Sources of Payment for Uncompensated Care for the Uninsured

Issue Brief
  1. The estimates in this brief include spending to cover both implicitly subsidized care (that is, the cost of care for an uninsured person with no identifiable source tied to that specific person) and care covered through alternative (non-health insurance) sources, such as payments to providers through the Indian Health Service or grants to Community Health Centers.

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  2. For example, we do not include funding from the Ryan White HIV/AIDS Program or the Title V Maternal and Child Health Services Block Grant Program.

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  3. The high share of federal funding is due to how states generally finance their share of these payments, which is through alternative financing sources such as provider taxes and intergovernmental transfers. See appendix for details.

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  4. See for example, Frakt, A.B. (2011). How Much Do Hospitals Cost Shift? A Review of the Evidence. The Milbank Quarterly,  89 (1); 90-130. DOI: 10.1111/j.1468-0009.2011.00621.x;Gruber, J. & Rodriquez, D. (2007). How much uncompensated care do doctors provide? J. of Health Economics 26,  1151-1169. DOI: 10.1016/j.jhealeco.2007.08.001;Colorado Department of Health Care Policy & Financing. (n.d.). Colorado Cost Shift Analysis. https://www.colorado.gov/pacific/hcpf/colorado-cost-shift-analysis.

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  5. One important exception to this is a study that showed that physicians provide negative to very limited uncompensated care to the uninsured. Gruber, J. & Rodriquez, D. (2007). How much uncompensated care do doctors provide? J. of Health Economics 26, 1151-1169. DOI: 10.1016/j.jhealeco.2007.08.001.

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  6. The ability to cost shift depends upon several factors, one being relative market power between hospitals and health plans. So, in some cases hospitals with substantial market power may have the ability to negotiate higher payments from insurers in response to increases in uncompensated care costs. But, Frakt finds that the preponderance of the literature as of 2011 shows that cost shifting is one strategy hospitals can adopt to make up for payment shortfall but that others (e.g., cutting costs) may be even more important. Changes to the health care market since 2011 (e.g., increased provider integration and consolidation) could shift the dynamics between payors and hospitals, in turn affecting the extent of provider cost shifting. Frakt, A.B. (2011). How Much Do Hospitals Cost Shift? A Review of the Evidence. The Milbank Quarterly, 89 (1); 90-130. DOI: 10.1111/j.1468-0009.2011.00621.x

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  7. In our analysis, we did not consider Medicare uncompensated care payments because until 2020 these payments were focused on defraying providers’ Medicaid payment shortfall not on the uninsured. Centers for Medicare and Medicaid Services. (2019, August 2). “Fiscal Year (FY)2020 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Prospective Payment System (CMS-1716-F).” https://www.cms.gov/newsroom/fact-sheets/fiscal-year-fy-2020-medicare-hospital-inpatient-prospective-payment-system-ipps-and-long-term-acute-0.

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Appendix
  1. Unlike in our previous work on this topic, we do not include Medicare payments as a funding source for uncompensated care for the uninsured. While Medicare makes DSH and uncompensated care payments, in 2017 these payments were not directed to covering uncompensated care costs for the uninsured. Centers for Medicare and Medicaid Services. (2016, August 2). “Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Final Rule Policy and Payment Changes for Fiscal Year (FY) 2017.” https://www.cms.gov/newsroom/fact-sheets/hospital-inpatient-prospective-payment-system-ipps-and-long-term-acute-care-hospital-ltch-final-rule. Specifically, in 2017 Medicare DSH payments were paid based on the level of a hospital’s Medicaid inpatient days, and Medicare uncompensated care payments were allocated based on a combination of the number of a hospital’s inpatient Medicaid days and the number of Medicare days for low-income Medicare patients who received Supplemental Security Incomes (SSI). In other words, in 2017 Medicare DSH and uncompensated care payments were largely directed at making up for the shortfall in Medicaid base payment, not uncompensated care for the uninsured. For more on this topic, see Stensland, J., Gaumer, Z.R., & Miller, M.E. (2016). Contrary To Popular Belief, Medicaid Hospital Admissions Are Often Profitable Because Of Additional Medicare Payments. Health Affairs, 35 (12), 2282- 2288. https://www.healthaffairs.org/doi/pdf/10.1377/hlthaff.2016.0599.  Importantly, beginning in fiscal year 2020 the way in which Medicare uncompensated care payments are distributed changed: Hospital uncompensated care levels (as reported in the Medicare cost report) rather than Medicaid and SSI days will be used to allocate Medicare uncompensated care payments, which are estimated to total about $8.4 billion. Centers for Medicare and Medicaid Services. (2019, August 2). “Fiscal Year (FY)2020 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Prospective Payment System (CMS-1716-F).” https://www.cms.gov/newsroom/fact-sheets/fiscal-year-fy-2020-medicare-hospital-inpatient-prospective-payment-system-ipps-and-long-term-acute-0. Another source of Medicare funding for uncompensated care for the uninsured that we included in previous work was Medicare Indirect Medical Education or IME payments which compensate teaching hospitals for the indirect costs of activities associated with medical teaching that add to the cost of treating Medicare patients. Similar to the distribution of Medicare DSH and uncompensated care payments in 2017, IME payments are paid out as a percentage add-on to a hospital’s inpatient Medicare payments and do not consider uncompensated care costs for uninsured in determining payment. The costs of uncompensated care for the uninsured is not part of the Medicare IME distribution formula.  http://www.medpac.gov/-public-meetings-/meeting-details/september-2019-public-meeting.

