with national reports from public hospitals. At the same time, several safety net hospitals reported declining inpatient volume as people postponed elective procedures. Since patients receiving elective care are more likely to be insured, this trend resulted in lost revenue for safety net hospitals.

Impact of Federal Stimulus Funding on the Safety Net

Beyond COBRA subsidies, federal stimulus funding aided the safety net in three key ways: an increase in the federal medical assistance percentage (FMAP) for state Medicaid programs; an increase in Medicaid disproportionate share hospital (DSH) payments to hospitals serving high proportions of low-income and Medicaid patients; and expanded grant funding to FQHCs.

FMAP adjustments raised the federal share of Medicaid costs by approximately 6.2 percentage points on average, delivering an additional $87 billion to all states between 2008 and 2010. With these increases, federal matching rates for the five study states ranged from 59 percent in New Jersey to 79 percent in South Carolina. Medicaid DSH payments also rose by 2.5 percent in 2009, with an additional 2.5 percent increase scheduled for 2010. To access the additional FMAP and DSH funds, states were required to maintain Medicaid eligibility standards at July 1, 2008, levels; however, they were not obligated to preserve optional services such as adult dental care.

For the most part, the FMAP and DSH increases did not flow directly to safety net providers but rather shielded them from further state budget cuts. Respondents reported that most of the extra federal funding remained with state governments -- for example, being applied to budget deficits. As a Cleveland hospital respondent explained, "At best it's a wash; if it keeps the budget balanced and helps in total, that's a positive thing, but it was never a direct pass-through of funds for us." Only a handful of hospitals reported receiving modest DSH funding increases since ARRA. However, respondents from several communities indicated that the FMAP boost helped indirectly by enabling states to maintain Medicaid provider payment rates or reduce the scale of cuts.

ARRA appeared to have a more significant effect on FQHC capacity, both by helping FQHCs avoid anticipated cuts and by enabling them to expand services. In March 2009, 23 FQHCs in the five study communities began receiving $37.5 million in ARRA funding through three types of grants that allowed health centers to maintain or grow their capacity in various ways.

Increased Demand for Services (IDS) grants covered the operational costs of treating additional patients. Respondents commonly used these grants to bring on clinical and administrative staff, particularly to address increased primary care, mental health, and dental needs. For instance, IDS funding helped one Cleveland health center hire a full-time nurse, a clerical worker, and a half-time physician. At another Cleveland health center, adding a part-time dentist and a full-time dental assistant was expected to create capacity for more than 1,000 new patients over two years.

New Access Point (NAP) grants enabled more community clinics to obtain FQHC status and allowed existing FQHCs to open new sites. Nonprofit public and private clinics can become FQHCs if they deliver comprehensive primary care and supportive services to medically underserved populations, both insured and uninsured, and are governed by a community board, among other criteria. NAP grants converted health centers in both Cleveland and Phoenix to FQHCs, which also qualified them for enhanced Medicaid reimbursement. In Cleveland, a NAP grant allowed a health center to reduce patient fees and increase the number of uninsured patients it treated. One Phoenix center receiving a NAP grant planned to triple its exam rooms and clinical staff.

Capital Improvement Program (CIP) grants provided funding for construction, infrastructure repairs, and equipment purchases, including information technology (IT). Health center directors frequently reported using CIP funds to adopt electronic health records systems or upgrade outdated IT infrastructure. For others, CIP grants supported facility expansions and improvements not directly tied to clinical care. For example, a Phoenix health center used a CIP grant for facility renovations. As an FQHC director in northern New Jersey reported, "The stimulus package was a godsend in that it allowed us to address at least a good share of those items from our wish list -- repaving the parking lot, redoing the roof."

While many FQHCs have benefited from both recent ARRA funding and federal expansion grants over the past decade, many free clinics that lack FQHC designation faced more severe financial strain than safety net hospitals and FQHCs. Free clinics do not receive the enhanced Medicaid reimbursements available to FQHCs and other community health centers deemed federal "look-alikes," nor are they eligible for ARRA or other federal health center grants. Free clinics primarily serve uninsured patients and rely on private philanthropy and volunteer physicians. Unlike FQHCs and FQHC look-alikes, which use sliding fee scales for uninsured patients, free clinics typically do not charge for services. In communities such as Cleveland and Greenville, free clinics are important providers of primary care to uninsured people but have struggled while FQHCs have expanded and often flourished thanks to greater federal support. Free clinic directors noted that many funders, policy makers, and the public are unaware they are ineligible for federal stimulus funding. As one FQHC executive put it, "FQHCs got money, and free clinics are worried about keeping their doors open. The FQHCs have funds to implement electronic medical records while the free clinics are laying off staff. There's a major haves-and-have-nots disparity."

