HOSPITAL 

UNCOMPENSATED 

CARE

Federal Action 

Needed to Better 

Align Payments with 

Costs

Report to Congressional Requesters

June 2016

GAO-16-568

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-16-568, a report to 

congressional requesters

June 2016

HOSPITAL UNCOMPENSATED CARE

Federal Action Needed to Better Align Payments with 

Costs 

Why GAO Did This Study

Hospitals have historically incurred 

billions of dollars in costs for services 

provided to uninsured and other lowincome individuals. The Patient 

Protection and Affordable Care Act 

(PPACA) offered ways for states to 

increase insurance levels including by 

expanding their Medicaid programs. In 

anticipation of the expected decline in 

the uninsured and uncompensated 

hospital costs, PPACA also reduced 

federal support for hospitals serving a 

disproportionate share of low-income 

and uninsured individuals and 

redirected some support to Medicare

UC payments for hospital

uncompensated care costs.

GAO was asked to examine federal 

support for hospital uncompensated 

care. GAO examined (1) the key

sources and amounts of federal 

support for hospital uncompensated 

care costs; (2) the basis for

determining hospital uncompensated 

care payments made under Medicaid 

and Medicare; and (3) the extent to 

which Medicare UC payments align 

with hospital uncompensated care 

costs. GAO analyzed federal payment 

data for fiscal years 2013 and 2014,

the most recent available, reviewed 

relevant laws and regulations, and 

interviewed CMS officials. 

What GAO Recommends

GAO recommends that CMS take two 

actions: (1) improve alignment of

Medicare UC payments with hospital 

uncompensated care costs; and (2) 

account for Medicaid payments made

when making Medicare UC payments 

to individual hospitals. In commenting 

on a draft of this report, HHS 

concurred with both recommendations.

What GAO Found

Key sources of federal support for hospitals incurring costs for services provided 

to uninsured and other low-income individuals (uncompensated care costs)

include multiple types of Medicaid and Medicare payments totaling about $50 

billion annually. GAO’s analysis shows that through Medicaid, a joint federalstate program for low-income individuals, states made three types of payments

that helped offset uncompensated care in fiscal years 2013 and 2014 totaling 

over $35 billion annually. Medicare, a federal program for aged and certain 

disabled individuals, made two types of payments in 2013 and three in 2014—

including a new type called Medicare Uncompensated Care (UC) payments—

totaling over $14 billion annually. Federal tax law also provides tax benefits—

estimated by researchers to be billions of dollars annually—to tax-exempt 

nonprofit hospitals that incur uncompensated care costs. 

The basis for determining these different types of Medicaid and Medicare

payments varies somewhat by type of payment. As shown in the table, however, 

the payment types are based on similar factors—generally hospitals’ costs or 

workloads related to providing services to Medicaid, uninsured, or low-income 

Medicare patients, or some combination of these.

a

For Medicaid, states determine and make payments subject to federal payment limits. GAO 

examined the basis for Medicaid payments by examining federal payment limits, not state payments.

Medicare’s UC payments are not well aligned with hospital uncompensated care 

costs for two reasons. First, payments are largely based on hospitals’ Medicaid 

workload rather than actual hospital uncompensated care costs. Centers for 

Medicare & Medicaid Services (CMS) officials acknowledge this could result in 

payments not aligned with uncompensated costs, particularly in states that have 

expanded Medicaid resulting in fewer uninsured individuals and lower 

uncompensated costs. In an April 2016 proposed rule, the agency announced 

that it is considering using hospitals’ actual uncompensated care costs as the 

basis for making Medicare UC payments. Second, CMS does not account for 

hospitals’ Medicaid payments that offset uncompensated care costs when 

making Medicare UC payments, even though the bulk of Medicare’s payments—

about 85 percent or $7.7 billion in 2014—were made on the basis of hospitals’ 

Medicaid workloads, for which hospitals may have also received Medicaid 

payments. CMS officials said that the Medicaid and Medicare programs are 

operated separately. Medicare UC payments that are not aligned with 

uncompensated care costs or adjusted to reflect Medicaid payments undermine 

CMS’s efforts to efficiently pay for health care services. View GAO-16-568. For more information, 

contact Katherine Iritani at (202) 512-7114 or 

iritanik@gao.gov.
Page i GAO-16-568 Hospital Uncompensated Care

Letter 1

Background 6

Multiple Sources of Federal Support for Hospital Uncompensated 

Care Totaled Nearly $50 Billion Annually in 2013 and 2014 8

Medicaid and Medicare Payments That Help Offset Hospital 

Uncompensated Care Costs Are Generally Based on Similar 

Factors 16

Medicare UC Payments Are Not Well Aligned with Hospitals’ 

Uncompensated Care Costs 20

24

26

Conclusions 

Recommendations for Executive Action 

Agency Comments and Our Evaluation 26

Appendix I Comments from the Department of Health and Human Services 28

Appendix II GAO Contact and Staff Acknowledgments 31

Related GAO Products 32

Figure

Figure 1: Medicare Payments That Help Offset Hospital 

Uncompensated Care by Type, 2013 and 2014 14

Contents
Page ii GAO-16-568 Hospital Uncompensated Care

Abbreviations

ASPE Assistant Secretary of Planning and Evaluation 

CMS Centers for Medicare & Medicaid Services

DSH Disproportionate Share Hospital

JCT Joint Committee on Taxation 

MedPAC Medicare Payment Advisory Commission 

PPACA Patient Protection and Affordable Care Act

HHS Department of Health and Human Services

IRS Internal Revenue Service

UC Uncompensated Care

UPL Upper Payment Limit

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Page 1 GAO-16-568 Hospital Uncompensated Care

441 G St. N.W.

Washington, DC 20548

June 30, 2016

The Honorable Orrin Hatch

Chairman

Committee on Finance

United States Senate

The Honorable Fred Upton

Chairman

Committee on Energy and Commerce

House of Representatives

Hospitals historically have incurred billions of dollars in costs for services 

they provided to uninsured and low-income patients for which they are not 

fully compensated. These costs are referred to as uncompensated care 

costs, and longstanding, federally supported programs provide funds to 

help offset these uncompensated costs. These programs include 

Medicaid, the joint federal-state partnership health coverage program for 

low-income and medically needy individuals, and Medicare, the federal 

health coverage program for the elderly and certain disabled individuals. 

At the federal level, the Centers for Medicare & Medicaid Services (CMS) 

within the Department of Health and Human Services (HHS), oversees 

state Medicaid programs and administers the Medicare program. For 

Medicaid, CMS provides guidance to states on federal requirements for 

Medicaid hospital uncompensated care payments and oversees 

compliance with these requirements. States are responsible for day to 

day administration of the program, including determining payment 

amounts to individual hospitals consistent with any applicable federal 

limits. For Medicare, CMS administers Medicare payment policies, 

including making Medicare payments to hospitals for uncompensated 

care.

