This report summarizes research on the effect of the major health insurance coverage expansion under the Affordable Care Act (ACA) on the drivers of uncompensated care (UCC) and on hospital UCC costs.
Hospital UCC costs totaled between $46 and $51 billion in 2012, according to the American Hospital Association (AHA)1 as well as data provided to the Center for Medicare and Medicaid Services (CMS) via Hospital Cost Reports.2 The Urban Institute reports that each individual uninsured for the full year of 2013 received $1,005 in implicitly subsidized uncompensated care, and that these costs totaled $49 billion nationwide in 2013.3
Though specific definitions differ, UCC is generally considered to be the unreimbursed cost of the care provided by hospitals to people who are uninsured, underinsured,4 or in some cases publicly insured. For the purposes of this report, we define hospital UCC costs as the combined total of bad debt and charity care.5 Bad debt refers to an amount hospitals anticipated receiving for services but in fact never received. Charity care is the value of services rendered for which hospitals never anticipated receiving payment, because the patient’s inability to pay was determined early in the course of care; both of these sources of UCC are in large part generated by medically indigent or uninsured patients, though unrealized co-pays or deductibles for insured patients are also included in this calculation.6,7,8
Uncompensated care is largely federally funded: through Medicaid, Medicare, the Veterans Health Administration, the Indian Health Service, community health center funding, and Ryan White funding for people with HIV/AIDS, the federal government is estimated to pay for 62 percent of UCC.9 The largest portion of these federal funds ($13.5 billion in 2013) flows through the Medicaid program in the form of Medicaid disproportionate share hospital (DSH) and upper payment limit (UPL) payments. Additionally, the Medicare program provides significant federal funding to providers for UCC through the Medicare DSH adjustments, payments for Medicare bad debt, and payments for indirect medical education (IME) ($8 billion in 2013).10 Though neither Medicare DSH nor IME payments are direct payments for UCC, they provide additional funding to recognize the higher cost structure of Medicare services, and may be available to offset provider UCC costs.
Though hospitals are not the only providers of UCC, on a cost basis they provide the majority of such care; 60 percent of all UCC costs are incurred through hospitals, while the other 40 percent of costs are incurred through publicly-supported community providers and office-based physicians. The AHA estimates that 6.1% of hospitals’ total expenses in 2012 were related to the provision of uncompensated care.11
Most analysts predicted that UCC would decline following the major ACA-driven coverage expansion in 2014 because an increase in the number of insured individuals would reduce the number who could not pay their hospital bills, as well as the need for charity care.12 The extent of this reduction is an empirical question, however, as it depends on a number of factors, including the extent to which newly-insured individuals are able to meet the cost-sharing obligations imposed by their plans.
Because of this anticipated decline in UCC following coverage expansion, the ACA enacts reductions in the major existing streams of federal Medicaid and Medicare reimbursement that help to offset costs of uncompensated care. For example, federal Medicaid DSH payments, which totaled $11.4 billion in 2012,13 are scheduled to be cut by just over 10%, or $1.2 billion, in FY2016 and by $17.6 billion in total by FY2020.14 Base Medicare DSH payments are reduced to 25 percent of previous levels under the ACA, and the remaining amount is distributed based on hospitals’ share of the total amount of uncompensated care provided nationally;15 these changes are estimated by the Congressional Budget Office to reduce Medicare DSH spending by $22.1 billion between 2010 and 2019.16 Given the magnitude and timing of these cuts, as well as the uncertainty introduced by whether and how states plan to expand Medicaid, it is critical to determine how UCC is changing following coverage expansion so as to avoid shifting a large financial burden to states, localities, and hospitals.
While this brief focuses primarily on changes in uncompensated care, hospital finances will also be affected by changes in utilization related to the expansion of insurance coverage. Increased volumes from higher utilization will often strengthen hospitals’ finances, although this need not be the case if providers agree to treat newly-insured patients with coverage that pays amounts that do not cover their marginal costs. Research examining prior insurance expansions can shed light on the changes in hospital utilization that might be expected. For example, evidence from Oregon’s Medicaid expansion showed that Medicaid increased the likelihood of being admitted to the hospital from 6.7 percent to 8.8 percent, a 30 percent relative increase.17 The Oregon expansion also suggested that Medicaid coverage increased use of emergency services by 40 percent, or 0.41 visits per person per year.18 Research examining a different abrupt gain of insurance – namely, turning 65 and qualifying for Medicare – similarly suggests a relative increase in admissions of 12-20 percent for those who were previously uninsured, particularly for people with chronic conditions19 and for admissions including elective procedures.20
However, the evidence is not entirely consistent; for example, a study of health care utilization after the creation of a new public insurance plan for low-income uninsured childless adults in Wisconsin found that in the first year of coverage, while outpatient visits increased 29 percent, and emergency department visits increased 46 percent, inpatient hospitalizations actually declined 59 percent as did preventable hospitalizations.21 Additionally, work from Massachusetts showed that overall hospitalizations in Massachusetts were unchanged relative to other states after the implementation of insurance expansion and that preventable hospitalizations declined.22 Further, emergency department visits declined to a small degree (6-8 percent), particularly for conditions which were likely treatable in less resource-intense settings.23
Given a rapidly changing health insurance landscape, it is clear that close ongoing attention to the impact of coverage expansion on hospital utilization, costs, and UCC at the national level is warranted. This report, which attempts to address these issues using the best available early evidence, is in two sections. The first section, “Changes in Hospital Uncompensated Care in 2014,” summarizes evidence available to date on the changes in the drivers of UCC during the first six months of major coverage expansion under the ACA, and allows us to look at initial trends in UCC at a subset of U.S. hospitals. Information in this section is based on quarterly hospital earnings reports, as well as member surveys conducted by hospital associations. The second section, “Projecting the Change in Total Hospital Uncompensated Care Costs,” uses estimates of the historical relationship between changes in insurance coverage and changes in UCC costs to project the decline in total U.S. hospital UCC costs as a result of increases in Medicaid coverage and reductions in the number of uninsured.
1 American Hospital Association, Uncompensated Care Cost Fact Sheet, January 2014. Available at http://www.aha.org/content/14/14uncompensatedcare.pdf