# Presentation: 525542

## Hospital Uncompensated Care Issues

**Hospital Uncompensated Care Issues**

**Jack Ashby, M.H.A.**
- Hospital Research Director
- Medicare Payment Advisory Commission

## What is uncompensated care?

- Definition:  Care provided by hospitals or other providers that is not paid for directly by patients or insurers
- Includes charity care (furnished without expectation of payment) and bad debts (provider has unsuccessfully attempted to collect)
- Includes entire or partial bills from the uninsured as well as unpaid copayments and deductibles

**Notes:**
To remind the Commission, our new approach for the update recommendation involves first determining whether the current level of payments to hospitals is adequate.  This decision could lead to a recommendation that incorporates a correction to the current level of payments in our update recommendation.
The first step in this process is to determine whether the hospital cost base is appropriate.
The second step is to then determine the relationship of Medicare payments relative to costs.  This will allow to do two things:
First, assess whether the current level of payments to all hospitals is adequate, and second, to then consider the distribution of payments among hospitals.  
Our approach is to consider Medicare payments to the whole hospital, for all hospital services purchased by Medicare.  Our goal is to assess inpatient and outpatient payment adequacy.  

## What is uncompensated care? (continued)

- Uncompensated care does not include:
- The contractual allowances of government and private insurers
- Lack of Medicaid payment for days beyond a length of stay limit
- Courtesy discounts for employees, students, members of religious orders, etc.

**Notes:**
Our first question is whether the current hospital cost base is appropriate. For this, we first considered the long-term trends that established the hospital cost base in the 1990s.
We know that cost growth was modest in the 1990s. The biggest reason for this was large declines in Medicare length of stay.  For three years in the mid-1990s cost per case growth was actually negative.  Other factors that kept cost growth down were revenue pressure from both public and private payers, and slow wage growth for hospital workers.  Based on these factors, we conclude that the hospital cost base established in the 1990s is appropriate.
In recent years, we observe that hospital cost growth has increased.  We attribute this to smaller declines in length of stay, as well as increased hospital wage growth due to a tighter labor market as well as a nursing shortage.  
Because of these factors, we believe that the recent higher cost growth for hospitals does not appear inappropriate.  This leads us to conclude the current hospital cost base is appropriate.

## How is uncompensated care measured?

- Hospitals measure their uncompensated care at charges (revenue foregone)
- Policymakers prefer a measure of costs
- Useful computed variables:
- Uncompensated care costs as a percent of total costs
- Share of uncompensated care costs covered by government subsidies
- Uncompensated care losses as a percent of total costs

## How much uncompensated care do hospitals provide?

- Uncompensated care costs:  $21.6 billion and 6.1 percent of total costs
- Uncompensated care losses:  $19.0 billion and 5.3 percent of total costs

- Source:  AHA Annual Survey, 2000.

## Trend in uncompensated care costs and losses

-                   17.3
-                   12.1

-       5.1
-       5.3

-       6.1
-       6.1

- 1996
- 2000

-                   23.3%
-                   22.4
-                   18.9

-       4.6%
-       4.8
-       4.9

-       6.0%
-       6.2
-       6.0

- 1984
- 1988
- 1992

-   government subsidies

- Losses

- Costs

- Year

-    Proportion of
-    uncompensated care                                                                                                                                                       covered by

- Uncompensated care as
- a percent of total costs

- Source:  AHA Annual Survey.

## How does uncompensated care vary by type of hospital?

**	****	****	****Uncompensated care as****	****	****	**** ****	****	****a percent of total costs**
**  ****Type of hospital**	               **Costs****	****	****      Losses**
- 	Urban		6.4%			5.3%
- 	Rural		5.3			4.7
- 	Major teaching		10.0			7.4
- 	Other teaching		4.9			4.5
- 	Non-teaching		4.9			4.4
- 	Voluntary		4.7			4.4
- 	Proprietary		4.7			4.0
- 	Urban government 		15.7			10.6
- 	Rural government         		6.4			4.9

**Notes:**
And they seem to have improved in 2000 and 2001. We fund a quarterly survey of about 500 hospitals that is weighted to create a representative national estimate.  This survey showed a 4.7 percent margin for 2000, and through the first three quarters of fiscal year 2001 we see a total margin of 4.5 percent.
Because hospital total margins are typically lower in the last quarter of a fiscal year compared with the annual margin, this margin is probably overstated.  When seasonally adjusted, the 2001 margin corresponds to an annual margin of 4.0 percent. 
These findings for 2000 and 2001 suggest that the recent poor financial performance of hospitals had perhaps reached its low point in 1999.  
In our consideration of broad indicators of the relationship of payments to costs for the hospital industry, we conclude that in general payments relative to costs for hospitals are adequate. 
Having established this, we now turn our attention to Medicare.

## How concentrated is the provision of uncompensated care?

- Uncompensated care costs	       Share of
- as a percent of total costs	       hospitals
- 0 to < 2				   	13.4%
- 2 to < 5					 43.0
- 5 to < 10					 35.3
- 10 to < 20					  6.8
- 20 to < 30					  0.7
- 30 to < 40					  0.4
- 40 to < 60					  0.2
- 60 and above				  0.2

- Source:  AHA Annual Survey.

## How concentrated is the provision of uncompensated care? (continued)

-  Measure	1992		2000
- Share of all uncompensated	45%		  46%
- care costs furnished by the
- top 250 providers
- Of the amount furnished by        61%		  53%
- the top 250 providers,
- share provided by
- government hospitals

- Source:  AHA Annual Survey.

## Is there a relationship between uncompensated care and overall financial performance?

- 	      Uncompensated care
-                                        costs as a                   Average
- Type of hospital	   percent of total costs	total margin
- Major teaching	  10.0%	 	   1.5%
- All other	  4.9	 	5.4
- Private	  4.7		 5.3
- Urban government	15.7		-1.3
- Rural government	  6.4	 	 3.4

- Source:  AHA Annual Survey.

## Is there a relationship between uncompensated care and overall financial performance? (continued)

- Uncompensated care costs	   	Average
- as a percent of total costs	   	total margin
- 0 to < 2		 4.0%
- 2 to < 5		 4.6
- 5 to < 10		 4.4
- 10 to < 20		 4.2
- 20 to < 30		 3.8
- 30 to < 40		 3.1
- 40 to < 60		 3.2
- 60 an above		-0.4

- Source:  AHA Annual Survey.

## What revenue sources do hospital use to cover their uncompensated care costs?

- Payments from private insurers (cost shifting)
- Government subsidies
- Operating subsidies
- Dedicated taxes
- Charity care pools
- Medicaid disproportionate share payments
- Medicare disproportionate share and indirect medical education payments
- Revenue from non-patient sources

## States with highest and lowestuncompensated care costs

- Louisiana	         	  13.1%
- New Mexico	             12.8
- Texas		             10.3
- Mississippi		    8.7
- Nevada		    8.1
- Oklahoma		    7.9
- Arkansas		    7.6
- Florida	 	    7.5
- California		    7.4
- Alabama		    7.3

- Nebraska		    2.0%
- Minnesota		    2.0
- North Dakota	    	    2.4
- Wisconsin		    2.6
- Oregon		    2.9
- Washington		    3.1
- Michigan		    3.2
- Missouri		    3.3
- Rhode Island	    	    3.4
- Iowa			    3.9

- Highest			     Lowest

- Source:  AHA Annual Survey.