aAll children’s hospitals are also teaching hospitals.
Hospital ratios of revenue to costs are determined from the Centers for Medicare & Medicaid Services state-reported Disproportionate Share Hospital payment reports and Healthcare Cost Report Information System and the American Hospital Association. Net income reflects the financial profit or loss generated for the services performed. AHRQ indicates Agency for Healthcare Research and Quality.
eTable. Costs and Revenue of Uninsured and Medicaid-Insured Inpatient Pediatric Patients at Freestanding Children’s Hospitals, Median (Interquartile Range) in $ Thousands
Jeffrey D. Colvin, Matt Hall, Jay G. Berry, Laura M. Gottlieb, Jessica L. Bettenhausen, Samir S. Shah, Evan S. Fieldston, Patrick H. Conway, Paul J. Chung. Financial Loss for Inpatient Care of Medicaid-Insured Children. JAMA Pediatr. 2016;170(11):1055–1062. doi:10.1001/jamapediatrics.2016.1639
Do certain types of hospitals have larger financial losses from the care of pediatric inpatients with Medicaid coverage?
In this cross-sectional analysis, Medicaid financial losses were greater in freestanding children’s hospitals compared with other hospital types (eg, non–children’s hospitals). Federal Disproportionate Share Hospital (DSH) payments, which compensate hospitals for financial losses acquired from uninsured and Medicaid-insured patients, decreased those financial losses at freestanding children’s hospitals by approximately half.
Because of high financial losses from Medicaid, freestanding children’s hospitals are unlikely to offset decreased DSH payments from caring for fewer patients who are uninsured.
Medicaid payments tend to be less than the cost of care. Federal Disproportionate Share Hospital (DSH) payments help hospitals recover such uncompensated costs of Medicaid-insured and uninsured patients. The Patient Protection and Affordable Care Act reduces DSH payments in anticipation of fewer uninsured patients and therefore decreased uncompensated care. However, unlike adults, few hospitalized children are uninsured, while many have Medicaid coverage. Therefore, DSH payment reductions may expose extensive Medicaid financial losses for hospitals serving large absolute numbers of children.
To identify types of hospitals with the highest Medicaid losses from pediatric inpatient care and to estimate the proportion of losses recovered through DSH payments.
Design, Setting, and Participants
This retrospective cross-sectional analysis evaluated Medicaid-insured hospital discharges of patients 20 years and younger from 23 states in the 2009 Kids’ Inpatient Database. The dates of the analysis were March to September 2015. Hospitals were categorized as freestanding children’s hospitals (FSCHs), children’s hospitals within general hospitals, non–children’s hospital teaching hospitals, and non–children’s hospital nonteaching hospitals. Financial records of FSCHs in the data set were used to estimate the proportion of Medicaid losses recovered through DSH payments.
Main Outcomes and Measures
Hospital financial losses from inpatient care of Medicaid-insured children (defined as the reimbursement minus the cost of care) were compared across hospital types. For our subsample of FSCHs, Medicaid-insured inpatient financial losses were calculated with and without each hospital’s DSH payment.
The 2009 Kids’ Inpatient Database study population included 1485 hospitals and 843 725 Medicaid-insured discharges. Freestanding children’s hospitals had a higher median number of Medicaid-insured discharges (4082; interquartile range [IQR], 3524-5213) vs non–children’s hospital teaching hospitals (674; IQR, 258-1414) and non–children’s hospital nonteaching hospitals (161; IQR, 41-420). Freestanding children’s hospitals had the largest median Medicaid losses from pediatric inpatient care (−$9 722 367; IQR, −$16 248 369 to −$2 137 902). Smaller losses were experienced by non–children’s hospital teaching hospitals (−$204 100; IQR, −$1 014 100 to $14 700]) and non–children’s hospital nonteaching hospitals (−$28 310; IQR, −$152 370 to $9040]). Disproportionate Share Hospital payments to FSCHs reduced their Medicaid losses by almost half.
Conclusions and Relevance
Estimated financial losses from pediatric inpatients covered by Medicaid were much larger for FSCHs than for other hospital types. For children’s hospitals, small anticipated increases in insured children are unlikely to offset the reductions in DSH payments.
