Safety-net hospital systems have long played a special role in the nation’s health care system by serving low-income, medically, and socially vulnerable patients regardless of their ability to pay. Beyond caring for people regardless of insurance coverage, safety-net systems provide comprehensive care to meet the needs of their diverse, complex patient populations, including culturally-responsive health and social services that other hospital systems do not.

As providers of last resort, some safety-net systems, especially public hospitals, are expected by their communities and by state and local governments to offer needed but unprofitable services, regardless of whether adequate revenue streams exist to support these services.

In recognition of that role, national, state, and local government agencies historically have provided supplemental funding to these systems to offset unreimbursed and under-reimbursed care. Under the Affordable Care Act, however, that is changing. With the expectation that most people will be insured under the new law, policy makers have planned to reduce much of this supplemental funding. In this view, safety-net systems will either become financially independent or close.

However, early experience under health reform suggests otherwise: millions of Americans remain uninsured today especially in the many states opting out of expanded Medicaid coverage. And evidence from Massachusetts health reform suggests that patients prefer to use those safety-net facilities even when they have insurance. As a result, most safety-net systems face increasing financial and competitive pressures as government funding decreases and performance expectations rise.

Previous articles in Health Affairs by Nancy Kane and colleagues and by Teresa Coughlin and colleagues and in other publications have argued that, for safety-net systems to continue fulfilling their missions while remaining afloat financially, they must reorganize their operations and their care delivery, and reposition their organizations within the health care market. For many safety-net systems, the changes required are substantial.

Our recent study of eight safety-net hospital systems indicates that while system redesign is needed to meet the demands of the current health care environment, the association between strategic system redesign and operating margins is weak. Critical additional factors affecting the safety-net systems’ operating margins are their business strategies and their competitive positions in local markets.

Our analyses raise important policy concerns about the need for consensus on the continuing role of safety-net systems under health reform, and the likely need for continuing government support to ensure that patients can continue to benefit from the extra value these systems provide.

The Role—And Limits—Of Strategic System Redesign

Recognizing the scope of the challenges facing safety-net systems, the Agency for Healthcare Research and Quality (AHRQ) commissioned our study of opportunities and sources of support for system redesign in safety-net systems. A key component of the project, conducted by a team of researchers, which two of us led (Lukas and Holmes), at the Boston University School of Public Health, was field studies of eight safety-net hospitals systems in the fall of 2012 and spring of 2013. Specific organizations were selected for study because they were known to be redesigning their systems.

Although all were well-known, historically innovative systems, not all were financially successful. To learn more about the systems we chose and our detailed analysis, please contact the authors.

In planning the study, we expected to find that strategic system redesign would position the sites well for success, including financial viability. Unlike traditional quality improvement activities, which may be highly focused and loosely aligned with one another, system redesign entails coordinated, managed improvement across multiple functional areas and levels of the organization.

Strategic system redesign aligns redesign efforts with the organization’s business priorities. Denver Health is frequently cited as a successful safety-net system that used Lean philosophy and methods to transform its organization—including financial viability—through strategic system redesign, as described by Gabow and Mehler in Health Affairs and by Harrison and Kimani. Originally developed in manufacturing, Lean is a continuous quality improvement strategy for reducing waste, as described by Spear, which has been applied successfully in some health care systems, as described by Toussaint and by Goldsmith.

What we found was a more complex picture. Our analyses indicate that the eight study systems were working, albeit with different areas of emphasis, to restructure their operations to increase efficiency and reduce costs; strengthen their alignment with physician organizations; and reorganize the care delivery systems and payment models to meet current regulatory and market requirements — and continue to attract patients.

We also found that strategic system redesign is not consistently associated with financial success. We defined strategic system redesign as having three elements:

  • maturity of systematic redesign approaches, indicated by the extent to which the organization uses advanced quality and process improvement methods (such as Lean) across the system.
  • extent of strategic business plan implementation, indicated by the presence of a business plan to respond to market competition and other external pressures, beyond internal quality and process improvement; and activities underway to implement that plan;
  • extent to which redesign was linked to strategic priorities, indicated by clear processes and structures to identify and support quality and process improvement or redesign activities that will further work on strategic priorities.

Using qualitative interview data from site visits to the eight study sites, we categorized the sites into high, medium, or low on each of the three elements above. To initially assess financial success at the time of our visits, we examined the operating margins for the hospital systems between 2010 and 2012, as reported by each site. They fell into three natural groupings: positive in all 3 years, mixed over the period, and negative in all 3 years. (The operating margin groupings remained stable when we looked at system finances after completing the study.)

