Uncompensated Care for the Uninsured in 2013: A Detailed Examination

Cost Shifting and Remaining Uncompensated Care Costs

Some observers maintain that some uncompensated care is financed by private insurance through cost-shifting—that is, health care providers, particularly hospitals, make up for losses they incur in treating uninsured patients by charging higher prices to and collecting higher payments from privately insured patients. This is a long-standing, complicated and controversial issue. Recent data suggest that private insurance payments exceed hospitals’ costs by over 30 percent.¹ In contrast, payments by both Medicare and Medicaid are less than hospital costs.² That private insurance payments exceed hospitals’ costs by a considerable amount enables hospitals to finance Medicare and Medicaid underpayments, as well as other expenditure items hospitals determined to be part of their missions.

However, there is limited evidence to indicate that rising numbers of uninsured people (and thus increases in uncompensated care) have caused hospitals to increase their charges to the privately insured. Even as the uninsured rate grew over the past two decades, hospitals’ uncompensated care as a share of overall cost has remained steady. Further, the private payment to cost ratio has steadily increased since 2001, suggesting that the rise in private surpluses is related to other forces, not caring for the uninsured.

Some hospitals with substantial market power in a local area may be able to negotiate higher charges in response to an increase in uncompensated care or a growth in Medicare and Medicaid underpayments. A prime example of such a hospital is major teaching hospitals. MedPac data, however, have shown that major teaching hospitals typically have lower private payment to cost ratios, high ratios of uncompensated care costs as a percentage of overall cost, and low total margins compared with other hospitals.³ MedPac work has also demonstrated that while some teaching hospitals may be able to increase charges when necessary, this does not seem to be the dominant pattern for hospitals overall.⁴  Specifically, MedPac found that in markets where private payments were high, hospital costs were also high. The presence of high private payments meant financial pressure was weak and hospitals incurred greater costs. Hospitals in these markets often lost money on Medicare because Medicare payments are set exogenously based on diagnoses and geographic cost indices, not the actual cost experience of the hospitals. This study also reported that in areas where there was more financial pressure because of a more competitive market, hospitals could not demand higher private payments, thus their costs were lower but their Medicare margins higher.

Based on the data generated in this study, we estimate the potential scope of cost shifting to private payers is relatively small. The value of uncompensated care in 2013 was $84.9 billion, and government sources provided $53.3 billion in payments to providers to help offset these costs. Of the remaining $31.6 billion in uncompensated care, $10.5 billion is charity care provided by office-based physicians (Table 3), which leaves $21.1 billion in uncompensated care costs that arguably could be financed by private insurance in the form of higher payments and ultimately higher insurance premiums in 2013. Total private health insurance expenditures in 2013 are estimated to be $925.2 billion (based on NHE projections). Using our estimate of $21.1 billion in providers’ uncompensated care costs that does not represent physician charity or is not covered by government funds, the amount potentially associated with uncompensated care cost shifting is only 2.3 percent of private health insurance costs in 2013. Even if our $21.1 billion estimate of the level of providers’ uncompensated care costs that is potentially financed by private insurance is off by as much as 100 percent (due to government funds overpaying some hospitals and undercompensating others, for example) and is instead $42.2 billion, the potential cost shift of caring for the uninsured to private insurance would only account for 4.6 percent of private health insurance costs in 2013.