Impact of Insurance Expansion on Hospital Uncompensated Care Costs in 2014. I. Introduction: Uncompensated Care Costs, Coverage Expansion, and Hospitals


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

2 ASPE calculations based on 2012 Hospital Cost Report Data. These calculations are described in Part 2 of this report as well as in Appendix B.
3 Coughlin TA et al, Uncompensated Care for the Uninsured in 2013: A Detailed Examination. The Kaiser Commission on Medicaid and the Uninsured, May 2014. Available at
4 There is variation in how the term “underinsured” is used for the purposes of defining uncompensated care, and likely in how it UCC for these patients is reported on a hospital level. For example, it could include only people who have insurance that doesn’t cover a certain service, or if could also include those whose insurance only covers a service partially (either because of copayment / deductible liability or because the payment rate is in adequate).
5 Medicare collects bad debt, charity care, and governmental payment shortfalls on Worksheet S-10: FORM CMS-2552-10, available at Using bad debt and charity care as the primary measures of UCC is an approach advocated by MedPAC and the AHA. See AHA reference above, as well as the MedPAC comment on the CMS FY2015 proposed inpatient prospective payment system rule, available at's-...
6 Additionally, the AHA makes a distinction between “self-pay” patients, i.e. those who have the means to pay for their care, and “charity care” patients, i.e. those who do not. However, this is not always specified in hospital reporting, particularly in the earnings calls discussed later in this report.
7 Note that the definition of UCC we use is slightly broader than that used for Medicaid Disproportionate Share Hospital (DSH) purposes, which consider some forms of bad debt to be unallowable for these calculations.
8 In some settings, including the ACA-strengthened mandatory reporting of community benefit to the Internal Revenue Service for non-profit hospitals, UCC also includes the payment shortfall from Medicaid, the Children’s Health Insurance Program (CHIP), and state or local government indigent care programs. The mandatory reporting system is via Schedule H, which is an addendum to hospitals’ annual 990 forms, and can be found here: This payment shortfall may contribute significantly to hospitals’ uncompensated costs in some settings. A recent study in the New England Journal of Medicine reported that non-profit hospitals spent 7.5% of their operating expenses on community benefit, of which 45% was due to public program shortfall, and 25% was for direct charity care provision. (Young et al, N Engl J Med 2013;368:1519-27)
9 Coughlin et al. (2014).
10 Coughlin et al. (2014).
11 AHA, Uncompensated Care Cost Fact Sheet
12 For example, see Graves JA, Medicaid Expansion Opt-Outs and Uncompensated Care. N Engl J Med 2012; 367:2365-2367; Price and Eibner, For States that Opt Out of Medicaid Expansion: 3.6 Million Fewer Insured and $8.4 Billion Less in Federal Payments. Health Aff (Millwood). 2013 Jun;32(6):1030-6; and Holahan, Buettgens, and Dorn, The Cost of Not Expanding Medicaid. The Kaiser Commission on Medicaid and the Uninsured, July 2013, available at
13 U.S. Department of Health and Human Services, FY2012 final DSH Allotments, released July 26, 2013. Available at
14 Bipartisan Budget Act of 2013 (H.J.Res.59). Available at
15 U.S. Department of Health and Human Services, August 2013, Federal Register, 78(160): 50496–51040. See in particular page 50505. Available at
16 CBO Director Doug Elmendorf, Letter To Rep. Nancy Pelosi, 3/18/10. See in particular Table 3. Available at
17 Finkelstein et al, Q J Econ. 2012 Aug;127(3):1057-1106
18 Taubman et al, Science. 2014 Jan 17;343(6168):263-8
19 McWilliams et al, N Engl J Med. 2007 Jul 12;357(2):143-53
20 Card et al, Am Econ Rev. 2008 Dec;98(5):2242-2258
21 DeLeire et al, Health Aff (Millwood). 2013 Jun;32(6):1037-45
22 Kolstad and Kowalski, J Public Econ. 2012 Dec 1;96(11-12):909-929
23 Miller S, J Public Econ. 2012 Dec 1;96(11-12):893-908

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