Legislative changes made under the Patient Protection and Affordable 

Care Act (PPACA), enacted on March 23, 2010, have implications for the 

amount of uncompensated care hospitals provide, as well as for the 

amount and allocation of federal support for hospital uncompensated care 

Letter
Page 2 GAO-16-568 Hospital Uncompensated Care

costs.1 Under PPACA, states have the option to expand their Medicaid 

programs to cover nearly all adults with incomes at or below 133 percent 

of the federal poverty level.2 PPACA also required the establishment of 

health insurance exchanges by January 1, 2014—marketplaces offering 

private health insurance coverage—and provided for federal subsidies to 

qualified individuals and families who purchase health insurance through 

the exchanges. As a result of these changes, the number of people with 

health insurance has increased. For example, the Congressional Budget 

Office and the Joint Committee on Taxation (JCT) have estimated that the 

number of uninsured individuals would decline by 12 million in 2014.3

Given that increases in the number of people with health insurance could 

significantly lower the amount of uncompensated care hospitals provide, 

PPACA also made changes intended to more closely align certain 

Medicare and Medicaid funds with hospital uncompensated care costs. 

For example, PPACA redirected some existing Medicare funds paid to 

hospitals serving a disproportionate share of the nation’s low-income 

individuals in order to establish a Medicare Uncompensated Care (UC) 

payment specifically to offset hospitals’ uncompensated care costs, 

including the cost of treating uninsured patients. Researchers have noted 

that the reduction in the number of uninsured individuals varies by state; 

for example, states expanding Medicaid to cover the newly eligible adults 

have had greater reductions in the number of uninsured individuals than 

others.4

 1

Pub. L. No. 111-148, 124 Stat. 119 (2010), as amended by the Health Care and 

Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (2010) 

(HCERA). In this report, references to PPACA include any amendments made by HCERA.

2

PPACA also provides for a 5 percent disregard when calculating income for determining 

Medicaid eligibility, which effectively increases this income level to 138 percent of the FPL. 

States were eligible for increased federal matching funds available for enrollees covered 

under the expansion beginning in January 2014.

3

The Congressional Budget Office and JCT estimate of the decrease in the number of 

uninsured individuals is based on comparing estimates of the number of uninsured 

individuals in 2014 absent PPACA with estimates of uninsured individuals in 2014 with 

PPACA enacted. See Congressional Budget Office, Updated Estimates of the Effects of 

the Insurance Coverage Provisions of the Affordable Care Act, April 2014 (Washington, 

D.C.: 2014).

4

See Office of the Assistant Secretary of Planning and Evaluation, Impact of Insurance 

Expansion on Hospital Uncompensated Care Costs in 2014 (Washington, D.C.: Sept. 24, 

2014.); and Robert Wood Johnson Foundation, State Health Reform Assistance Network, 

The Impact of Medicaid Expansion on Uncompensated Care Costs: Early Results and 

Policy Implications for States, (Princeton, N.J.: June 2015).
Page 3 GAO-16-568 Hospital Uncompensated Care

In light of the multiple changes that have affected, and will continue to 

affect, the amount and costs of hospital uncompensated care and the 

financial support hospitals receive from federal programs, you asked us to 

examine the various federal efforts to help hospitals with uncompensated 

care costs and the basis for determining federal payment amounts for 

hospital uncompensated care costs. This report examines

(1) the key sources and amounts of federal support for hospitals’ 

uncompensated costs of care in 2013 and 2014;

(2) the basis for determining hospital uncompensated care payments 

made under Medicaid and Medicare; and

(3) the extent to which Medicare UC payments align with hospital 

uncompensated care costs.

To examine the key sources and aggregate amounts of federal 

government support for hospital uncompensated care, we gathered data 

on reported aggregate payment amounts for hospital uncompensated 

care for each type of payment available under the Medicaid and Medicare 

programs in fiscal years 2013 and 2014—the most recent available.

5 We 

also obtained information on the value of tax-exemptions for nonprofit 

hospitals available in 2006 under federal tax laws. For Medicaid 

payments, we analyzed data from the quarterly Medicaid Expenditure 

Reports—referred to as the CMS-64—that states use to report Medicaid 

expenditures to CMS for the purpose of receiving federal matching funds. 

For Medicare payments, we obtained reported data on projected 

spending in fiscal years 2013 and 2014 from CMS.6 We also reviewed 

available information from the Internal Revenue Service (IRS) on tax 

exemptions provided to nonprofit hospitals, including relevant laws and 

 5

We did not include Medicaid or Medicare supplemental payments made by managed 

care plans that may offset hospital uncompensated care costs. 

6

See https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/ 

AcuteInpatientPPS/dsh.html. The aggregate payments reported by CMS are projected 

based on data in the most recent Hospital and Hospital Health Care Complex Cost Report 

(Hospital Cost Report) that all Medicare-certified hospitals are required to submit to CMS 

on an annual basis. The reports provide information on hospitals’ charges, costs, and 

utilization for all payers. The reports are audited before they are finally settled. CMS 

officials stated that this is a process that can take between 3 to 4 years. They also said 

that actual settled payment amounts for 2013 and 2014 will therefore not be available on 

the CMS website until 2017 at the earliest. 
Page 4 GAO-16-568 Hospital Uncompensated Care

IRS regulations, and interviewed IRS officials to clarify our understanding 

of these materials. In addition, we obtained available estimates on the 

financial value of tax-exemptions for hospitals that qualified for these 

exemptions under federal tax laws.

7

To assess the basis for determining hospital uncompensated care 

payments made under Medicaid and Medicare, we reviewed federal laws, 

regulations, and CMS policy and guidance documents that detailed the 

formulas—including the methodologies, definitions, and data sources—

used for determining payments that help offset hospital uncompensated 

care. For Medicaid payment types we reviewed the formulas for the 

federal payment limits that apply to payments made by the states. Under 

Medicaid, states have discretion to make payments in amounts up to 

hospital-specific payment limits and state-wide DSH allotments. We did 

not review the actual Medicaid payments that states made to individual 

hospitals or the basis for payments they made. For Medicare payments 

we reviewed federal formulas used to determine hospital payments that 

help offset uncompensated care costs. We did not analyze actual 

Medicare payments made to individual hospitals. In addition, we 

interviewed Medicaid and Medicare officials at CMS to understand each 

program’s policies for determining hospital uncompensated care. We also 

interviewed experts, including officials from the Medicaid and CHIP 

Payment and Access Commission (MACPAC), the Medicare Payment 

Advisory Commission (MedPAC), and industry stakeholders including the 

American Hospital Association and Healthcare Financial Management 

Association, to obtain their views on CMS’s policies to determine hospital 

uncompensated care payments under Medicaid and Medicare.

To determine the extent to which Medicare UC payments align with 

hospital uncompensated care costs, we examined CMS’s Impact File for 

the 2014 Final Rule that implements Medicare payment policies for fiscal 

 7

Although federal tax law provides tax exemptions to non-profit hospitals and does not—

as Medicaid and Medicare programs do—provide payments to hospitals for 

uncompensated care, we included federal tax laws in our review because the provision of 

uncompensated care is a measure by which nonprofit hospitals may qualify for tax 

exemptions. 
Page 5 GAO-16-568 Hospital Uncompensated Care

year 2014—the first year Medicare UC payments were made.8 We 

reviewed studies on the relationship between the factors on which 

Medicare UC payments were based and hospital uncompensated care 

costs, including a CMS contractor study and MedPAC studies.9 We also 

interviewed CMS officials regarding implementation of the Medicare UC 

payments, and MedPAC officials and the contractor hired by CMS to 

provide technical assistance about the implementation of the Medicare 

UC payment. We did not compare actual Medicare UC payments made to 

individual hospitals with those hospitals’ uncompensated care costs.