Other Reductions Diminish Stimulus Funding Gains

As state and local officials wrestled with large budget deficits, safety net hospitals and CHCs confronted funding cuts that would offset gains from federal stimulus money. All five states reduced or proposed reductions in optional Medicaid services for adults -- including dental, vision, mental health, podiatry, and prescription drug coverage. One Seattle FQHC director described the additional federal funding as "a trickle" compared to the "torrent" of state and local reductions. Without ARRA funding and its requirement that states maintain Medicaid eligibility standards, even deeper cuts to eligibility and services would likely have occurred.

Four of the five states also made significant cuts to other programs that support safety net providers; South Carolina was the exception because it had not funded such programs historically. Washington nearly halved funding for the state's Basic Health Plan -- a subsidized insurance program for low-income people -- which safety net providers expected would eliminate coverage for many of their patients. As of November 2009, the plan covered about 78,000 people, down from more than 100,000 six months earlier, and enrollment was expected to drop by approximately another 15,000 by early 2010.

Additionally, three of the five states cut funding supporting primary care: Ohio and Arizona reduced tobacco tax revenues earmarked for primary care at hospitals and clinics, and New Jersey eliminated a $5 million pool for building health center capacity. Other New Jersey funding pools that support uncompensated care -- $40 million for health centers and $605 million for hospitals -- remained intact but were not increased to keep pace with rising uncompensated care costs.

Local budgets were also becoming increasingly strained, with some consequences for safety net providers. Three communities -- Cleveland, Phoenix, and Seattle -- have county hospitals funded by local revenues. Despite heightened fiscal pressure, large-scale local funding cuts for these hospitals had not yet materialized, though the county hospital in Phoenix did experience some funding decline. Seattle historically has supported local health centers financially, but both county and city funds for this purpose have fallen during the recession. Some safety net providers also anticipated increased demand for public health services -- including mental health, maternal and child health, and immunizations -- as state and local health departments scaled back in the face of budget deficits.

Meanwhile, other revenue streams for many safety net providers declined. Multiple private safety net hospitals reported significant investment losses, while public providers generally held more stable, smaller investment portfolios. Both public and private safety net providers reported reduced support from charitable foundations, whose own investment values had fallen. A free clinic in Greenville, for example, reported a 20 percent reduction in foundation funding. Overall, however, the decline in donations was reportedly not as steep as many respondents had feared, in some cases because of multi-year grants issued before the recession and because some donors were "stepping up" to maintain or, in a few instances, increase their giving.

Driven by recession-related financial concerns, many safety net hospitals postponed capital projects and trimmed some services. For instance, a Newark hospital limited the availability of certain outpatient specialty services for low-income patients, and Cleveland's public hospital cut specialty pediatric services. More commonly, safety net providers attempted to preserve clinical services at the expense of administrative and support functions.

Safety Net Provider Strategies to Remain Viable

Even as they expanded in some areas, safety net providers reported greater financial pressure in 2008-09 than in previous years. They pursued a range of strategies to boost revenues and cut costs. Providers intensified efforts to maximize revenue per patient visit by improving identification and enrollment of uninsured patients eligible for Medicaid or other public insurance and by strengthening collections from public and private insurers. Some providers also tried to increase income from patient fees and donations. For example, a Newark hospital added a $25 to $50 fee per dental visit. Even a Phoenix free clinic -- which normally provides services at no charge -- became more proactive in requesting patient donations, typically $10.

Many providers also worked to improve operational efficiency. Some identified or negotiated savings on supplies. Safety net providers in Phoenix reported that the recession had driven up commercial real estate vacancies, pushing rental prices down. As one CHC director noted, "There are some great deals out there, and we're trying to capitalize on those as our leases come up for renewal."

Most providers sought to control labor costs, which represent a significant share of their operating budgets. Layoffs or staffing reductions through attrition of varying degrees were reported in all five communities, especially at safety net hospitals and free clinics, though wage freezes were more common. Some reductions were substantial -- for example, Cleveland's county hospital eliminated more than 300 positions, mainly administrative, over the course of a year. Some safety net hospitals significantly reduced or eliminated nurse overtime and the use of agency nurses, which offer staffing flexibility but are relatively expensive. In some cases, those slots were filled with regular full- or part-time nursing staff.