When we looked at the sites on both sets of indicators, we did not find a strong correspondence between strength of strategic system redesign and positive operating margin. Across the operating margin groupings, the sites have mixtures of scores in redesign, particularly in their maturity of systematic redesign approaches and the extent to which redesign is aligned with strategic priorities.

The most striking comparison is between the only two sites that rated high on all three redesign elements: one had consistently positive operating margins (4.79-5.36 percent between 2010 and 2012) while the other had consistently negative operating margins (-0.50 and -1.50 over the same period).

Business Strategy and the Local Market

The lack of strong association between operating margin and strategic system redesign suggests that other factors come into play. While the operating margin at each study site was influenced by many factors, one factor that seems to stand out across sites is the system’s business strategy and its competitive position in the local market.

Negative Operating Margins

At one end of a rough continuum of strategy and financial success, two study sites were not pursuing specific business strategies beyond internal quality and efficiency improvements, despite negative operating margins. This approach appeared to be based on their belief that, as public safety-net systems, they would continue to receive the needed government support.

Positive Operating Margins

At the other end of the continuum, three systems with consistently positive operating margins between 2010 and 2012 (and more recently) had developed successful business strategies. Two of these successful sites were large systems with long-established strategies of market dominance — one by forming strong alliances with a substantial majority of physician practices in their area and the other by acquiring the other non-safety-net hospitals and practices in the area.

The third site was working to strengthen its presence as a tertiary referral center by upgrading its physical facilities and by opening specialty ambulatory services in suburban areas to draw patients with commercial and Medicare coverage to the hospital for their acute care.

Two of the three were also working to build an expanding number of centers of excellence in lucrative specialty areas.

Uncertain Operating Margins

In the middle of the continuum, the three remaining systems—those with uncertain or negative operating margins—were all in highly competitive markets with no chance of market dominance and limited opportunity to expand to new markets. All three had strong safety-net identities and were the largest safety-net providers in their areas.

While all were academically affiliated, one was a tertiary hospital, and the other two were community hospitals systems. In addition to working internally to improve efficiency and develop new models of care, they were all focused on active business strategies to expand beyond their current patient base. Of the three, only the system with tertiary capacity—and with the most recent attention to its operational efficiency and business practices—succeeded in achieving a break-even operating margin after several years of negative margins.

The other two systems, despite longer standing systematic redesign efforts and active business strategies—one by reconfiguring its delivery system and affiliating clinically with a tertiary system, and one by creating a high-end physical environments—did not achieve financial success from those strategies, a pattern continued in fiscal year 2014.

We recognize that these analyses have the limitations of a small sample. Nevertheless, the lack of association suggests that not all safety-net systems can redesign themselves to financial success. The eight sites we studied were undoubtedly at the high end of the safety-net curve in terms of skills and resources. Smaller safety-net systems and those that are community hospitals rather than academic medical centers are likely to experience greater challenges both in their internal redesign efforts and in meeting the demands of the current competitive environment.

Implications For The Future Of Safety-Net Hospital Systems

While all hospital systems face similar issues, safety-net systems encounter particularly intense challenges shaped by the vulnerable populations they serve, the comprehensive services they offer, tight finances, and uncertain future government payments.

Strategic system redesign is necessary, but not sufficient to ensure the financial health of safety-net systems in all situations. This point is reinforced by Hacker and colleagues in a case study of the Cambridge Health Alliance. In any given local market, a safety-net system may not have the service mix—for example, tertiary surgical procedures—needed to offer lucrative services to attract commercially-insured patients or open markets to establish new business.

Safety-net systems also may retain high proportions of government payers in their mix, face inadequate Medicaid rates, and lack market share leverage to negotiate higher commercial rates. Thus their options for success in strategic system redesign to achieve financial viability are more limited than other systems.

There currently is no strong consensus on the continuing role of safety-net systems. It is important to build that consensus. To retain the extra value that safety-net systems provide while maintaining their financial viability, they will likely need continued government support and appropriate realignment of incentives.

Author’s note: The research reported in this blog was funded by the Agency for Healthcare Research and Quality under contract HHSA290201000029I/HHSA29032001T, Task Order 2. The views expressed here are solely those of the authors and do not represent any U.S. government agency or any institutions with which the authors are affiliated.

Other study team members who critically contributed to this work are Elisa Koppelman, Gouri Gupta, Martin Charns, Cara Frigand, Natasha Neal, Karen Hacker, and Caroline Logan.