We determined that the data we obtained from CMS on Medicaid and 

Medicare payment amounts and from the CMS Impact file were reliable 

for purposes of our review by checking the data for discrepancies, 

comparing the data to other publicly available data, and communicating 

with officials to resolve any identified discrepancies. We conducted this 

performance audit from April 2015 to June 2016 in accordance with 

generally accepted government auditing standards. Those standards 

require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives. We believe that the evidence obtained 

provides a reasonable basis for our findings and conclusions based on 

our audit objectives.10

 8

CMS annually implements Medicare payment policies through the federal regulatory 

rulemaking process, including seeking public comment on notices of proposed 

rulemaking. In conjunction with this process, CMS develops payment models to estimate 

the effect policy changes will have on hospitals. The data from CMS’s payment models 

are made available in CMS’s impact files for review as part of the public comment 

process. 

9

See Dobson DaVanzo & Associates, LLC, Improvements to Medicare Disproportionate 

Share Hospital (DSH) Payments, a Report Prepared at the Request of Centers for 

Medicare & Medicaid Services (May 9, 2013); also see MedPAC, Report to the Congress: 

Medicare Payment Policy, March 2014.

10A list of related GAO products appears at the end of this report.
Page 6 GAO-16-568 Hospital Uncompensated Care

Hospitals are an important and significant provider of health care services 

to our nation. Nearly one-third of the total $3 trillion in health care 

spending in 2014 was attributed to hospital services.11 Three major 

payers comprise the bulk of our nation’s hospital spending: Medicare, 

Medicaid, and private health insurance companies:

• Medicare is a federal health program administered by CMS that 

provides health insurance coverage for seniors aged 65 and over, 

individuals with end-stage renal disease, and certain disabled 

persons.

• Medicaid is a joint federal-state health care program that provides 

health insurance coverage to low income and medically needy 

individuals. Medicaid is administered and operated by each state 

Medicaid program under CMS oversight. Within broad federal 

requirements, each state establishes provider payment rates, pays 

providers for services rendered, and determines the optional 

populations and benefits its Medicaid programs will cover beyond the 

mandatory populations and benefits states are required to cover. The 

federal government matches each state’s Medicaid expenditures for 

services according to the state’s federal medical assistance 

percentage.

• Private health insurance includes employer-sponsored coverage and 

coverage purchased by individuals from a private insurance carrier.

Medicare, Medicaid, and private insurance covered over 80 percent of 

spending on hospital services in 2014. The remainder of the spending 

came from various other sources including other third party payers and 

programs and out-of-pocket spending by patients.12 Patient out-of-pocket 

 11Centers for Medicare & Medicaid Services, National Health Expenditure Data, Table 7: 

Hospital Care Expenditures; Levels, Percent Change, and Percent Distribution, by Source 

of Funds: Selected Calendar Years 1970-2014, accessed on Jan. 6, 2016, 

https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-andReports/NationalHealthExpendData/NationalHealthAccountsHistorical.html.

12Other third party payers include workers’ compensation and local indigent care 

programs. 

Background
Page 7 GAO-16-568 Hospital Uncompensated Care

spending includes deductibles, coinsurance, copayments, or payments 

for services not covered by insurance or that exceed coverage limits.13

Some patients receiving hospital services do not have health insurance 

coverage through public programs or private insurance; as a result, 

hospitals may provide care to these uninsured individuals for which the 

hospital may not receive compensation. Although the federal government 

has multiple funding streams to help offset these and other hospital 

uncompensated care costs, no standard definition of uncompensated 

care costs exists across federal programs. As a result, no standard 

federal estimate of total hospital uncompensated care costs is available. 

On the basis of its annual survey of hospitals, the American Hospital 

Association estimated that hospital uncompensated care costs totaled 

over $46 billion in 2013.14 Any estimate of these costs would vary 

depending upon the definition of uncompensated care used for the 

estimate. Definitions of uncompensated care costs may include the 

following:

• Uninsured patient costs. These include the costs of services 

provided to patients who do not have health insurance coverage and 

are unable to pay for the services they receive; these services are 

sometimes referred to as charity care and can include the cost of care 

provided to privately insured patients whose insurance did not cover 

the services provided.

• Bad debt. This includes cost-sharing for which patients are 

responsible for paying but have not paid—-for example, deductible 

and coinsurance amounts.

 13A deductible is a set amount of spending that is the responsibility of the insured patient 

before the patient’s insurance begins paying. Co-insurance is the amount of a provider’s 

bill that is the responsibility of the insured patient; it is generally a percentage of the 

allowable charges for covered services. Copayments are a fixed amount paid for a 

covered service. In addition, services received that are not covered by a patient’s health 

insurance coverage—such as an individual with basic hospitalization coverage that has an 

exclusion for organ transplant services—or services that exceed coverage limits—for 

example, hospital days that exceed specified limits on the number of covered inpatient 

days—-are also the responsibility of the patient. 

14See American Hospital Association, Uncompensated Hospital Care Cost Fact Sheet 

(Washington, D.C.: January 2015.)
Page 8 GAO-16-568 Hospital Uncompensated Care

• Public payer payment shortfalls. These include the differences 

between payments from public payers such as Medicaid, and 

hospitals’ costs for the services provided to these payers’ 

beneficiaries.15

In fiscal years 2013 and 2014, the federal government made multiple 

types of payments to hospitals to help offset uncompensated care costs 

mainly through two programs—Medicare and Medicaid—totaling nearly 

$50 billion each year. Medicaid payments accounted for almost threequarters of these payments in each year. Federal tax laws provided other 

benefits to qualifying non-profit hospitals through tax exemptions.

In fiscal years 2013 and 2014, state Medicaid programs spent over $35 

billion in each year for payments that helped hospitals offset their 

uncompensated care costs. Medicaid spending comprised three types of 

payments: disproportionate share hospital (DSH) payments, upper 

payment limit (UPL) payments, and uncompensated care payments made 

under section 1115 demonstrations. All three payment types are, for 

purposes of this report, considered to be supplemental payments, which 

are payments generally made separately from, and in addition to, states’ 

regular, claims-based payments to hospitals for Medicaid services 

provided to Medicaid beneficiaries. Supplemental payments are generally 

made as lump sum payments on a monthly, quarterly, or annual basis. 

Specifically

• Medicaid DSH payments. These are Medicaid payments that 

Congress established for hospitals serving large numbers of Medicaid 

and low-income individuals to help offset their uncompensated costs. 

Federal law requires states to make DSH payments to certain eligible 

 15Payment shortfalls from Medicare are generally not included in definitions of 

uncompensated care, since Medicare’s inpatient prospective payment system, which pays 

a fixed amount for each type of inpatient admission, is intended to encourage efficiency in 

the delivery of care. Private payer shortfalls are also typically not considered in definitions 

of uncompensated care because hospitals have the ability to negotiate payment rates with 

private insurers. 

