Safety net hospitals are broadly defined, but a common characteristic is that they are not owned by investors or shareholders, and their primary motivation is to serve the community rather than make a profit (Hefner & Hogan & Opoku-Agyeman, et al. 2021). SNHs are usually located in low-income, medically underserved communities where most of their patients are uninsured or Medicaid beneficiaries. Most safety net hospitals struggle to break-even or are operating at a deficit which threatens closure, or forces them to privatize (Khullar, D., Song, Z., & Chokshi, D. A. 2018). This is because with the large proportion of uninsured patients, healthcare services go uncompensated. And even when those patients are on Medicaid, it is often not enough to close the gap in spending for the hospitals.
The federal government provides supplemental payments, which are distributed by state governments, to compensate for the revenue hospitals lose from Medicaid. However, because revenue is used to calculate the size of a hospital, this means that much of these supplemental payments go to hospitals who don’t need it (Evans, M. Whyte, L.E., & McGinty, T. 2022). In fact, these supplemental payments covered only 51% of the costs of uncompensated care at hospitals receiving payments nationwide (U.S Government Accountability Office. 2019)
This gap between the supply of SNHs in low-income areas and the demand for healthcare creates a shortage of health resources that we could define as a market failure, due to the inefficient allocation of federal funds to hospitals, usually private, that usually do not face a similar, proportionally large client base of Medicaid beneficiaries.
But this poses the question, if a hospital cannot manage to operate independently, should their services be subsidized by the federal government? Would a more competitive healthcare market incentivise better care? I argue that the healthcare market does not meet the five qualifications of a competitive market: many small buyers and sellers, all firms producing identical products, all market participants have full information about price and product characteristics, transaction costs are negligible, and firms can easily enter and exit the market. Therefore a competitive model shouldn’t be applied to the hospital system, and government subsidies to safety net hospitals are crucial for access to care and the reduction of health disparities.
The demand for uncompensated care (Medicaid) has increased; National health expenditure increased 2.7% in 2021, Medicaid spending increased 9.2% that same year, and hospital expenditures grew 4.4% – This was a slower rate of increase than 6.2% in 2020, however the spike in hospital expenditures in 2020 is most likely a result of the COVID-19 pandemic response (Centers for Medicare and Medicaid Services. 2023). As Medicaid takes up a higher percentage of GDP annually, so does the cost of supplemental payments. And yet the supply of affordable and accessible healthcare is constantly under threat by bankruptcy and closure due to inefficient allocation of government supplemental payments.
- The market consists of many small buyers and sellers
One local example: The Atlanta Medical Center, owned by Wellstar, was a safety-net hospital and was one of only two level 1 trauma centers in the area. Low income residents in the area who benefited from access to the non-profit hospital were given little to no option as to which hospital to go to given the lack of available care centers, cutting off any opportunity for competitive behavior from the hospitals. State officials have since then advocated for increased funding to Grady Hospital to compensate for the new healthcare deficit. However, it’s unlikely that investing in Grady alone is sufficient enough to cover the displacement of patients (Thomas, D, J. 2022)
But the issue of hospital closure is predominantly a rural health issue, not an urban one like described in Atlanta, and it affects the majority of Americans. “Health-care deserts” are defined as areas where residents lack adequate access to pharmacies, primary care providers, hospitals, hospital beds, trauma centers, and low-cost health centers. 80% of Americans live in a county with at least four of the six types of healthcare deserts (Nguyen, A., & Kim, S. 2021). This means that the majority of Americans are not given adequate choice as health care consumers.
2. All firms produce identical products.
Hospitals vary significantly in terms of nosocomial infections, medical errors, and wait times, not only at a state level, but even within a county (Agency for Healthcare Research Quality, 2023). Safety net hospitals and privately owned, for-profit hospitals differ dramatically in terms of the range of their services provided. Their revenue will determine how much they can invest in high-tech care, the number of services provided, and the number of healthcare providers, which will affect patient wait times. This means that they do not in fact produce comparable services.
3. All market participants have full information about price and product characteristics.
Because of the nature of health insurance, patients usually do not know the true cost of care until after they have received a service and their copay is charged, while the charge of services does vary by hospital, even within a region (Kurani, N., Rae, M., Pollitz, K., Amin, K., & Cox, C. 2022). Because of the lack of price transparency, patients cannot effectively allocate their spending to which medical costs are optimal for their budget, this process only occurs in the health insurance marketplace.
