Early Impacts of the Recession on Health Care Safety Net Providers

Overview

When the Great Recession gripped the United States beginning in late 2007, health policy observers braced for a devastating blow to the nation's health care safety net. Millions of Americans were losing their jobs and, with them, their employer-sponsored health insurance. Logic suggested that the surge of newly uninsured patients would overwhelm safety net providers already stretched thin by years of growing demand.

A 2009 study by the Center for Studying Health System Change (HSC), funded by the Robert Wood Johnson Foundation, examined how safety net providers in five communities — Cleveland, Greenville (S.C.), northern New Jersey, Phoenix, and Seattle — were handling these pressures. The findings painted a more nuanced picture than expected. While demand did increase, the initial impact on many providers was less catastrophic than feared, in large part because of timely federal intervention through the American Recovery and Reinvestment Act (ARRA) of 2009.

The Role of Federal Stimulus Funding

Signed into law in February 2009, the ARRA directed billions of dollars toward shoring up the health care safety net. Three provisions were particularly consequential. First, the law boosted the federal matching rate for state Medicaid programs, giving states badly needed fiscal relief at a time when enrollment was climbing and tax revenues were falling. Second, it increased disproportionate share hospital (DSH) payments to facilities serving large numbers of low-income and Medicaid patients. Third, it awarded additional grants to federally qualified health centers (FQHCs), enabling many to expand capacity, hire staff, and maintain services.

This federal money helped offset what would have been a far worse financial picture for safety net providers. State and local governments, facing their own budget crises, were cutting funding to public hospitals and community health programs. Private donations — a lifeline for free clinics — were declining as well. Without the ARRA, many providers would have faced simultaneous spikes in patient volume and drops in revenue.

Why the Impact Was Less Severe Than Expected

Across the five study communities, the HSC researchers found that rising demand on safety net providers predated the recession. Employer-sponsored insurance had been eroding for years, and private physicians were increasingly reluctant to treat uninsured or Medicaid patients. Safety net hospitals and health centers had already been adapting to higher patient loads before the downturn hit.

Several additional factors cushioned the blow. Over the preceding decade, a series of federal expansion grants had significantly increased the capacity of community health centers. Programs designed to steer patients toward primary care providers may have blunted the expected rush to emergency departments by uninsured individuals looking for care during the downturn. And in some communities, safety net organizations had already built infrastructure and operational practices capable of absorbing patient surges.

"Safety net providers have adopted strategies to stay financially viable, but many believe they have not yet felt the full impact of the deepest recession since the Great Depression," noted Laurie E. Felland, a senior health researcher at HSC and lead author of the study. Co-authors included Peter J. Cunningham, Genna R. Cohen, Elizabeth A. November, and RWJF Program Officer Brian C. Quinn.

Disparities Among Provider Types

Not all safety net providers fared equally. The study found meaningful differences depending on a provider's funding structure, federal designation, and ability to bill insurers.

FQHCs, many of which had received both ARRA funding and earlier federal expansion grants, were generally in a stronger position. Their federal designation entitled them to enhanced Medicaid reimbursement rates and direct federal grants, creating a more diversified and resilient revenue base. These health centers used the additional funding to hire clinicians, expand clinic hours, and open new sites.

Free clinics, by contrast, were in a much more precarious situation. Ineligible for ARRA funding, they depended heavily on private donations and volunteer labor — both of which were under pressure during the recession. Unlike FQHCs, free clinics do not receive enhanced Medicaid payments and lack the billing infrastructure to generate insurance revenue. For these organizations, the recession hit harder and faster.

State and Local Budget Pressures

Even as federal dollars flowed in, state and local governments were pulling back. All five states in the study had either reduced or proposed reductions in optional Medicaid services for adults, including dental, vision, mental health, podiatry, and prescription drug coverage. These cuts directly affected both providers and the patients who relied on those services.

The net effect was that federal stimulus money, while substantial, was partially offset by these state and local reductions. Safety net hospitals and health centers found themselves in a financial tug-of-war, gaining from one level of government while losing from another.

Cost-Cutting and Efficiency Measures

Providers across the five communities adopted a range of strategies to control costs. Labor expenses, the largest category of operating costs, were the primary target. Layoffs and attrition-based workforce reductions were reported in all five communities, particularly at safety net hospitals and free clinics. Wage freezes were more common than outright layoffs.

Interestingly, the recession also delivered some unexpected advantages. Facility leasing costs dropped substantially in some markets. Providers that were expanding found themselves choosing from larger, more qualified applicant pools for administrative and financial positions — a direct result of layoffs in other sectors. Employee turnover also declined, as workers chose to stay put rather than risk job hunting in a brutal labor market, reducing recruiting and training costs.

Capacity Constraints and Future Concerns

Despite holding together through the early stages of the recession, safety net providers in the five communities were far from comfortable. The downturn added strain to systems that already had limited capacity and fragile finances. Even with the expansions of the prior decade, many health centers were operating at full capacity. New patients faced long waits to get appointments, and some facilities simply could not accept additional patients.

Looking ahead, the study's authors warned that unemployment and uninsurance rates were likely to stay elevated well beyond the first signs of economic recovery in late 2009. The demands on safety net providers would persist — and possibly intensify — even as the temporary stimulus funding was scheduled to run out. The effects of the recession were also highly localized; while the five study communities weathered the storm reasonably well, safety net hospitals in other parts of the country had already encountered serious financial problems and were cutting back services.

Research Methodology

The HSC study was based on 45 telephone interviews conducted between June and September 2009 with representatives of safety net hospitals, community health centers, free clinics, and other knowledgeable observers in the five communities, supplemented by conversations with national experts. The findings were published as an HSC Research Brief titled "The Economic Recession: Early Impacts on Health Care Safety Net Providers."

About HSC

The Center for Studying Health System Change was a nonpartisan policy research organization based in Washington, D.C., focused on providing objective, timely analysis of the U.S. health care system to inform policymaking. HSC was funded in part by the Robert Wood Johnson Foundation and affiliated with Mathematica Policy Research.

Sources and Further Reading

AHRQ — National Healthcare Quality and Disparities Report — Federal data on health care access and quality.

Kaiser Family Foundation — Uninsured — Data on uninsured populations and access barriers.

Census Bureau — Health Insurance Coverage — Population-level insurance coverage statistics.

Robert Wood Johnson Foundation — Health policy research and programs.

Commonwealth Fund — Research on health care access and equity.