Multiple Sources of 

Federal Support for 

Hospital 

Uncompensated Care 

Totaled Nearly $50 

Billion Annually in 

2013 and 2014

Three Types of Payments 

Are Made in the Medicaid 

Program That Help Offset 

Hospital Uncompensated 

Care Costs, with 

Payments of over $35 

Billion Annually in 2013 

and 2014
Page 9 GAO-16-568 Hospital Uncompensated Care

hospitals and also limits DSH payment amounts to each hospital’s 

costs of providing uncompensated care, as defined under federal law 

and regulations governing Medicaid DSH payments.16 States have 

broad flexibility in deciding how to allocate these payments among 

eligible hospitals as long as any payment to an individual hospital 

does not exceed that hospital’s uncompensated costs of providing 

care to Medicaid beneficiaries and individuals without health 

insurance or other sources of third-party coverage for the service 

provided. State-specific limits also exist on the amount of federal 

funds available for Medicaid DSH payments.17

• Medicaid UPL payments to hospitals. These are supplemental 

payments states make per the Medicaid UPL regulations. The UPL is 

a limit or ceiling on the amount of a state’s Medicaid payments for 

certain fee-for-service Medicaid services the federal government will 

match and is based on an estimate of what Medicare would pay for 

comparable services. States’ regular payments to hospitals for 

services rendered to Medicaid beneficiaries are often below the UPL. 

Consequently, most states make UPL supplemental payments to 

some hospitals that are in addition to the hospitals’ regular payments 

but do not exceed the UPL. Medicaid payments to individual hospitals

are not limited to the hospitals’ costs of providing services, and UPL 

payments that states make have resulted in Medicaid payments that 

exceed hospital costs for Medicaid services, making funds available to 

the recipient hospitals for uncompensated care purposes.18 The UPL 

is not a hospital-specific limit but is applied in the aggregate across 

certain categories of providers, and states have some flexibility in 

 16States are required to make DSH payments to hospitals treating large numbers of 

Medicaid or low-income patients. 42 U.S.C. §§ 1396a(a)(13), 1396r-4(d). Congress first 

required states to make Medicaid DSH payments to hospitals in 1981 when it eliminated 

the requirement that states pay hospitals on a reasonable cost basis. Recognizing that 

hospitals that serve a large Medicaid and low-income population are particularly 

dependent on Medicaid reimbursement, Congress directed states to adjust payment rates 

to account for the atypical costs experienced by these hospitals in treating this population. 

See Omnibus Budget Reconciliation Act of 1981, Pub. L. No. 97-35, § 2173, 95 Stat. 357, 

808-809 (1981) (codified, as amended, at 42 U.S.C. § 1396a(a)-(13)): H. R. Rep. No. 97-

208, at 962 (1981) (Conf. Rep.). 

17PPACA included provisions to reduce Medicaid DSH payments nationally. Under current 

law, these payments are scheduled to be reduced by $43 billion between fiscal years 

2018 and 2025. 42 U.S.C. § 1396r-4(f)(7).

18See GAO, Medicaid: More Transparency of and Accountability for Supplemental 

Payments Are Needed, GAO-13-48 (Washington, D.C.: Nov. 2012)
Page 10 GAO-16-568 Hospital Uncompensated Care

deciding which hospitals will receive a UPL payment, and how to 

allocate UPL payments among hospitals.19 While UPL supplemental 

payments to providers are associated with particular types of services, 

whether the payments are intended to offset uncompensated care 

costs related to the provision of those services is generally not 

reported.20

• Section 1115 demonstration uncompensated care payments. 

These are payments that some states make to hospitals specifically 

for uncompensated care costs in conjunction with demonstration and 

pilot projects for which they have received approval from the 

Secretary of Health and Human Services.21 Section 1115 of the Social 

Security Act authorizes the Secretary of Health and Human Services 

to waive certain federal Medicaid requirements and allow costs that 

would not otherwise be eligible for federal matching funds for 

experimental, pilot, or demonstration programs that, in the Secretary’s 

judgement, are likely to assist in promoting Medicaid objectives.22

Certain states have received approval to make supplemental 

payments for hospital uncompensated care in their Medicaid 

 19Federal regulations establish separate UPLs for certain services provided by three 

categories of hospitals based on ownership: local (nonstate) government-owned or 

government-operated hospitals, state-government-owned or state-government-operated 

hospitals, and privately owned and operated hospitals. See 42 C.F.R. §§ 447.272, 

447.321 (2015). Also see GAO, Medicaid: Federal Guidance Needed to Address 

Concerns about Distribution of Supplemental Payments, GAO-16-108 (Washington, D.C.:

Feb, 2016).

20Although federal requirements do not permit Medicaid UPL payments for any purpose 

other than to pay for Medicaid services, for purposes of this report, we considered UPL 

payments as payments that can help offset uncompensated care costs because UPL 

payments that exceed Medicaid costs may be available for hospital uncompensated care 

costs for uninsured patients. In addition, Medicaid rules require that payments in excess of 

costs must be applied to hospital uncompensated care for purposes of DSH payment 

limits. 

21States have been approved to make two types of supplemental payments under 

Medicaid demonstrations: uncompensated care payments and incentive payments for 

delivery system reforms and improvements. Supplemental incentive payments—referred 

to as Delivery System Reform Incentive Payments —are not for medical services 

rendered and not for hospital uncompensated care.

2242 U.S.C. § 1315(a). 
Page 11 GAO-16-568 Hospital Uncompensated Care

demonstrations.23 Supplemental payments states make under 

demonstrations are made according to the terms and conditions 

approved by the Secretary of HHS for each demonstration.

In fiscal years 2013 and 2014, total Medicaid spending—state and federal 

funds—through the three types of payments exceeded $35 billion each 

year based on state Medicaid expenditure reports submitted to CMS. In 

fiscal year 2013, Medicaid DSH payments totaled $16.4 billion and 

combined UPL and section 1115 demonstration payments totaled $19

billion.24 In fiscal year 2014, Medicaid DSH payments totaled $18.1 billion 

and combined UPL and section 1115 payments totaled $17.5 billion. 

These payments could comprise a large proportion of payments that 

hospitals receive. For example, total Medicaid payments for hospital 

inpatient and outpatient services totaled over $88 billion in fiscal year 

2013 and about $84 billion in fiscal year 2014. All of these Medicaid 

payments were eligible for federal matching funds; that is, the federal 

government provided funds for half or more of the payments, depending 

on the state.25

 23In 2013 and 2014, 10 states made supplemental payments to hospitals for hospital 

uncompensated care under approved section 1115 demonstrations: Arizona, California, 

Florida, Hawaii, Kansas, Massachusetts, New Mexico, New Jersey, Tennessee, and 

Texas. Some of these states’ demonstrations also included supplemental incentive 

payments for delivery system reforms and improvements and did not offset hospital 

uncompensated care costs. 

24States are required to separately report DSH payments and hospital supplemental 

payments on supplemental payment reporting lines on the CMS expenditure reports. 

However, according to CMS officials, UPL supplemental payments and uncompensated 

care payments made under section 1115 demonstrations are reported together on the 

same line of the CMS expenditure report. As a result, we were unable to separately report 

payment amounts for each of these payment types. Our analysis does not include all 

Medicaid supplemental payments that states make. We did not include incentive 

payments for delivery system reforms in the total Medicaid supplemental payments for 

purposes of this analysis. In addition, some states may make supplemental payments but 

not report them on the supplemental payment lines on the CMS expenditure reports, in 

which case they would not be captured in this analysis.

