Unintended consequences of the health reform law could bring financial distress to many of the nation’s 1,500 safety net hospitals, compelling them to form new business models, a just-released report contends.

“State cuts to Medicaid budgets are increasing despite the growing demand for services,” says the report from multi-industry management consulting firm Alvarez & Marsal. “Medicare value purchasing programs, combined with PPACA mandated reductions in disproportionate share hospital payments and Medicare market basket payment updates are likely to exacerbate financial constraints, particularly in states that do not plan on expanding Medicaid coverage. The PPACA will also provide newly insured Medicaid recipients a choice to shop elsewhere, potentially choosing non-safety net hospitals and their associated care delivery systems.”

Consequently, safety net hospitals should develop closer relationships with other providers, such as profitable academic medical centers, according to the consultancy. “Integration would facilitate scale economies, operational efficiencies and information liquidity, and enhance clinical effectiveness. Access to specialty care would also increase. Safety net hospitals also could affiliate with Federally Qualified Health Centers, shown to increase primary care access and cost-effective care delivery. A few safety net hospitals already operate FQHCs directly. Expert specialty care, combined with increased primary care access, could emerge as a new business model.”

So, while the reform law has the noble ambition of making health care more accessible and affordable, it brings a fundamental disconnect between policy and reality with unforeseen ramifications, says David Gruber, M.D., director of research in the health care unit of Alvarez & Marsal. “Safety net hospitals now are operating in the untenable crosshairs of economic distress and health care reform. Already experiencing the deleterious effects of ongoing reductions in Medicaid spending and fiscal constraints at all government levels, they must now deal with shifting funding streams that historically have supported their missions. The combined result could have a negative impact on socially disadvantaged and clinically vulnerable populations in communities throughout the country.”

The report, “Safety Net Hospitals at Risk: Rethinking the Business Model,” is free and available here. Brief registration is required.

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