Will Local Hospitals Survive Cuts to Funding for Indigent Care Programs?

September 8, 2014

Since the beginning of 2013, twenty-four rural hospitals have closed across the country, and many observers believe that more closures will occur. They blame this on the Affordable Care Act (ACA). The ACA aims to extend coverage to the most vulnerable populations by offering states the option to expand their Medicaid programs. If more individuals are covered through Medicaid and Covered California (the Exchange), costs for uncompensated care will decrease.

Consequently, the ACA authorizes cuts to funding for indigent care programs. These statutory cuts include funding through Disproportionate Share Hospital (DSH) payments. Federal administrative waivers that pay for uncompensated care such as Safety Net Care Pool and Delivery System Reform Incentive Pool may not be renewed when they expire. Since Medicaid expansion is optional due to the decisions of the Supreme Court and some state’s policymakers, many Southern and some Rocky Mountain states have opted not to expand their program. In these states, rural hospitals that rely heavily on federal support are predicted to have increased financial burdens and more closures.

For example, Texas’ Linden Hospital was forced to close earlier this year due to a steady decline in patients and reductions in Medicare and Medicaid payments.  In a recent article describing the financial struggle of Linden Hospital, a former patient reported that the next closest hospital is 15 miles away. For individuals without a means to travel large distances, this presents a barrier to accessing care. Many times rural hospitals are the only source of care that a community relies on. If federal cuts and the opposition to ACA’s Medicaid expansion continue, hospitals already having trouble filling beds will fold. Without sufficient financial viability and lack of the newly authorized federal funds, the numbers do not balance. Because Texas decided not to expand their Medicaid program, and the prospective federal cuts to indigent care funds that hospitals rely on; rural hospital closures could leave a gap in care for community residents. Parents with dependent children with income between 15% and 100% of the federally poverty level do not qualify for Medicaid or health exchange plans in Texas. Adults without minor children and incomes up to 100% of FPL do not qualify at all for Texas’ Medicaid program. This will leave the most vulnerable individuals, typically the uninsured, without access to their only source of care.

Even for states that expand their Medicaid program, it is likely that rural hospitals will need to adjust their delivery systems due to the ACA to put a greater emphasis on outpatient care. This has been the case for a few rural hospitals in California. With the implementation of Medicaid expansion, health coverage has increased and inpatient volume has decreased. Newly insured individuals now have more health care options. Individuals living in geographically distant and remote areas have the option to receive care at Federally Qualified Health Centers (FQHCs), local physician offices and other community clinics. The transition of patients from hospital settings to community providers may negatively impact some hospitals’ revenue growth and operating margins.

In California, state, local and federal funds to support indigent care have diminished as the ACA expansion funds have increased; we think that the ratio of expansion to reductions is roughly ten to one. Since the ACA has reduced the number of uninsured, the amount of Realignment funds that counties receive for healthcare has been cut and the federal waiver funding for county Low Income Health Programs (LIHP) have been discontinued. In combination with the reduction in inpatient volume, the reduction in government assistance strongly impacts the ability of those hospitals that continue treating those who remain uninsured and lose the newly insured patients and revenues to other local competitors.

The ACA has succeeded in many ways. More individuals are insured and seeking care through their community providers. But, for those who remain uninsured, if local hospitals close their doors, where will they continue to seek care?

Along with other obstacles rural health systems face, like provider shortages, changes in patient distribution among facilities and reductions in government assistance add additional challenges to an already overburdened system. To improve the health of everyone, not just those insured, continual investment in the safety net is vital as providers adjust to the evolving health care system.