25The federal government matches state Medicaid expenditures based on a statutory 

formula—the Federal Medical Assistance Percentage (FMAP). Under the FMAP, the 

federal government pays a share of Medicaid expenditures based on each state’s per 

capita income (PCI) relative to the national average. Federal law specifies that the regular 

FMAP will be no lower than 50 percent and no higher than 83 percent. 
Page 12 GAO-16-568 Hospital Uncompensated Care

Medicare provided two types of payments that helped offset hospital 

uncompensated care costs in fiscal year 2013: DSH payments and bad 

debt payments. As required by PPACA starting in fiscal year 2014, 

Medicare DSH payments were reduced and a third type of payment— the 

Medicare UC payment—was established. Specifically

• Medicare DSH payments: These Medicare payments are required to 

be made to hospitals that serve a significantly disproportionate 

number of low-income patients. Congress established these 

payments to address concerns that these hospitals would have 

unreimbursed costs that would not be recognized under Medicare’s 

prospective payment system.26 Although these payments do not 

directly reimburse hospital uncompensated care costs, they are 

intended to help offset eligible hospitals’ unreimbursed cost of treating 

low-income patients. DSH payments are added on to Medicare’s base 

payment to hospitals for each Medicare patient discharge. In general, 

there are no national or hospital-specific limits on Medicare DSH 

payments.27 Under PPACA, starting in fiscal year 2014, Medicare 

DSH payments were reduced to 25 percent of the amount that would 

have been paid under prior law. PPACA requires that the remaining 

75 percent of the amount that would have been paid as DSH 

payments is used to make a new type of payment, Medicare UC 

payments, discussed below.28

• Bad debt payments: Hospitals are eligible to receive Medicare 

reimbursement for a portion of Medicare beneficiaries’ unpaid 

copayments and deductibles—known as bad debt—as long as the 

hospital makes a reasonable effort to collect the unpaid amounts.29 In 

 26As Medicare moved to a prospective payment system in the 1980s, whereby 

predetermined rates were set for each Medicare hospital discharge, concerns were raised 

that hospitals with substantial low-income patient loads would likely experience higher 

costs than otherwise similar institutions because low-income patients may be more 

severely ill than average, and these higher costs would not be adequately recognized 

under the prospective payment rates. DSH payments were enacted to help offset these 

higher costs. See Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 

99-272, tit. IX, § 9105, 100 Stat. 82, 158-160 (1986) (codified, as amended, at 42 U.S.C. § 

1395ww(d)(5)(F)).

27The Medicare DSH adjustment is capped at 12 percent for certain hospitals, including 

urban hospitals with under 100 beds. See 42 C.F.R. § 412.106(d)(2)(iii)(C)(3)(2015).

2842 U.S.C. § 1395ww(r).

29The criteria for allowable bad debt appear at 42 C.F.R. § 413.89(e) (2015).

Two Types of Payments 

Are Made in the Medicare 

Program That Help Offset 

Hospital Uncompensated 

Care Costs, with 

Payments of over $14 

Billion Annually in 2013 

and 2014
Page 13 GAO-16-568 Hospital Uncompensated Care

general, Medicare bad debt payments to individual hospitals are 

limited to 65 percent of a hospital’s bad debt costs. The total amount 

of payments made by Medicare for bad debt is not capped and 

fluctuates as hospital bad debt increases or decreases. Bad debt 

payments are made as lump-sum supplemental payments and are not 

added on to Medicare base payments.

• Medicare UC payments: These payments, which were established

under PPACA and required to be made starting in fiscal year 2014,

are intended to help offset hospitals’ uncompensated care costs and

are added on to Medicare’s base payment for each Medicare patient

discharge.30 Hospitals that are eligible to receive Medicare DSH

payments are automatically eligible to receive Medicare UC

payments. These payments are made from an amount equal to 75

percent of what otherwise would have been paid as Medicare DSH

after reducing this amount for changes in the percentage of

individuals that are uninsured.

In fiscal years 2013 and 2014, total Medicare spending through these 

payment types was over $14 billion each year. In comparison to 

Medicaid, Medicare spending through these payment types is a lower 

proportion of payments the program made to hospitals for services. 

Medicare payments to hospitals for inpatient and outpatient services 

totaled about $179 billion in 2013 and about $183 billion in 2014. As 

illustrated in figure 1, of the different types of Medicare payments that 

help offset hospital uncompensated care costs, DSH payments were the 

largest in fiscal year 2013 (over $12 billion); Medicare UC payments were 

the largest in fiscal year 2014 (over $9 billion); and bad debt payments 

were the smallest and relatively unchanged from one year to the next.

3042 U.S.C. § 1395ww(r)(2). Medicare’s base payments are determined under a 

prospective payment system. Under this system, Medicare pays hospitals a flat fee per 

patient stay for the procedure provided or condition treated, set in advance, with different 

amounts for each type of condition. These payment rates are also influenced by such 

factors as the relative hourly wage in the area where the hospital is located and whether 

the hospital qualifies for additional payments. Medicare also pays hospitals for services 

provided to beneficiaries in outpatient departments under the hospital outpatient 

prospective payment system. 
Page 14 GAO-16-568 Hospital Uncompensated Care

Figure 1: Medicare Payments That Help Offset Hospital Uncompensated Care by Type, 2013 and 2014

In addition to payments from Medicaid and Medicare that offset hospital 

uncompensated care costs, federal tax law provides additional financial 

benefits to hospitals that qualify for tax-exempt status. Financial benefits 

for these qualifying nonprofit hospitals include exemptions from federal 

income taxes, eligibility for tax-exempt bond financing of capital projects, 

and tax-deductible contributions from donors (both individuals and 

corporations).31 To qualify for federal tax-exempt status, nonprofit 

hospitals must be organized and operated exclusively for charitable 

purposes. To meet this requirement, IRS requires that nonprofit hospitals 

meet its community benefit standard, a measure of which may include 

provision of uncompensated care.32 Hospitals are required to report the 

value of the community benefits they provide, including uncompensated 

care costs, in Schedule H of IRS Form 990. In tax year 2011, of the 

approximately 4,900 total hospitals nationwide, about half qualified for tax 

 31In addition to federal tax exemptions, hospitals also may receive various tax exemptions 

at the state and local level, including exemptions from state and local income, property, 

and sales taxes. State and local benefits vary by jurisdiction. 

32In 2010, PPACA added new requirements for tax-exempt hospital organizations that 

included the adoption of written financial assistance and emergency medical care policies, 

limits on the amounts charged for emergency or other medically necessary care to 

individuals eligible for assistance under the hospital’s financial assistance policy, and a 

community health needs assessment and adoption of an implementation strategy at least 

once every 3 years. See. PPACA, § 9007, 124 Stat. at 855 (adding subsection (r) to 

section 501 of the Internal Revenue Code, 26 U.S.C. § 501(r)).

