Local Public Hospitals: Changing with the Times

Originally published by the Center for Studying Health System Change (HSC), a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Over 15 years of tracking, public hospitals in five metropolitan communities pursued multiple strategies to remain financially viable while continuing to serve low-income populations. This November 2012 research brief by Laurie E. Felland and Lucy B. Stark drew on HSC's Community Tracking Study site visits to Boston, Cleveland, Indianapolis, Miami, and Phoenix, where local public hospitals served as core safety net providers. The hospitals adopted six broad strategies: establishing governance structures independent of local government, locking in predictable local funding, strengthening Medicaid revenue streams, improving revenue collection, attracting privately insured patients, and building community-based primary care capacity.

The History and Evolution of Public Hospitals

American public hospitals trace their origins to pre-20th century almshouses that provided health and social services to impoverished individuals. While private institutions evolved into businesses serving a paying middle class, public hospitals grew into larger medical facilities, often using federal Hill-Burton Act funds to expand capacity. Their patient populations, however, remained heavily composed of people unable to pay for care. The creation of Medicaid in 1965 covered many low-income patients, but Medicaid reimbursement rates fell below what private insurers and Medicare paid, leaving public hospitals dependent on direct government subsidies and charitable contributions.

Rising costs of treating growing numbers of uninsured and Medicaid patients made hospital ownership increasingly burdensome for local governments. Private hospitals nationally maintained margins near 5 percent over the decade prior to the study, while public hospital margins barely broke even on average. The share of hospitals under public ownership dropped from one in four in 1999 to one in five by 2010, as many closed or converted to private ownership.

Five Hospitals Under Study

The Community Tracking Study had followed five public hospitals since 1996: Cambridge Health Alliance (CHA) in the Boston area, MetroHealth System in Cleveland, Wishard Health Services in Indianapolis, Jackson Health System in Miami, and Maricopa Integrated Health Services (MIHS) in Phoenix. Beyond inpatient care, these hospitals provided primary and specialty services to low-income patients through employed or academically affiliated physicians. They also handled language and cultural needs, social services, and specialized functions like trauma, burn, and psychiatric care that served the broader population.

All five hospitals had not just survived but grown. CHA and Jackson expanded through mergers, adding hospital campuses. Wishard, MIHS, and MetroHealth added inpatient capacity to their single-hospital operations. Most enlarged their emergency departments and outpatient programs, though they still struggled with appointment backlogs and long wait times. With relatively few privately insured patients, the hospitals depended heavily on public funds to offset rising uncompensated care costs.

Governance Independence and Financial Strategies

Four of the five hospitals had adopted governance structures partially or fully separated from direct local government control. CHA operated under a public health authority created in the mid-1990s. MIHS was managed by an elected taxing district board after Maricopa County voters approved the arrangement in 2003. Jackson's governing trust, which had been nominally independent but still subject to Miami-Dade County Commission authority over major decisions, was replaced in 2010 with a seven-member Financial Recovery Board after a county grand jury found that lack of autonomy was a primary cause of the hospital's financial difficulties. Only MetroHealth remained under direct county operation in Cuyahoga County.

Independent boards offered several advantages: fewer political constraints on labor decisions, greater flexibility in attracting board members with health care management expertise, and the ability to separate strategic planning from the shifting priorities of elected officials. Jackson's new Financial Recovery Board, for instance, partnered with hospital executives on cost-cutting measures including renegotiated labor contracts that were expected to bring the hospital to breakeven by fiscal year 2012.

Predictable local funding was another pillar. Voters in four communities had approved financial support for their public hospitals. MIHS benefited from a property tax levy that provided steadily growing revenue, from $40 million in 2006 to $60 million at the time of the study. Jackson received a half-penny sales tax and a portion of property tax revenue, though these fixed-rate sources had declined during the housing crash and recession, stabilizing around $333 million annually.

