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Opinion: The Hospital Charity Care Conundrum

New Jersey needs to be careful not to get hurt by healthcare reform.

Funding hospital charity care is one of the longest-running conundrums in New Jersey health policy. In fiscal year 2012 it will cost $675 million. This seems like (and is) a lot of money, although some in the hospital sector argue that this level of funding is insufficient. They point out that the state charity care program pays well below the average cost for admitted patients. The allocation of these scarce dollars among hospitals caring for low-income, uninsured individuals is also always a matter of some consternation. Hospitals with higher “burdens” of eligible patients collect more per case than those with lower case loads.

But in a few years, hospitals and policymakers may look back on these challenges as the good old days. The Patient Protection and Affordable Care Act (ACA) makes major changes to the federal “disproportionate share hospital” or DSH program that New Jersey uses to fund half of our charity care payments. This cut makes sense on paper, since ACA is projected to extend coverage to about half of the uninsured nationwide -- starting in 2014 -- while phasing in a 50 percent cut to DSH payments between 2014 and 2019. Moreover, the ACA calls for a new formula for distributing DSH funding to states based on the number of uninsured and how effectively they target DSH support to hospitals delivering the most Medicaid (which typically reimburses hospitals at low rates) and uncompensated care. This plan contemplates that expanded coverage under ACA will actually materialize. The DSH cuts go into effect no matter how many people remain uninsured. Planned increases to Medicare revenue streams are also trimmed under ACA over time, further clouding the fiscal picture for hospitals down the road.

The Center for State Health Policy projects that ACA when fully implemented will reduce the uninsured by about 41 percent in New Jersey, with nearly 450,000 individuals gaining coverage and just under 650,000 remaining uninsured. We expect that the largest number of people leaving the ranks of the uninsured will obtain coverage through the new health benefit exchange (whether created by the state or the federal government), and about 230,000 will be added to Medicaid rolls if the state elects to expand eligibility. Since New Jersey’s uninsured rate is expected to decline somewhat less than the national rate, it may seem plausible that we will do relatively well under the revised need-based federal DSH allocation formula. Not so. The current formula for distributing DSH among the states has never been rational and some states, including New Jersey, draw down amounts well out of proportion to their share of the uninsured. New Jersey ranks in the top 10 states in federal DSH dollars per uninsured person, so when the formula is changed to reflect the distribution of uninsured across states, we will surely lose.

What can New Jersey do to mitigate the possible harm to our hospital industry from these looming cuts? First, every effort should be made to maximize enrollment in federally subsidized coverage through the exchange that comes on line in 2014. The ongoing debate about whether and which parts of the exchange should be state administered must not obscure the imperative to educate the public about coverage options and get the outreach and enrollment functions of the exchange working effectively. When Massachusetts implemented its subsidized insurance mandate in 2006, it launched a large and successful education campaign. A New Jersey-based expert panel recommended similar steps should be taken, by government and others, to prepare the public for 2014 coverage options here.

The big decision about whether to expand eligibility under Medicaid in 2014 also has major implications. The Supreme Court healthcare decision effectively made that choice optional for states. Under the ACA, Medicaid is the only federally funded coverage option for persons below the poverty line, so states deciding not to take up the expansion will have much higher uninsured rates. This option will be free to the states for the first three years, but will eventually require them to put up 10 percent of the cost of covering the expansion population. While this cost is real, policymakers must consider the cost in charity care to the state coffers as federal DSH subsidies are dialed back sharply.

In the dog days of summer 2012, the sweeping reorganization of health insurance coverage set for January 2014 may seem a long way off. But given the enormity of the task of readying the public for this change and the myriad policy decisions that must be made before we can even prepare public education messages, 2014 seems just around the corner.

Joel C. Cantor is the director of the Center for State Health Policy and professor of public policy at Rutgers University. He has authored numerous studies of health insurance regulatory policy, healthcare delivery system performance, and access to care for low-income and minority populations. He serves frequently as an advisor on health policy matters to New Jersey state government. The views expressed in this essay are solely those of the author and are not endorsed by funders of the Center for State Health Policy.

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