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  2. See note 1.

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  3. In addition to DSH and uncompensated care pool payments, states can also make other Medicaid hospital supplemental payments. As identified by the Medicaid and CHIP Payment and Access Commission (MACPAC) these are upper payment limit (UPL) payments, delivery system reform incentive (DSRIP) payments, and graduate medical education (GME) payments. 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;  Unlike DSH and uncompensated care pool payments, however, UPL, DSRIP and GME payments are not intended to help hospitals cover the unpaid costs of the uninsured but rather are designed to support other purposes. For example, UPL payments are meant to supplement Medicaid hospital fee-for-serve base payments that in recent years many states have reduced or frozen. 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. DSRIP payments, which are made available under some Medicaid Section 1115 demonstrations, are not intended to pay for medical services but rather are designed to help providers (hospitals and others) undertake infrastructure and other investments to improve access to and quality of care provided to Medicaid enrollees. Finally, GME payments are designed to support teaching hospitals in their efforts to train medical professionals, among other things. Given this, we do not include UPL, DSRIP and GME payments as funding for uncompensated care costs associated with the uninsured.

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  4. In addition to community-based acute care hospitals, Medicaid DSH payments are also paid to institutions for mental diseases or IMDs. To better align with our uncompensated care estimate based on the MEPS, which excludes individuals residing in institutions from the survey sample, we exclude IMD DSH payments from this analysis. 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.

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  5. States are statutorily required to submitting DSH audit data to CMS; at the time of MACPAC 2019 report 2014 was the latest year for which data were available. MACPAC. (2019, June). Report to Congress on Medicaid and CHIP June 2019. Chapter 2: Treatment of Third-Party Payments in the Definition of Medicaid Shortfall. https://www.macpac.gov/wp-content/uploads/2019/06/Treatment-of-Third-Party-Payments-in-the-Definition-of-Medicaid-Shortfall.pdf.

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  6. Increasingly, states have relied on Medicaid UPL payments to help cover the Medicaid shortfall. In 2017, states paid $12.9 billion in hospital UPL payments, higher than the $12.1 billion states paid in DSH in the year. 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.Given the scale of state use of hospital UPL payments, it is plausible, though not certain, that a sizable share of Medicaid DSH payments is targeted to cover unpaid costs of the uninsured.

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  7. The nine states: Arizona, California, Florida, Hawaii, Indiana, Kansas, New Mexico, Tennessee and Texas. 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.

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  8. ibid.

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  9. In addition to Medicaid uncompensated care pool payments, the GAO study included UPL payments and other add on payments in its non-DSH supplemental payment category. Similar to DSH payments, we considered the category of other sources of funding (e.g., tobacco settlement funds) as state funds for non-DSH supplemental payments. 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.

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  10. Note that we have excluded expenditures for enabling services such as outreach, case management, transportation services, as well as facility and non-clinical support services. Bureau of Primary Health Care, Health Resources and Services Administration (HRSA). (n.d.) Uniform Data System, 2017 Health Center Data. https://bphc.hrsa.gov/uds2017/datacenter.aspx?q=tall&year=2017&state=.

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  11. At 12 percent, private sources accounted the rest of Community Health Center (CHC) funding. Health Resources and Services Administration (HRSA). (n.d.). Health Center Program Data Table 9E. https://data.hrsa.gov/tools/data-reporting/program-data/national/table?tableName=9E&year=2017.

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