In 2013, medical care for patients without private health insurance in the United States resulted in $75 billion in estimated uncompensated costs.1 In addition to the care of uninsured patients, the care of patients with Medicaid coverage also contributes to uncompensated costs because Medicaid typically reimburses below hospital costs. In 2014, hospital financial losses from Medicaid underpayment totaled $14.1 billion.2
To offset the combined financial losses resulting from the care of both Medicaid-insured and uninsured patients, the Medicaid program provides Disproportionate Share Hospital (DSH) payments to hospitals serving large populations of uninsured and Medicaid-insured patients.3 In 2013, these payments were $13.5 billion.1 The Patient Protection and Affordable Care Act (ACA) reduces the number of uninsured patients by requiring individuals to obtain health insurance through either private marketplaces or expanded eligibility for Medicaid. The number of uninsured patients is also reduced by expanding dependent coverage for individuals 19 to 25 years old through their parents’ insurance. In anticipation of decreases in the number of uninsured patients and therefore decreased uncompensated care, the ACA and subsequent congressional legislation beginning in 2018 will gradually reduce DSH payments.4 Disproportionate Share Hospital payments are scheduled to be reduced annually, by $2 billion in 2018 and then increasing up to an $8 billion reduction in 2025.
The financing of pediatric health care may be uniquely affected by DSH reductions. While almost one-fourth of all adults (20.6%) and practically all adults 65 years and older (96.2%) rely on Medicare coverage, more than one-third of children are insured by Medicaid.5,6 In contrast, compared with uninsured adults (17% of all adults before 2014), children without health insurance comprise a small percentage of all children (8%).5,6 Consequently, the increase in insurance enrollment will likely be more limited across pediatric populations and may not offset decreases in DSH payments.
The existence of hospitals dedicated to the care of children is another way in which the delivery of pediatric health care differs from that of adults. Children’s hospitals (whether freestanding or within a general hospital) provide a wide range of pediatric specialty care or are dedicated solely to specific disease states (eg, pediatric cancer). They represent less than 5% of all hospitals and are responsible for approximately one-third of all pediatric discharges.7 Approximately half of hospital discharges of children with medical complexity and children with the highest illness severity are from children’s hospitals.7
We sought to identify which hospital types (eg, freestanding children’s hospitals [FSCHs] and teaching hospitals) incur the highest estimated aggregate financial losses from pediatric inpatient care covered by Medicaid. We also aimed to determine the proportion of losses reduced by DSH payments in a subpopulation of FSCHs.
We conducted a retrospective cross-sectional analysis using 2 data sets. The dates of the analysis were March to September 2015. First, we used the 2009 Kids’ Inpatient Database (KID) from the Healthcare Cost and Utilization Project of the Agency for Healthcare Research and Quality to determine which hospital types incur the highest financial losses from pediatric inpatient care covered by Medicaid. Using the KID, we compared aggregate Medicaid financial losses across multiple hospital types (including children’s hospitals, teaching hospitals, and community-based hospitals). The 2009 KID contains a sample of 3 407 146 pediatric discharges (age range, ≤20 years) from all community, nonrehabilitation hospitals in 44 states.8 The KID contains a 10% sample of uncomplicated births and an 80% sample of all other inpatient discharges.8 Therefore, it is only a sample of pediatric inpatient costs. The 2009 KID was chosen over the 2012 KID because 2009 was the last year with hospital identifiers, which were needed to connect hospitals to Medicaid reimbursement data found in other data sources. Our use of 2009 data most likely underestimates Medicaid financial losses due to the increased enrollment of children in Medicaid from 2009 to 2012, which resulted in more conservative estimates.9,10
The KID data quality is assured through the Healthcare Cost and Utilization Project, participating states, and health care institutions.11 The KID includes up to 40 International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) diagnosis and procedure codes per discharge. Payer data include Medicaid (including patients with Children’s Health Insurance Program coverage), self-pay or no charge, other, and private. We used ICD-9-CM codes mapped to complex chronic conditions12,13 to identify patients with high complexity.
States that deidentified hospitals or restricted financial information were excluded (Figure 1). We also excluded hospitals without Medicaid reimbursement data. We did not use the weights available in the KID because they are intended only to produce national discharge estimates and are invalid for hospital-level estimates. Consequently, the KID allowed us to compare estimated financial losses across hospital types, with the recognition that those outcomes are underestimated.
The KID does not record DSH payments. However, we examined the 2009 audited financial records for 10 of the 12 FSCHs included in our KID study population. These hospitals had submitted their 2009 annual financial records to the Children’s Hospital Association for their inclusion in the Pediatric Analysis and Comparative Tool (PACT) database. Unlike the KID’s sample of discharges, the PACT database contains all Medicaid-insured inpatient costs and reimbursements and DSH payments. Therefore, access to a second data set in the PACT database permitted us to determine the full financial margin of each hospital’s Medicaid-insured and uninsured inpatient population and to estimate the effect of DSH payments in offsetting losses. All financial records had undergone independent audits for accuracy. Financial records from an additional 15 FSCHs from non–study population states were made available to us, and the results of all 25 hospitals are included in the eTable in the Supplement. This study was deemed exempt from institutional board review, with waiver of consent by the Office of Research Integrity at Children’s Mercy Hospital and Clinics, University of Missouri–Kansas City.
