How much do uninsured patients cost hospitals

do so, because of “price sensitive employers, aggressive insurers, and excess capacity in the hospital industry,” which suggests a relative lack of market power on the part of hospitals (Morrisey, 1996). Finally, the total burden of utilization and expenses by uninsured people has remained quite stable over the past decade or so (Taylor et al., 2001). For uncompensated care utilization by the uninsured to affect the rate of increase in service prices and premiums, the proportion of care that was uncompensated would have to be increasing as well.

There is somewhat more evidence for cost shifting among nonprofit hospitals than among for-profit hospitals because of their service mission and their location (Hadley and Feder, 1985; Dranove, 1988; Frank and Salkever, 1991; Morrisey, 1993; Gruber, 1994; Morrisey, 1994; Needleman, 1994; Hadley et al., 1996). Private hospitals have become less able to shift costs as health services markets have become more competitive (Morrisey, 1993; Bamezai et al., 1999; Keeler et al., 1999), although some analysts argue that the ability to shift costs remains substantial (Zwanziger et al., 2000). Some studies have demonstrated that the provision of uncompensated care has declined in response to increased market pressures (Gruber, 1994; Mann et al., 1995).

The concern with cost shifting from the uninsured to the insured population as a phenomenon may be changing to a focus on the transference of the burden of uncompensated care from private hospitals to public institutions due to decreased profitability of hospitals overall (Morrisey, 1996). Instead of shifting costs, private hospitals are cutting costs and reducing uncompensated care (Campbell and Ahern, 1993; Gruber, 1994; Zwanziger et al., 1994; Hadley et al., 1996; Morrisey, 1996; Dranove and White, 1998).

Private subsidies and cost shifting may also take place among communitybased providers, particularly in rural areas. Coburn (2002) argues that physicians in private practice are able to provide the 20 to 40 percent of uncompensated care in rural communities that they do because they are supported or subsidized by their community’s hospital. For employers in rural areas, the seriousness of the question of cross-subsidy is a function of scale. It is a greater burden in small towns, where there are fewer employers across whom to spread the cross-subsidy when it occurs in the form of higher costs for health care and for health insurance premiums. As a result, there is a competitive disadvantage that accrues to employers who offer more generous or greater subsidies of their employment-based coverage.

The extent to which cost shifting exists and thus the extent to which it influences medical care price increases are probably quite small. As reported in the previous section, the uninsured used an estimated $35 billion in uncompensated care in 2001. Hospitals received an estimated $23.6 billion in government subsidies basically earmarked for the care of the uninsured. Philanthropic support for hospital care to the uninsured has been estimated at another $800 million to $1.6 billion. Hadley and Holahan (2003a) assume that cross-subsidies from private insurance revenues to cover the costs of care provided to uninsured patients amount to 10 to 20 percent of the profit from hospital care provided to privately

But in new research—based on decades of previously confidential data—Kellogg School assistant professor of strategy Craig Garthwaite and his coauthors find that when the population of uninsured Americans increases, hospitals end up bearing the cost by providing uncompensated care. In fact, their results suggest that each additional uninsured person costs local hospitals $900 per year.

That means hospitals are effectively serving as “insurers of last resort” within the American healthcare sector by providing care to uninsured patients who cannot afford to pay their medical bills. “People are still going to the emergency room,” Garthwaite says, “and they are still receiving treatment—so the cost is still there. When governments do not provide health insurance, hospitals must effectively provide it instead.”

Insurers of Last Resort

Demand for uncompensated care is what Garthwaite calls relatively “inelastic”—it remains constant regardless of changes in healthcare supply. To demonstrate this, he and his coauthors Tal Gross of Columbia University and Matthew Notowidigdo of Northwestern University looked at 359 hospital closures from 1987 through 2000. Whenever a hospital closed, the uncompensated care costs for nearby hospitals rose significantly, suggesting that there was a nearly complete spillover effect. “Again, the cost does not go away,” Garthwaite says. “It’s passed on to the remaining hospitals.”

The spillover arises because the Emergency Medical Treatment and Labor Act, passed in 1985, requires that hospitals treat all individuals in need of emergency care regardless of their insurance status.