Federal Tax Law Provides 

Additional Financial 

Benefits for Tax-Exempt 

Non-Profit Hospitals 

Incurring Uncompensated 

Care Costs with Benefits 

Estimated in the Billions 

Annually
Page 15 GAO-16-568 Hospital Uncompensated Care

exempt status, and hospital uncompensated care accounted for about 56 

percent of their total reported community benefit expenses.33

The exact amount of the financial benefits nonprofit hospitals receive from 

tax exemptions is not regularly tracked, but reported benefits are in the 

billions of dollars.34 For tax year 2002, the latest data available, the Joint 

Committee on Taxation (JCT) estimated that the financial benefits of 

federal tax exemption for nonprofit hospitals nationwide totaled about 

$6.1 billion.35 Using JCT’s methodology for estimating nonprofit hospital 

tax exemption, researchers estimated that for tax year 2011 the financial 

benefits of the federal tax exemption totaled about $13 billion.36

 33IRS, Report to Congress on Private Tax-Exempt, Taxable, and Government-Owned 

Hospitals (Washington, D.C.: January 2015). 

34The JCT, (a nonpartisan committee that assists Congress with tax legislation), does not 

classify tax-exempt status as a tax expenditure and therefore, the tax-exempt status 

benefits that non-profit hospitals receive are not included in annual estimates of federal 

tax expenditures. See Joint Committee on Taxation, Estimates of Federal Tax 

Expenditures for Fiscal Years 2014-2018, (Washington, D.C.: Aug. 5, 2014). 

35Of the total $6.1 billion in federal tax expenditures, exemptions from federal income 

taxes accounted for about $2.5 billion; federal bond financing $1.8 billion, and federal 

charitable contributions accounted for another $1.8 billion. In addition to federal tax 

exemptions, JCT estimated that nonprofit hospitals received exemptions from state and 

local taxes, the value of which was estimated to be $6.4 billion. The largest categories 

were the exemption from local property taxes ($3.1 billion) and the exemption from state 

and local sales taxes ($2.8 billion). See Congressional Budget Office, Nonprofit Hospitals 

and the Provision of Community Benefits (Washington, D.C.: December 2006).

36Of the total $13 billion in federal tax expenditures, exemption from federal income taxes 

accounted for about $6.3 billion; federal bond financing $3.3 billion, and federal charitable 

contributions accounted for another $3.4 billion. In addition to federal tax exemptions, 

researchers estimated that nonprofit hospitals received exemptions from state and local 

taxes, the value of which was estimated to be $11.6 billion. The largest categories were 

the exemption from state and local sales taxes ($6.1 billion) and the exemption from local 

property taxes ($4.3 billion). See Sara Rosenbaum, David A. Kindig, Jie Bao, Maureen K. 

Byrnes and Colin O’Laughlin, “The Value of The Nonprofit Tax Exemption Was $24.6 

billion in 2011,” Health Affairs, vol. 34, no.7 (2015).
Page 16 GAO-16-568 Hospital Uncompensated Care

The basis for determining the different types of Medicaid and Medicare 

payments that help offset hospital uncompensated care costs varies 

somewhat by type of payment. However, the majority of the different 

payment types are based on similar factors—generally hospitals’ costs or 

workloads related to providing services to Medicaid, uninsured, or lowincome Medicare patients, or some combination of these patients.

Federal law and policy limit the amounts states may pay under the three 

types of payments that help offset hospitals’ uncompensated care costs. 

Within these limits, however, states generally may determine the 

hospitals that will receive these payments and the payment amounts. For 

example, Medicaid DSH payment limits are statutorily based on a 

calculation of a hospital’s uncompensated care costs of treating Medicaid 

and uninsured patients. Although this statutory formula does not apply to 

section 1115 demonstrations, CMS officials stated that they generally use 

the Medicaid DSH methodology in determining payment limits for Section 

1115 uncompensated care payments. As such, DSH payments and 

uncompensated care demonstration payments are based, in part, on the 

cost of services provided to Medicaid and uninsured patients. The third 

payment type—UPL payments—is based on the difference between what 

the state Medicaid program pays for Medicaid services and the federal 

upper payment limit for payments for such services. Specifically

• Medicaid DSH payments. Federal law requires that states make 

Medicaid DSH payments to certain eligible hospitals but limits the 

amount of Medicaid DSH payments that states may make to individual 

hospitals.37 These limits are based on a hospital’s uncompensated 

care costs, which are defined by federal law and regulation to be the 

hospital’s uncompensated costs of providing care to Medicaid patients 

 3742 U.S.C. § 1396r-4(g).

Medicaid and 

Medicare Payments 

That Help Offset 

Hospital

Uncompensated Care 

Costs Are Generally 

Based on Similar 

Factors 

Medicaid Payments That 

Help Offset 

Uncompensated Care Are 

Generally Based on 

Services Hospitals Provide 

to Medicaid and Uninsured 

Patients
Page 17 GAO-16-568 Hospital Uncompensated Care

and uninsured patients.38 CMS relies on states and hospitals to 

calculate these uncompensated care costs using data from Hospital 

Cost Reports, their financial records, and state Medicaid agency data. 

In calculating their uncompensated care costs for Medicaid patients 

and uninsured patients, hospitals are required to include all payments 

received from Medicaid, including supplemental payments that are 

related to Medicaid services provided, as revenues that offset the 

costs of care. Since 2010, states have been required to submit 

independently certified audited reports annually on any hospital 

receiving Medicaid DSH payments.39

• Medicaid section 1115 uncompensated care payments. Limits on 

the amount of these payments to individual hospitals are established 

based on a hospital’s uncompensated care costs, which are 

determined under the approved terms and conditions of a state’s 

demonstration. According to CMS officials, the agency requires that 

section 1115 hospital uncompensated care payments generally use 

similar methods to those used for Medicaid DSH payments to 

calculate hospital uncompensated care costs. States may include in 

their calculations additional costs typically not allowed for Medicaid 

DSH payments, subject to CMS approval. For example, some states 

include hospital uncompensated costs of physician services provided 

in a hospital.

• Medicaid UPL payments. Limits on the amount of these payments 

are established in the aggregate based on the difference between 

state Medicaid payments to hospitals for services rendered to 

Medicaid patients and the amount Medicare would have paid for 

similar services. Thus, the total amount of Medicaid UPL payments a 

state can make is based on services provided to Medicaid patients. 

The UPL is not a hospital-specific limit and states have flexibility in 

determining which hospitals to pay and the payment amounts. In fiscal 

 38Under federal Medicaid DSH regulations, uninsured patients include privately insured 

patients who lack coverage for specific services—for example, patients who have 

exhausted their lifetime benefits or an individual with basic hospitalization coverage that 

has an exclusion for organ transplant services—as long as those services are covered by 

the state’s Medicaid plan. 42 C.F.R. § 447.295 (2015). Medicaid DSH payments are 

available only for inpatient and outpatient hospital costs. Unreimbursed physician costs 

associated with inpatient or outpatient hospital services are not eligible costs under the 

Medicare DSH program. See 79 Fed. Reg. 71679, 71687 (Dec. 3, 2014).

3942 U.S.C. § 1396r-4(j).
Page 18 GAO-16-568 Hospital Uncompensated Care

year 2014, the bulk of state UPL payments were made to hospitals for 

inpatient and outpatient services.

