Sources of Payment for Uncompensated Care for the Uninsured

Summary

Uncompensated care costs for the nation’s uninsured averaged $42.4 billion per year in the 2015-2017 time period. While substantial, these costs significantly declined following implementation of the Affordable Care Act’s coverage expansion, down from $62.8 billion per year in 2011-2013. Although health care providers incur substantial cost in caring for the uninsured, the bulk of their costs are compensated through a web of complicated funding streams, financed largely with public funds from the federal government, states and localities. This brief estimates the level of public funding that was paid to help offset providers’ uncompensated care costs for the uninsured in 2017. To conduct the analysis, we rely on several secondary data sources including government budget appropriations and expenditure data for major public programs that provided funds to cover the cost of care for the uninsured, as well as analyses of secondary data sources completed by others.  Key findings include:

• Nationally, at least $33.6 billion in public funds were paid to providers to help defray providers’ uncompensated care costs associated with caring for the uninsured in 2017.
• The federal government accounted for an estimated $21.7 billion, or nearly two-thirds of the public funding sources examined, most of which was through the Veterans Health Administration or Medicaid; providing $11.9 billion, states and localities made up the balance, primarily through indigent care and public assistance programs.
• Comparing the level of public funding to our estimate of total uncompensated care costs for the uninsured ($42.4 billion per year in 2015-2017), we calculate that in the aggregate nearly 80.0 percent of providers’ uncompensated care costs were offset by government payments designed to cover these costs.

Given the rise in the number of the uninsured since 2017, provider uncompensated care costs associated with caring for the uninsured have likely increased. Between 2017 and 2019, the number of uninsured grew by an estimated 1.5 million.  In addition, with the economic toll brought on by the pandemic, the nation’s uninsured rate may have continued to climb in 2020. With the increase in uninsurance since 2017, provider uncompensated care also likely increased.  As policymakers undertake efforts to expand coverage and assess the financial impact of the pandemic, understanding uncompensated care costs and the adequacy of public funding to help defray these costs can help direct policies targeted to the uninsured. With substantial public funding of uncompensated care, government costs associated with increases in coverage could be offset in part by savings in other parts of the public ledger.

Introduction

Uninsured people use less care than their insured counterparts, but when they do use care and cannot pay for it themselves, the cost of that care is uncompensated.  Providers may absorb these costs as bad debt or tap into funding sources designed to cover some of the costs. However, these funding sources  may be inefficient or may not target funds to providers with the most uncompensated care, which can  leave uninsured people with bad debt, credit issues, or even bankruptcy.

Over the years, the federal government, states, and localities have devoted considerable resources to pay providers for care they provide to uninsured patients through several public program efforts (e.g., Veterans Health Administration and state and local indigent care programs) and also through direct financial support (e.g., Medicaid disproportionate share hospital (DSH) payments).

The economic downturn caused by the COVID-19 pandemic has potentially led to millions more people in the United States being uninsured. In addition to posing challenges to these individuals’ ability to access needed health care and be protected from medical debt, rising uninsured rates could exacerbate issues with uncompensated care costs associated with providing health care to the uninsured.

In this brief, we examine government funding streams that were available to help providers defray the costs of providing medical services to the uninsured in 2017. Specifically, building on previous analyses, we use government program data and appropriations information and other data to estimate the level of public funds paid in 2017 to help offset providers’ uncompensated care costs associated with caring for the uninsured. This study complements our analysis that estimates the total cost of uncompensated care for uninsured people, using an alternative approach to estimate specific sources of funding for uncompensated care.¹ We compare the total amount estimated in this analysis to our 2017 estimate of the total cost of care for uninsured people to assess the extent to which government funding defrays the uncompensated care costs for uninsured people.

Methods

We use publicly available program data and appropriations information and other secondary data to estimate the level of public funds paid in 2017 to help offset providers’ uncompensated care costs associated with caring for the uninsured. Specifically, we examine the following government funding sources: the Veterans Health Administration, the Medicaid program (namely, Medicaid DSH and uncompensated care pool payments), state and local indigent care programs, state and local public assistance programs, the Indian Health Service, and community health centers. For government funding tied to individual patients, the estimates reflect payments various programs made for direct medical care and services for uninsured people including inpatient care, outpatient care, behavioral health serves and prescription drugs. Non-medical related program activities (e.g., costs associated with facilities and administration) are not included. We also excluded uncompensated care costs associated with long-term care services. We then compare this level of estimated public funding to our estimate of the cost of uncompensated care provided to uninsured people in 2017, which was generated using data from the Medical and Expenditure Panel Survey. Although we include major sources of public funding, we acknowledge that we do not account for all available government funding streams to help provide care for the uninsured.2 While this leads us to underestimate the level of available public funds for uncompensated care, previous analysis indicates that these sources account for a relatively small share of public funds for uncompensated care. To the extent possible, we tried to match services and payments we included with those contained in our recent analysis that estimated the level of uncompensated care costs for the uninsured. This was done so we could compare the extent to which government funding defrays the uncompensated care costs for uninsured people, but we acknowledge that the alignment is likely imperfect. Another limitation to the analysis is that we do not account for private funding sources that are available to help pay for care received by the uninsured such as care provided to the uninsured by philanthropic organizations or by private physicians or private funds that flow through government-funded programs, such as prescription drug rebates. These estimates rely on available information on program budgets as well as a series of supported assumptions about to what extent funds are directed to cover the cost of care for uninsured people. Details on the different data sources, the assumptions, and the process for estimating the level of government funding can be found in the technical appendix.