Our primary outcome was the per-hospital, aggregate inpatient pediatric net Medicaid income derived from the 2009 KID. The net Medicaid income was defined as the hospital-level reimbursement for inpatient care of children with Medicaid coverage minus the cost of that care. Our secondary outcome, based on the PACT data, was the proportion of Medicaid financial loss reduced by DSH payments.
Figure 2 shows how per-hospital Medicaid charges, costs, and reimbursement in the 2009 KID were calculated. We calculated each hospital’s net Medicaid income, which represents reimbursements minus costs, as follows. To estimate costs, we summed the charges for Medicaid-insured patients and then multiplied those charges by the hospital’s ratio of costs to charges (RCC). The RCCs are a common method for the determination of health care costs.14- 16 The Agency for Healthcare Research and Quality RCCs undergo internal validation and have shown high correlation compared with external financial data sources (both private and governmental sources), as well as similarity to estimates that are based on specific hospital cost centers.17- 19 The RCCs are a recommended method for the conversion of charges to costs20,21 and are derived from detailed reports submitted by hospitals to the Centers for Medicare & Medicaid Services.17 The RCCs represent a hospital’s total inpatient annual costs and charges across all conditions and payers.17 While using RCCs to estimate individual hospitalization costs may lack precision, in aggregate they will yield appropriate cost estimates.18 To estimate reimbursements for Medicaid-insured patients, we multiplied the per-hospital costs by each hospital’s ratio of Medicaid reimbursement to costs. Each hospital’s ratio of Medicaid reimbursement to costs was determined from publicly available, audited reports,22 as well as Medicaid cost reports from the Centers for Medicare & Medicaid Services Healthcare Cost Report Information System23 and the American Hospital Association. To calculate each hospital’s ratio of Medicaid reimbursement to cost, total Medicaid reimbursements (excluding any DSH payments) were divided by total Medicaid costs. Finally, we subtracted total costs for Medicaid-insured patients from reimbursements to obtain the net Medicaid income.
For measures using the PACT database, we multiplied each hospital’s total Medicaid costs, reimbursements, and DSH payments by their proportion of inpatient to total Medicaid charges. This calculation resulted in estimates of the inpatient-specific Medicaid costs, reimbursements, and DSH payments. Because the proportion of 2009 inpatient to total Medicaid charges was not available, 2010 data for that proportion were used.
The main exposure was hospital type, categorized by children’s hospital status and teaching status. A hospital was designated as a children’s hospital if it met the definition created by the Children’s Hospital Association, namely, a not-for-profit, self-governing, independent hospital dedicated to serving children or a pediatric unit within a general hospital, which has (1) an autonomous governing structure or a standing committee in the multihospital system, (2) a daily census of at least 45 patients (excluding healthy newborns), (3) pediatric specialties to support a pediatric training program, (4) a distinct public identity with established entrances and emergency facilities, and (5) either fiscal autonomy or discrete cost centers and a separate staffing plan.24 The Children’s Hospital Association further subcategorizes children’s hospitals as FSCHs, specialty (hospitals caring for a limited number of diagnoses, such as pediatric oncologic conditions), and children’s hospitals within general hospitals (CHGHs) if the pediatric unit of a general hospital met the definition of being a children’s hospital and self-identifies as a children’s hospital (Figure 1).
A hospital was designated as a teaching hospital according to the Agency for Healthcare Research and Quality’s definition that the hospital “has an [American Medical Association] AMA-approved residency program, is a member of the Council of Teaching Hospitals (COTH) or has a ratio of full-time equivalent interns and residents to beds of 0.25 or higher.”25 Because all children’s hospitals in the cohort were teaching hospitals, only non–children’s hospitals were further categorized as non–children’s hospital teaching hospitals or non–children’s hospital nonteaching hospitals (NCNTs).
We compared patient and hospital characteristics across hospital types using the χ2 test. We then summarized hospital-level costs, reimbursements, and net income using medians and interquartile ranges (IQRs) and compared differences using the Kruskal-Wallis test. Using a software program (SPSS, version 22; IBM Corporation), P < .05 was considered statistically significant.
The 2009 KID study population included 1485 hospitals from 23 states. Table 1 lists characteristics of the included hospitals. The median number of Medicaid-insured discharges ranged widely across hospital types (from 4082 [IQR, 3524-5213] FSCHs to 161 [IQR, 41-420] NCNTs) and outnumbered the median number of uninsured discharges (from 123 [IQR, 69-252] CHGHs to 13 [IQR, 4-33] NCNTs).