CMS makes Medicare DSH and Medicare UC payments to hospitals 

based on their workload, expressed as the number of days a hospital 

spends treating Medicaid and low-income Medicare patients (referred to 

as Medicaid patient days and low-income Medicare patient days, 

respectively).40 CMS also makes Medicare bad debt payments based on 

a certain percentage of the unpaid copayments and deductibles for 

Medicare beneficiaries. Specifically

• Medicare DSH payments. As required by statute, CMS determines 

Medicare DSH payments based on each hospital’s disproportionate 

patient percentage, which is calculated as the sum of two ratios: 

(Medicare low-income patient days / total Medicare days) + (Medicaid 

days / total hospital days). Hospitals qualify for Medicare DSH 

payments if their disproportionate patient percentage is above 15 

percent, but actual Medicare DSH payments vary based upon 

hospitals’ characteristics, including their size and geographic 

location.41 The resulting payment amount is a percentage of the 

Medicare base payment calculated using a statutory formula that is 

then added to the base payment the hospital receives for each 

Medicare patient discharge. In fiscal year 2014, as required by 

PPACA, Medicare DSH payments were reduced to 25 percent of the 

amount that would have been paid under prior law. Overall, the 

number of Medicaid patient days was the largest factor in determining 

Medicare DSH payments in fiscal year 2014. Generally, the ratio that 

included Medicaid patient days accounted for about 70 percent of 

Medicare DSH payments in fiscal year 2014 while the ratio that 

 40Low-income Medicare patients may also be eligible for Medicaid. For Medicare DSH 

purposes, their utilization is counted only once, as part of the Medicare low-income patient 

days ratio.

41The actual amount of a hospital’s DSH payments is calculated as a percentage add-on 

to Medicare’s base payment for the service. The percentage used to calculate the DSH 

add-on varies by hospital because it is determined by the hospital’s exact proportion of 

low-income patient days, its location, and its size. For example, a large urban hospital with 

100 or more beds and a disproportionate patient percentage (DPP) exceeding 20.2 

percent receives a larger percentage add-on than a smaller urban hospital with a lower 

DPP. A small number of hospitals—10 in fiscal year 2014—qualify for a specific Medicare 

adjustment using an alternative method.

Medicare Payments That 

Help Offset 

Uncompensated Care Are 

Generally Based on the 

Number of Days Hospitals 

Spend Treating Medicaid 

and Low-Income Medicare 

Patients
Page 19 GAO-16-568 Hospital Uncompensated Care

included low-income Medicare beneficiaries treated accounted for the 

remaining 30 percent.

• Medicare UC payments. PPACA directed CMS to base these 

payments on hospital uncompensated care costs, including the costs 

of treating uninsured patients.42 However, CMS has discretion to 

choose the methods and data sources it uses to calculate these costs, 

and CMS has to date used data related to Medicaid and Medicare 

workload as a proxy for uncompensated care costs. For fiscal years 

2014, 2015, and 2016, Medicare UC payments made to individual 

hospitals are based on a hospital’s days spent treating Medicaid 

patients and low-income Medicare beneficiaries rather than on a 

hospital’s actual uncompensated care costs.43 Specifically, an 

individual hospital’s Medicare UC payment is based on the hospital’s 

relative proportion of days spent treating Medicaid patients and lowincome Medicare patients across all hospitals receiving UC payments 

nationally. Our analysis indicates that, under this formula, Medicaid 

patient days accounted for about 85 percent of Medicare UC 

payments, and low-income Medicare patient days accounted for the 

remaining 15 percent in fiscal year 2014.44 In other words, we found 

that the amount of a hospital’s Medicare UC payment is largely based 

on the hospital’s Medicaid patient workload.

• Medicare bad debt payments. CMS pays hospitals a certain 

percentage of the actual unpaid copayments and deductibles that 

hospitals expected to receive, but were unable to collect, from 

Medicare beneficiaries. In general, hospitals must demonstrate that 

they have made reasonable attempts to collect the bad debt—that is, 

 42See 42 U.S.C. § 1395ww(r)(2)(C).

43CMS has also proposed basing fiscal year 2017 Medicare UC payments on a hospital’s 

days spent treating Medicaid patients and low-income Medicare beneficiaries. See CMS, 

Medicare Program; Hospital Inpatient Prospective Payment System for Acute Care 

Hospitals and the Long-Term Care Hospital Prospective Payment System and Proposed 

Policy Changes and Fiscal Year 2017 Rates, 81 Fed. Reg. 24946, 25087 (Apr. 27, 2016).

44The proportion of Medicare UC payments that is based on Medicaid patients treated is 

different from the proportion of Medicare DSH payments that are also based on this factor 

because the methodologies for calculating payments are slightly different. Specifically, 

Medicare DSH is based on the sum of two ratios, and actual payments also vary based on 

the exact DPP, size and location. Medicare UC payments, on the other hand, are based 

on a hospital’s relative proportion of total Medicaid and low-income beneficiary days and 

not the sum of two ratios. 
Page 20 GAO-16-568 Hospital Uncompensated Care

the same type of efforts that they would make for non-Medicare 

patients.45

Medicare UC payments are not well aligned with hospital uncompensated 

care costs for two key reasons. First, Medicare UC payments are 

distributed to hospitals based largely on Medicaid patients treated and not 

on hospitals’ actual uncompensated care costs, which include the costs of 

treating uninsured patients. Second, CMS does not account for Medicaid 

payments made to hospitals that help offset uncompensated care costs, 

even though the bulk of Medicare UC payments are based on Medicaid 

patients treated.

Medicare UC payments are not aligned with hospitals’ uncompensated 

care costs because CMS bases these payments mainly on hospitals’ 

historical Medicaid patient days rather than actual costs hospitals incurred 

treating uninsured patients. A 2015 report by HHS’s Office of the 

Assistant Secretary of Planning and Evaluation (ASPE) found that an 

increase in Medicaid coverage (which would result in a corresponding 

increase in Medicaid hospital patient days) was associated with a 

reduction in hospital uncompensated care costs.46 Distributing UC 

payments on the basis of Medicaid patient days will likely result in larger 

shares of Medicare UC payments directed towards hospitals where 

 45However, if a hospital, using its customary methods, can document that a Medicare 

patient is indigent, or medically indigent, the hospital can then forgo any collection effort 

aimed at the patient. And, if the hospital also determines that no source other than the 

patient is legally responsible for the unpaid deductibles and coinsurance, the hospital may 

claim the amounts as Medicare bad debts.

46Specifically, ASPE estimated that hospital uncompensated care costs in 2014 were 26 

percent lower as a result of Medicaid expansion, based on an analysis of 28 states and 

the District of Columbia that had expanded Medicaid under PPACA. See Office of the 

Assistant Secretary of Planning and Evaluation, Insurance Expansion, Hospital 

Uncompensated Care and the Affordable Care Act (Washington D.C.: March 23, 2015.) In 

addition, a report from the Robert Wood Johnson Foundation examining statewide data 

published by a number of hospital associations and hospital systems in Medicaid 

expansion states showed decreases in hospital uncompensated care costs ranging from 

about 18 percent to about 60 percent in nine states that had expanded their Medicaid 

programs. While the methods for measuring uncompensated care and the time periods 

varied across systems and states, hospital systems consistently reported higher declines 

in uncompensated care costs in Medicaid expansion states compared to other states. See 

Robert Wood Johnson Foundation, State Health Reform Assistance Network, The Impact 

of Medicaid Expansion.