Findings

In the aggregate, we estimate that government payments to offset the cost of uncompensated care for the uninsured totaled $33.6 billion in 2017 (Figure 1 and Table 1).  The federal government contributed nearly two-thirds of these payments, an estimated $21.7 billion. States and local government payments accounted for the remaining amount, $11.9 billion.

The Veterans Health Administration was the single largest government payment source, spending an estimated $10.3 billion in caring for the uninsured in 2017, all of which was federal funds (Table 1). With estimated spending totaling $9.8 billion, funding provided through the Medicaid program followed closely. Medicaid payments to cover the cost of care for the uninsured were split between DSH payments ($4.4 billion) and uncompensated care pool payments ($5.4 billion).  The federal government accounted for more than four-fifths of this Medicaid funding, reflecting states’ use of alternate financing arrangements to finance their share of DSH and uncompensated care pool funds.³

Through public assistance and indigent care programs, states and localities spent an estimated $9.9 billion on caring for the uninsured. The bulk of these payments, $7.7 billion, came from tax appropriations for indigent care programs. An estimated $2.2 billion was spent through state and local government public assistance programs.

Other federal programs examined were the Indian Health Service, which spent an estimated $2.3 billion on the uninsured (all federal funds), and community health centers which spent an estimated $1.3 billion, with $1 billion being federal payments and $0.3 billion state and local.

Table 1: Estimate of Public Funding for Uncompensated Care Costs for Uninsured by Program Type and Funding Sources Examined, 2017 ($Billions)
Program	Funding by Program by Level of Government ($Billions)
	Federal	State/Local	Total
Total Estimated Public Funding for UCC Costs for Uninsured by Payment Sources Examined	$21.7	$11.9	$33.6
Veterans Health Administrationa	$10.3	NA	$10.3
Medicaid Programb	$8.1	$1.7	$9.8
UCC Pool Payments	$4.6	$0.8	$5.4
DSH Payments	$3.5	$0.9	$4.4
State and Local Programs	NA	$9.9	$9.9
State/Local Tax Appropriations for Indigent Programsc	NA	$7.7	$7.7
State/Local Public Assistanced	NA	$2.2	$2.2
Indian Health Servicee	$2.3	NA	$2.3
Community Health Centersf	$1.0	$0.3	$1.3
NOTES: a U.S. Department of Veteran Affairs. (2019). “Volume II Medical Programs and Information Technology Programs Congressional Submission FY 2019 Funding and FY 2020 Advance Appropriations.” http://www.va.gov/vetdata/Expenditures.asp; Huang, G., Muz, B., Kim, S., & Gasper, J. (2018). “2017 Survey of Veteran Enrollees’ Health and Use of Health Care.” Westat. https://www.va.gov/HEALTHPOLICYPLANNING/SOE2017/VA_Enrollees_Report_Data_Findings_Report2.pdf. b Medicaid and CHIP Payment and Access Commission (MACPAC). (2018, December) “MACStats: Medicaid and CHIP Data Book.” https://www.macpac.gov/wp-content/uploads/2018/12/December-2018-MACStats-Data-Book.pdf; U.S. Government Accountability Office (GAO). (2019, July). “Medicaid States’ Use and Distribution of Supplemental Payments to Hospitals.” Report to Congressional Requesters. GAO-19-603. https://www.gao.gov/assets/710/700378.pdf;  U.S. Government Accountability Office (GAO). (2014, July). “Medicaid Financing States’ Increased Reliance on Funds from Health Care Providers and Local Governments Warrants Improved CMS Data Collection.” Report to Congressional Requesters. GAO-14-627. https://www.gao.gov/assets/670/665077.pdf; U.S. Government Accountability Office (GAO). (2015, March 13). “Medicaid Financing: Questionnaire Data on States’ Methods for Financing Medicaid Payments from 2008 through 2012.” GAO-15-227SP. https://www.gao.gov/products/gao-15-227sp;MACPAC. (2019, March). “Medicaid Base and Supplemental Payments to Hospitals.” Note the link to this issue brief is no longer publicly available but formerly accessed at https://www.macpac.gov/wp-content/uploads/2018/06/Medicaid-Base-and-Supplemental-Payments-to-Hospitals.pdf. c Centers for Medicare and Medicaid Services. (2019, December). “National Health Expenditure Accounts (NHEA).” https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical. d Centers for Medicare and Medicaid Services. (2019, December). “National Health Expenditure Accounts (NHEA). ”https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical. e U.S. Department of Health and Human Services, Indian Health Service. (2018). “Indian Health Service Budget Submission Fiscal Year 2019 Congressional Justification.” https://www.ihs.gov/sites/budgetformulation/themes/responsive2017/display_objects/documents/FY2019CongressionalJustification.pdf. f U.S. Department of Health and Human Services, Health Resources & Services Administration (HRSA), Bureau of Primary Health Care. (2017). “2017 Health Center Data.”  https://bphc.hrsa.gov/uds2017/datacenter.aspx?q=tall&year=2017&state=. SOURCE: Authors’ estimates derived from secondary data.