The final study population included 843 725 Medicaid-insured discharges (Table 2). Although less than 5% of hospitals were children’s hospitals (FSCHs and CHGHs), they accounted for 20.0% of pediatric Medicaid-insured discharges and 23.4% of privately insured discharges. Forty-three percent of discharges from FSCHs had a complex chronic condition compared with less than 10% of discharges from NCNTs.
Large differences were seen across hospital types for per-hospital Medicaid costs, reimbursements, and net income (Table 3). Freestanding children’s hospitals had the largest costs for Medicaid-insured patients, with a median of $77.2 million, compared with less than $500 000 for NCNTs. The median net Medicaid income was an approximately $10 million financial loss for FSCHs compared with less than $50 000 for NCNTs. These estimates are based on the KID’s sample of 10% of uncomplicated births and 80% of all other inpatient discharges.
Using the PACT database, we determined the effect of DSH payments on financial losses attributable to inpatients with Medicaid coverage at a subsample of 10 FSCHs included in our KID study population. The median aggregate per-hospital costs attributed to pediatric Medicaid-insured inpatients was $143 072 171 (IQR, $125 856 907 to $158 409 100). The median reimbursement for that care was $98 856 475 (IQR, $81 181 610 to $112 958 669). Without the inclusion of DSH payments, the median financial loss was −$41 988 770 (IQR, −$65 992 439 to −$18 775 781). The median DSH payment attributable to inpatient care was $5 187 414 (IQR, $2 649 343 to $22 304 200). When DSH payments were included, all hospitals had a financial loss greater than $10 million, but the median losses attributable to Medicaid-insured discharges were decreased to −$28 749 182 (IQR, −$48 706 678 to −$13 659 723), or approximately half of the financial loss before the inclusion of DSH payments. The median costs associated with uninsured patients were $4 538 337 (IQR, $4 196 822 to $4 854 755).
In this study, we examined more than 800 000 Medicaid pediatric hospitalizations from 23 states to identify which hospital types incur the highest aggregate Medicaid financial losses from pediatric hospitalizations. We also estimated the amount of that loss reduced by DSH payments. We found large differences in the per-hospital financial losses across hospital types. In 2009, FSCH losses totaled more than $10 million per hospital compared with less than $50 000 for each NCNT. Because the KID sample represented approximately 10% of uncomplicated births and 80% of all other inpatient discharges, these estimated losses are likely underestimates of true losses. Financial records from 10 FSCHs containing all Medicaid-insured discharges revealed losses in excess of $30 million per hospital. When DSH payments were included, losses at FSCHs were reduced by almost half. In contrast, the number of uninsured discharges was low and was similar across hospital categories. In the subsample of FSCHs, the aggregate losses from Medicaid-insured patients far exceeded the aggregate losses from uninsured patients. The ACA’s effort to expand health insurance coverage was primarily directed at uninsured adults, not children. Compared with adults, fewer children were uninsured when the ACA was enacted. Therefore, it would be unexpected that hospital financial losses due to the care of uninsured and Medicaid-insured patients would be eliminated through the increased enrollment of uninsured children. Our findings indicate that financial losses from the care of inpatient Medicaid-insured children at any hospital, but especially children’s hospitals, are unlikely to be offset by insuring previously uninsured children.
Previous studies have examined the potential effects of health care payment reform on hospitals primarily serving adult populations. In one study,26 hospitals with small operating margins, high dependence on DSH payments, or location in states opting out of Medicaid expansion were most financially vulnerable. Other work predicts increased financial losses for safety-net hospitals owing to higher costs from both Medicaid-insured and uninsured patient populations as a result of continued growth of health care spending.27 One study28 examining the effect of health care reform in Massachusetts, which was partially replicated by the ACA, found that safety-net hospitals initially improved financially owing to the reduction in uninsured patients but later reverted to their prereform financial status when state-financed payments for uncompensated care (an equivalent to DSH payments) were reduced. Consequently, safety-net hospitals fared worse under Massachusetts health reform than non–safety-net hospitals.29
The financial effects of the reductions in DSH payments are likely to differ for hospitals serving children, primarily because these hospitals already have high Medicaid-insured patient proportions (including patients qualifying through the Children’s Health Insurance Program) and therefore a lower likelihood of financial gains from increased Medicaid enrollment. The potential clinical effects of financial losses may also differ for pediatric care compared with adult care. Within pediatric care, subspecialists are heavily concentrated within children’s hospitals, which in turn serve as regional referral centers.30,31
It is unknown if the reductions in DSH payments will affect the ability of children’s hospitals to continue outreach across regions to serve patients with higher complexity regardless of payer. However, for all hospital types, the effect of DSH payment reductions will depend greatly on the decisions of state and local policy makers, including individual state decisions about the allocation of DSH payments and the use of supplementary local funding to offset losses from uncompensated care. In addition, any increases in Medicaid reimbursement to the level of actual costs or to Medicare levels would greatly alter the effect of DSH reductions.32,33 Some hospitals may be able to offset Medicaid losses through the cross-subsidization of positive margins derived from the care of privately insured patients. However, the ability of each hospital to offset Medicaid losses through cross-subsidization is dependent on their market position, ability to negotiate with private insurers, and case mix. Hospitals already cross-subsidize care, and removing DSH payments may exacerbate this subsidy and thereby affect access for patients with Medicaid insurance.