Medicaid Revenue and Revenue Collection

Medicaid represented the single largest funding source for safety net hospitals nationally, accounting for 35 percent of total net revenues. The five hospitals were particularly exposed to changes in Medicaid eligibility rules and payment rates, which fluctuated with state budget conditions. When states shifted Medicaid enrollees from fee-for-service to managed care, the hospitals worried about losing patients to private hospital networks. Most responded proactively by starting their own Medicaid managed care health plans, which helped retain existing patients and sometimes attracted new ones.

Supplemental Medicaid and Medicare payments, including disproportionate share hospital (DSH) funds, upper payment limit provisions, and state waiver arrangements, provided critical financial support. However, these funding streams were intertwined and subject to federal oversight. When Arizona cut Medicaid coverage for childless adults in 2011 and reduced payment rates by 15 percent, MIHS worked with the state to create a Safety Net Care Pool that generated $50 million in federal supplemental funds, though the hospital's margin still fell by half.

The hospitals also became more assertive about collecting payment. Wishard introduced discounts for uninsured patients who paid on time and added emergency department fees to encourage primary care use. MIHS used information technology to streamline eligibility determinations for charity care and implemented more systematic billing. MetroHealth charged out-of-county patients a $150 fee to see a physician while expanding charity care discounts for county residents.

Pursuing Privately Insured Patients and Expanding Primary Care

Privately insured patients accounted for less than 20 percent of inpatient discharges across the five hospitals. To broaden their payer mix, the hospitals worked to demonstrate improved efficiency and quality. CHA's nationally recognized emergency department transformation cut average wait times to under 5 minutes. Wishard's upgraded maternity, physical therapy, and cardiac catheterization facilities attracted patients across income levels. All five maintained medical school affiliations, which not only provided physician services to low-income patients but also signaled access to renowned specialists and advanced technology.

Building primary care capacity in the community was a central strategy. The hospitals expanded clinics in neighborhoods where low-income residents lived, aiming to prevent emergency and inpatient visits by providing timely preventive and primary care. Wishard more than doubled its community clinics from six in 2002 to 13 by 2010 and was building another large primary care center. MIHS obtained federally qualified health center look-alike status for its 11 clinics in 2006 to secure higher Medicaid payments. MetroHealth added four clinics in outer suburban Cleveland to reach privately insured patients while maintaining its downtown safety net focus.

Health Reform: Uncertain Financial Outlook

The Affordable Care Act was expected to affect public hospitals in opposing ways: improving payer mix as uninsured people gained Medicaid or subsidized private coverage, while threatening federal DSH and Medicare supplemental payments. The net impact depended on community-specific factors, including how many uninsured residents would actually enroll in coverage programs and whether their states would expand Medicaid eligibility. Florida, Arizona, Indiana, and Ohio all had Republican governors who had voiced opposition to Medicaid expansion.

Massachusetts offered a cautionary preview. Although state reform had significantly expanded coverage, CHA's aggregate payment for Medicaid and subsidized patients declined from pre-reform levels. The state redirected hospital funding to subsidize coverage and later cut Medicaid inpatient rates to CHA by 25 percent. CHA responded with staff reductions, downsized inpatient services, and merged primary care sites, but continued posting negative operating margins.

Policy Implications

The research demonstrated that public hospitals had matured into large, relatively independent organizations, yet remained heavily dependent on government policy decisions and funding at all levels. The five hospitals had shown resilience and seemed positioned to adapt under health reform. But four operated in states where Medicaid expansion might not occur, risking a scenario where federal funding fell while costs of caring for uninsured patients continued to climb. Even in reform-supportive states, as Massachusetts showed, new insurance revenue minus lost subsidies might not cover the full cost of caring for low-income populations. Public hospitals would need to keep improving efficiency and quality while relying on external funding as long as they served large numbers of uninsured and Medicaid patients.

Sources and Further Reading

Centers for Medicare and Medicaid Services — Federal agency overseeing Medicaid DSH payments and hospital funding.

Health Affairs — Peer-reviewed journal on health policy and safety net research.

Kaiser Family Foundation — Research on Medicaid, the uninsured, and safety net providers.

Robert Wood Johnson Foundation — Co-funder of the Community Tracking Study.