4. Transaction costs are negligible.
Transaction costs for healthcare would involve the cost of transportation and wait times on the patient-end. For hospitals themselves, the transaction cost of healthcare administration is incredibly high; in 2017 the cost of healthcare administration in the united states was 34.2% of national health expenditures, compared to only 17% for our neighbor, Canada (Himmelstein, D. U., Campbell, T., & Woolhandler, S. 2020). The transaction costs are anything but negligible.
5. Firms can easily enter and exit the market.
Hospitals mergers and acquisitions drive up the cost of healthcare services (Ginsburg, P. 2017). The market consolidation of private hospitals makes it increasingly difficult for smaller hospitals to enter and thrive in the market, since it’s more lucrative for newly licensed physicians to pursue employment at a larger practice. This further contributes to the monopolization of healthcare by blocking the opportunity for smaller, more accessible practices to enter the market and hire a sufficient number of practitioners.
Because the hospital system does not meet the qualifications of a competitive market, it will not benefit safety net hospitals or healthcare consumers to allow non-profit hospitals and smaller practices to continue to operate without additional government funding and support. By not supporting these kinds of healthcare providers, it is only increasing the prevalence of healthcare deserts and driving up the cost of care when patients can finally access it. By shifting the allocation of supplemental payments from larger private practices to smaller ones or those with more Medicaid beneficiaries, it can close the gap between the demand for healthcare and the supply of affordable providers.
References
Hefner, J. L., Hogan, T. H., Opoku-Agyeman, W., & Menachemi, N. (2021). Defining safety net hospitals in the Health Services Research Literature: A systematic review and critical appraisal. BMC Health Services Research, 21(1). https://doi.org/10.1186/s12913-021-06292-9
Khullar, D., Song, Z., & Chokshi, D. A. (2018, May 10). Safety-Net Health Systems at risk: Who bears the burden of … Health Affairs. Retrieved April 24, 2023, from https://www.healthaffairs.org/do/10.1377/forefront.20180503.138516/
Evans, M., Whyte, L. E., & McGinty, T. (2022, December 4). Billions in covid aid went to hospitals that didn’t need it. The Wall Street Journal. Retrieved April 24, 2023, from https://www.wsj.com/articles/billions-in-covid-aid-went-to-hospitals-that-didnt-need-it-11670164570
Government Accountability Office. (2019, July 19). Medicaid: States’ use and distribution of supplemental payments to hospitals. U.S Government Accountability Office. Retrieved April 24, 2023, from https://www.gao.gov/products/gao-19-603
Centers for Medicare and Medicaid Services. (2023, February 17). NHE fact sheet. CMS . Retrieved April 24, 2023, from https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nhe-fact-sheet#:~:text=Medicaid%20spending%20grew%209.2%25%20to,28%20percent%20of%20total%20NHE.
Thomas, D. J. (2022, October 31). After weeks of Drama, disappointment, Atlanta Medical Center to close. ajc. Retrieved April 24, 2023, from https://www.ajc.com/news/atlanta-news/after-weeks-of-drama-disappointment-atlanta-medical-center-to-close/WCORMLKD7FEEJAD3NA4XI3KY7A/
Nguyen, A., & Kim, S. (2021, September 9). Mapping healthcare deserts: 80% of the country lacks adequate access to healthcare. GoodRx. Retrieved April 24, 2023, from https://www.goodrx.com/healthcare-access/research/healthcare-deserts-80-percent-of-country-lacks-adequate-healthcare-access
Agency for Healthcare Research and Quality. (2023, March). National Healthcare Quality & Disparities Reports. AHRQ. Retrieved April 24, 2023, from https://www.ahrq.gov/research/findings/nhqrdr/index.html
Kurani, N., Rae, M., Pollitz, K., Amin, K., & Cox, C. (2022, June 30). Price transparency and variation in U.S. health services. Peterson-KFF Health System Tracker. Retrieved April 24, 2023, from https://www.healthsystemtracker.org/brief/price-transparency-and-variation-in-u-s-health-services/
Himmelstein, D. U., Campbell, T., & Woolhandler, S. (2020). Health care administrative costs in the United States and Canada, 2017. Annals of Internal Medicine, 172(2), 134. https://doi.org/10.7326/m19-2818
Ginsburg, P. (2017, February 3). Health Care Market Consolidations: Impacts on costs, quality and access. Brookings. Retrieved April 24, 2023, from https://www.brookings.edu/testimonies/health-care-market-consolidations-impacts-on-costs-quality-and-access/