This study has several limitations. Our study did not include outpatient or observation-stay discharges. Consequently, our results may underestimate financial losses across delivery settings. We were also unable to obtain hospital identifiers for 11 states. Of the 23 states with hospital identifiers, we were unable to obtain reimbursement data for almost one-fourth of the hospitals. We are unsure how Medicaid financial losses may have differed in hospitals without available data and whether the absence of those hospitals imparted selection bias. This study also relied on data from 2009, and it is possible that financial losses attributable to patients with Medicaid coverage have changed since that time. Since 2009, the number of children enrolled in Medicaid has increased.9,10 It may be that the older data used in the present study underestimated the current extent of financial losses. We were also only able to examine DSH payments of FSCHs and only 10 of the 12 FSCHs in our KID cohort had data in the PACT database. This small number of hospitals may affect the stability of our loss estimates and the generalizability of the findings. We could not examine DSH payments at non-FSCHs, which also have large volumes of inpatients with Medicaid coverage. However, these hospitals are situated within general hospitals and are likely to experience financial losses differently than hospitals that exclusively care for children. The effect of DSH funding depends greatly on the specific financial condition and insurance mix of each hospital. Therefore, any effects on patient care will depend not only on the decisions made by hospitals in light of new financial conditions but also on their pre-ACA financial health. Also, hospital cost reporting may not always be completely accurate depending on indirect cost allocation and other factors.
Finally, distinguishing which financial losses were due to excessively high costs was beyond the scope of the present study. Further investigation is needed to understand the contribution of payment algorithms for high-severity or high-complexity discharges, costs associated with trainees, and other factors. For instance, we found that the largest financial losses were at children’s hospitals, but those hospitals had increased proportions of high-complexity discharges and were teaching institutions.
Aggregate financial losses incurred by hospitals serving pediatric Medicaid-insured inpatients varied by hospital type, with losses at children’s hospitals greatly exceeding losses at other hospital types. Disproportionate Share Hospital payments reduced those losses by almost half. Given the few uninsured children at children’s hospitals, those hospitals are unlikely to offset DSH payment reductions through the increased enrollment of uninsured patients into either public or private insurance. Children’s hospitals serve many of the most complex patients. In this era of health care system reform, we need to consider how these payment changes may affect the unique patient populations served by children’s hospitals.
Corresponding Author: Jeffrey D. Colvin, MD, JD, Department of Pediatrics, School of Medicine, Children’s Mercy Hospitals and Clinics, University of Missouri, 3101 Broadway Blvd, 10th Floor, Kansas City, MO 64111 (firstname.lastname@example.org).
Accepted for Publication: May 18, 2016.
Published Online: September 12, 2016. doi:10.1001/jamapediatrics.2016.1639.
Author Contributions: Dr Colvin had full access to all the data in the study and takes responsibility for the integrity of the data and the accuracy of the data analysis.
Study concept and design: All authors.
Acquisition, analysis, or interpretation of data: Colvin, Hall, Berry, Gottlieb, Shah, Fieldston, Conway, Chung.
Drafting of the manuscript: Colvin, Hall.
Critical revision of the manuscript for important intellectual content: All authors.
Administrative, technical, or material support: All authors.
Conflict of Interest Disclosures: None reported.
Funding/Support: This work was supported by internal funds from Children’s Mercy Hospitals and Clinics (Dr Colvin). This research was completed as a part of the Academic Pediatrics Association Research Scholars Program (Drs Colvin and Bettenhausen).
Role of the Funder/Sponsor: The funding source had no role in the design and conduct of the study; collection, management, analysis, and interpretation of the data; preparation, review, or approval of the manuscript; and decision to submit the manuscript for publication.
Disclaimer: The views and opinions in this article reflect those of the authors and not necessarily the organizations that they represent.