The government does provide some compensation to hospitals for treating low-income patients. Most of it is in the form of Disproportionate Share Hospital (DSH) payments, which, according to federal law, are owed to any qualified hospital that serves a large number of Medicaid and uninsured patients. But the research shows it is not enough to offset hospital costs. “The DSH payments are less than the uncompensated care that’s provided,” explains Garthwaite.

Nor does the cost fall on those who hold private insurance policies, as many policymakers assume. “There’s this idea that hospitals simply pass on the costs of uncompensated care to privately insured patients by raising prices,” Garthwaite says—a phenomenon known as “cost-shifting,” which some have also interpreted as a “hidden tax” on all Americans.

“We show evidence that it’s not true. If it were true, we wouldn’t see profits fall—but we see profits fall meaningfully following an increase in the share of the population that is uninsured.” Beyond the empirical evidence, though, Garthwaite says it is not clear that hospitals could shift costs in the way many policymakers assume they do. “Hospitals are sophisticated financial organizations,” he says. “If raising prices would have made them more money, they would have already raised prices.”

Ultimately, hospitals are left to absorb at least two-thirds of the cost of all of this uncompensated care, the researchers estimate.

Burden on Nonprofits

Interestingly, nonprofit hospitals end up absorbing the bulk of this care. A majority of private hospitals in the United States—more than 70 percent—are nonprofit firms and therefore expected to provide a “community benefit” in exchange for tax relief. One key component of this community benefit is charity care for indigent patients. For-profit firms do not face a similar community-benefit standard.

This means that when there are changes in the supply or demand of healthcare services to the poor, most of the burden—in terms of uncompensated care costs—falls on nonprofit hospitals, a finding that sheds new light on the role nonprofits play in the healthcare industry. In contrast to what many believe, nonprofit hospitals are not simply for-profits in disguise. “Previously, it wasn’t clear exactly what kind of role nonprofit hospitals were playing,” he says. “This demonstrates that they’re serving to fill in the gaps in the social safety net.”

The authors note that this burden on hospitals should not be seen as a foregone conclusion that results from health care being a necessary service. “Grocery stores also sell a vital product that is partially financed by the government through food stamps,” Garthwaite says. “But grocery stores that accept food stamps are not required to provide ‘uncompensated food’ for people who aren’t eligible for food stamps or who have already used their monthly benefits.” In both cases—healthcare and food stamps—the government deals with private firms to offer this assistance, but only in the healthcare sector do private firms incur costs beyond what the government compensates for.

The Costs of Disenrollment

The fact that hospitals, not governments, bear this cost has profound implications for the debate over Medicaid expansion. For evidence of what happens when millions of people lose their insurance, Garthwaite and his coauthors look at two recent case studies of large-scale disenrollment.

In 2005, citing severe budget constraints, Missouri and Tennessee both chose to cut back their public insurance programs. The disenrollments had a significant impact on local hospitals. In Missouri, whose program mostly supported low-income parents, the cost of uncompensated care was estimated at $556–786 for each newly uninsured citizen. In Tennessee—where four percent of the non-elderly population lost its public insurance—the uncompensated care cost reached $1,048–1,678. (Tennessee’s population was more costly because it included people who could afford to buy their way onto the state health insurance, but who may have had preexisting conditions).

Given that public insurance benefits hospitals as much low-income patients, it is no wonder that hospital groups are lobbying for its expansion. “We even see state hospital associations offering to pay more taxes,” Garthwaite says. “You don’t hear industry organizations say that very often.”

Garthwaite says this research was meant to understand the true cost of public insurance programs. “We want a debate about the Affordable Care Act and the Medicaid expansion and public insurance in general to be based on economic facts,” he says. “There are people who say it costs too much. What do we mean when we say it costs too much?”

For policymakers who want to balance state budgets while also offering public health insurance, factoring in the costs of uncompensated care might help them make more informed decisions about how to design statewide programs. “There will always be a minimum level of care that people are going to consume,” Garthwaite says. “So we need to have a conversation about how to most efficiently provide that care—otherwise we’re left with sloppy arguments. Choosing to ignore this population doesn’t mean the cost of that care is ever going to go away.”

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