The recession also produced some benefits for providers that were maintaining or growing their staff -- especially FQHCs expanding their service areas. Providers generally found larger, more qualified applicant pools for financial and administrative positions, which they attributed to job losses in other sectors. Employees were also more inclined to stay in their current roles rather than risk moving elsewhere, reducing providers' recruiting and training expenses and helping maintain a strong workforce. As one FQHC director described, "It's guaranteed work and salary. That seems to be satisfying to physicians right now, so our turnover costs are lower."

Policy Implications

Although safety net providers in the five communities had so far weathered the economic downturn, the recession placed additional strain on already-limited capacity and fragile financial situations. Despite expansions over the preceding decade, many health centers were operating at full capacity, limiting their ability to take on new patients and resulting in longer wait times for care. Furthermore, the recession's effects are highly localized, and some safety net hospitals outside the five study communities had experienced significant financial difficulties and service reductions.

The safety nets studied benefited from federal stimulus funding, organizational strategies to cut costs, and some unexpected advantages related to savings and staff recruitment. Without ARRA, many people likely would have lost Medicaid coverage as states reduced eligibility to balance budgets, and both safety net hospitals and health centers would have had greater difficulty meeting rising demand as people lost their jobs and insurance. Yet, states that had tried to expand coverage beyond Medicaid -- such as Washington -- or at least provide some funding for safety net services have lost ground as they contend with ongoing deficits.

Safety net providers also expressed concern that they had not yet experienced the downturn's full effects. Unemployment and uninsured rates were likely to remain elevated for an extended period despite some signs of economic recovery at the end of 2009. These heightened demands on safety net providers might persist even as federal stimulus funding expired. While Congress extended COBRA coverage subsidies from nine to 15 months, ARRA provisions for increased FMAP, DSH funding, and health center grants were set to end at various points in 2010 and 2011. State and local budgets were unlikely to recover fully by then, and many state governments would have other spending priorities. Additionally, the timing of multi-year grant cycles might result in some providers experiencing greater reductions in private grants and donations in the following year or two.

Consequently, safety net providers were likely to face significant, and potentially growing, financial pressures. Many would continue to adapt successfully as they had in the past, but it was unlikely they would be able to expand capacity enough to meet the higher demand from unemployed and uninsured people that would linger even after the recession officially ended. Moreover, the creative strategies that safety net providers have long used to cope with rising demand and financial constraints have their limits. As a Seattle FQHC director explained: "We're working hard in every area we can see -- in our intake system, in how we triage people -- we're doing our best to do more with less, but there's only so far you can go with that approach."

Data Source and Funding Acknowledgement

Five study communities -- Cleveland; Greenville, S.C.; northern New Jersey; Phoenix; and Seattle -- were selected from the 12 Community Tracking Study (CTS) sites for their geographic and economic diversity, assessed using indicators such as unemployment rates and the size of the state FY 2009 budget gap. Between June and September 2009, a total of 45 telephone interviews were conducted with representatives of safety net hospitals, community health centers, free clinics, and other knowledgeable observers in the five communities, as well as national experts. Respondents were asked about the recession's impact on safety net providers between July 2008 and July 2009. Each interview was conducted by a two-person research team; notes were transcribed and jointly reviewed for quality assurance. All interview responses were coded and analyzed using Atlas.ti, a qualitative software tool.

This research was funded by the Robert Wood Johnson Foundation.

Sources and Further Reading

Bureau of Labor Statistics: Labor Force Statistics — National and local unemployment data from BLS, which documented the recession-era unemployment rates exceeding 10 percent that drove increased demand on safety net providers.

CMS: Disproportionate Share Hospital (DSH) Payments — Federal program providing additional Medicare payments to hospitals treating large numbers of low-income patients, with ARRA-era increases discussed in this study.

KFF: Medicaid Financing -- The Basics — Overview of the Federal Medical Assistance Percentage (FMAP) and state Medicaid financing, including the enhanced FMAP provisions under ARRA that supported safety net providers.

Robert Wood Johnson Foundation: Safety Net Research — RWJF-funded research on the health care safety net, including community health centers, free clinics, and public hospitals studied in this report.

AHRQ: Health Care Safety Net — Federal research on the capacity, challenges, and financing of safety net providers including federally qualified health centers and public hospitals.

U.S. Census Bureau: Health Insurance Coverage — Census data on health insurance coverage trends, including the decline in employer-sponsored coverage during the recession that increased uninsured patient volumes at safety net providers.