Government payments substantially offset the cost of uncompensated care for the uninsured. In other recent work, we estimated uncompensated care costs for the nation’s uninsured averaged $42.4 billion per year in the 2015-2017 time period. Comparing this estimate to our estimate of government payments for uncompensated care in 2017 ($33.6 billion), public dollars cover nearly 80 percent of providers’ costs of caring for the uninsured.

The remaining share of uncompensated care (about 20 percent) may be covered by private sources, provider charity, or possibly transferred to other payers in the health care system. While, overall, government funding offsets nearly four-fifths of provider uncompensated care costs, it does not pay for all of these costs.  Based on our estimates, about $8.8 billion is not covered by public dollars included in this analysis.  Some of this remaining share may be accounted for by public sources not considered in this analysis, though in earlier analysis we estimate those amounts to be relatively small. Private funding sources (e.g., workers compensation, provider charity and philanthropic organizations), which we did not consider here, may also cover some of the residual share. Some of it may be also be paid for by the privately insured through increased health insurance premiums. The extent to which providers shift costs associated with shortfalls in Medicare and Medicaid payments and caring for the uninsured to private payers has been a long-standing health policy question and remains unsettled.⁴ While limited research has been conducted on provider cost shifting to pay for charity care associated with the uninsured,⁵considerable work has examined whether hospitals charge private payers more because of shortfalls in public payments. Evidence on this question is mixed, showing that provider’s ability to do so is largely based in market power, cost shifting occurs at a relatively low rate, and when it occurs it does so well below a “dollar for dollar” shift.⁶

Even if we assume, however, that all the $8.8 billion spending on the uninsured not covered by public dollars was passed to the privately insured, the effect on premiums would be small. According to the National Health Expenditures Account, spending on private health insurance premiums totaled $975.5 billion in 2017, so uncovered spending on the uninsured accounted for less than 1 percent total spending on health insurance premiums.

Looking Ahead

Even with the significant coverage expansion afforded by the ACA, provider uncompensated care costs associated with caring for the uninsured remain substantial. In other recent work, we estimate that these costs averaged $42.4 billion each year in 2015-2017. At the same time, as reported here we find that the government covers the vast majority of uncompensated care costs; we calculate that nearly 80 percent of these costs were compensated with public funding.

Importantly, though, our analysis examined providers’ uncompensated care costs and sources of public funding in the aggregate, not at the individual provider level. The federal government, states and localities support multiple programs designed to help offset provider uncompensated care costs, and targeting of payments made under these varied programs has been a longstanding issue. Thus, some providers may incur costs treating the uninsured and receive little to no compensation.

The level of provider uncompensated care is far from static. Since 2017, the level of uninsurance has increased. Between 2017 and 2019, the number of the uninsured grew by 1.5 million and may have continued to increase in 2020 due the economic downturn caused by COVID-19. So, in all likelihood, provider uncompensated care costs have also increased since 2017.

Apart from rising uninsurance, changes to government payments to cover uncompensated care costs have occurred since 2017, and more are scheduled.  Beginning in in fiscal year 2020, for example, the distribution of Medicare hospital uncompensated care payments changed so that hospital uncompensated care levels rather than Medicaid and Supplemental Security Income (SSI) days are used to allocate these payments. Estimated to total about $8.4 billion each year, this Medicare policy change provides a substantial new funding source to help offset providers’ uncompensated care costs associated with the uninsured.⁷ On the other hand, sizable reductions in federal Medicaid DSH allotments are scheduled. Under current law, cutbacks in federal funding totaling $8 billion each year are set to start fiscal year 2024 and run to fiscal year 2027. As policymakers undertake efforts to expand coverage and assess the financial impact of the pandemic, understanding uncompensated care costs and the adequacy of public funding can help direct policies targeted to the uninsured. With substantial public funding of uncompensated care, government costs associated with increases in coverage could be offset in part by savings in other parts of the public ledger.