Medicare UC 

Payments Are Not 

Well Aligned with 

Hospitals’ 

Uncompensated Care 

Costs

Medicare UC Payments 

Are Not Well Aligned with 

Hospitals’ Uncompensated 

Care Costs As CMS Does 

Not Base Payments on the 

Costs of Treating 

Uninsured Patients
Page 21 GAO-16-568 Hospital Uncompensated Care

uncompensated care costs have likely declined. This is because hospitals 

located in states that expanded their Medicaid programs have higher 

proportions of Medicaid patient days and would therefore receive a larger 

share of Medicare UC payments. At the same time, uncompensated care 

costs in these hospitals may be declining due to a reduction in the 

number of uninsured individuals in the state. Conversely, hospitals in 

states that have not expanded Medicaid will continue to have relatively 

higher levels of uninsured individuals and thus higher uncompensated 

care costs, but these hospitals will likely have fewer Medicaid patient 

days and will thus receive a smaller share of Medicare UC payments 

under CMS’s current calculation.

CMS officials acknowledged that using Medicaid patient days as a basis 

for Medicare UC payments could result in hospitals located in Medicaid 

expansion states receiving disproportionately higher payments. Officials 

stated that the effect of using Medicaid patient days rather than actual 

uncompensated care costs was somewhat mitigated because CMS had, 

for purposes of fiscal year 2014 Medicare UC payments, used data from 

fiscal years 2010 or 2011 to estimate hospitals’ proportions of Medicaid 

patient days—a time period before when most states expanded their 

Medicaid programs in response to PPACA. However, hospitals in states 

that had broader Medicaid eligibility requirements in 2010 or 2011 (and 

therefore higher numbers of Medicaid patient days) would receive higher 

payments than those in states with more restrictive requirements in those 

same years, despite potentially having to provide less uncompensated 

care. In addition, the hospitals in seven states that had expanded their 

Medicaid programs prior to 2014 may have also received higher Medicare 

UC payments through CMS’s use of Medicaid patient days to calculate 

Medicare UC payments.47 Directing a larger portion of the Medicare UC 

payments, which are intended to reimburse hospital uncompensated care 

costs, to hospitals where hospital uncompensated care is declining is not 

consistent with CMS’s role as an efficient payer of health care services.

CMS has for several years considered options for defining and using 

hospital uncompensated care costs to make Medicare UC payments, but 

has not yet implemented plans to do so. In a May 2013 notice of 

 47PPACA permitted states to expand their Medicaid programs by covering certain lowincome adults not historically eligible for Medicaid coverage and beginning on January 1, 

2014, provided states enhanced federal matching funds for costs incurred in covering this 

population.
Page 22 GAO-16-568 Hospital Uncompensated Care

proposed rulemaking, CMS stated that the definition of hospital 

uncompensated care costs for purposes of making Medicare UC 

payments could comprise charity care and bad debt costs (for both 

Medicare and non-Medicare patients), since these were commonly 

identified as sources of hospital uncompensated care by various 

stakeholders, including federal and state programs, and provider 

associations.48 CMS also identified a potential data source for actual

hospital uncompensated care costs—an uncompensated care worksheet 

in the Hospital Cost Report—that is the only national data source for 

charity care and bad debt costs.49 CMS did not propose at the time to use 

this definition or the data in the uncompensated care worksheet because 

of concerns by certain stakeholders about the worksheet’s reliability.50 In 

an April 2016 proposed rule, CMS proposed transitioning away from 

using Medicaid days as the basis for UC payments, and instead using 

hospital uncompensated care costs from the uncompensated 

worksheet.

51 Under the proposed rule, Medicare UC payments made in 

 4878 Fed. Reg. 27486, 27585 (May 10, 2013). Medicare bad debt for Medicare UC 

payment purposes represents a hospital’s Medicare bad debt costs not covered by 

Medicare bad debt payments. Medicare bad debt payments are limited to 65 percent of a 

hospital’s total allowable bad debt costs. Non-Medicare bad debt represents hospital costs 

that a patient is responsible for paying and has the financial capacity to pay, but is

unwilling to pay.

49The data source is called the S-10 Hospital Uncompensated and Indigent Care Data

worksheet. 

50Multiple studies conducted by a CMS contractor and MedPAC in recent years show that 

concerns about completeness and reliability of the data in the uncompensated care 

worksheet should not prevent its use for determining uncompensated care costs. See 

Dobson DaVanzo & Associates, LLC, Improvements to Medicare Disproportionate Share 

Hospital (DSH) Payments, and Improvements to Medicare Disproportionate Share 

Hospital (DSH) Payments, Benchmarking S-10 Data Using IRS Form 990 Data and 

Worksheet S-10 Trend Analyses( Apr. 13, 2016); also see MedPAC’s June 2013 Letter to 

CMS commenting on the proposed rule entitled Hospital Inpatient Prospective Payment 

Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment 

System and Proposed Fiscal Year 2014 Rates, 78 Fed. Reg. 27582 (May 10, 2013); also 

see MedPAC’s June 2015 letter to CMS commenting on the proposed rule, Hospital 

Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term 

Care Hospital Prospective Payment System Policy Changes and Fiscal Year 2016 Rates; 

Revisions to Quality Reporting Requirements for Specific Providers, including Changes 

Related to the Electronic Health Record Incentive Program, 80 Fed. Reg. 24324 (Apr. 30, 

2015).

51CMS, Medicare Program: Hospital Inpatient Prospective Payment System for Acute 

Care Hospitals and the Long-Term Care Hospital Prospective Payment System and 

Proposed Policy Changes and Fiscal Year 2017 Rates, 81 Fed. Reg. 25091, 25092 (Apr. 

27, 2016).
Page 23 GAO-16-568 Hospital Uncompensated Care

fiscal year 2020 would be entirely based on hospital uncompensated care 

costs, which CMS proposes to define as charity care and non-Medicare 

bad debt.52 In its proposed rule, CMS requested public comments on its 

proposed definition of hospital uncompensated care costs and use of the 

uncompensated care worksheet to determine these costs, among other 

things.

Although the majority of Medicare UC payments to individual hospitals 

are based on Medicaid patient days, CMS does not adjust these 

payments to reflect payments hospitals receive from Medicaid. Hospitals 

could potentially receive significant amounts of payments that help offset 

uncompensated care costs from both the Medicare and Medicaid 

programs. A relatively large portion of the Medicare UC payments are 

determined in the Medicare UC formula by hospitals’ Medicaid patient 

days; similarly, a large portion of the Medicaid payments that help offset 

hospital uncompensated care costs are distributed, in part, on the basis of 

payment limits determined by those hospitals’ Medicaid workloads. We 

estimate, for example, that in fiscal year 2014 about $7.7 billion of 

Medicare UC payments to hospitals were based on Medicaid patient days 

and about $14.1 billion of Medicaid payments to hospitals were based on 

services provided to Medicaid patients.53

CMS officials told us that Medicare and Medicaid are separate programs 

administered under different statutory and regulatory rules under which 

hospitals can qualify for, and receive, both Medicare UC payments and 

Medicaid payments that help offset hospital uncompensated care costs. 

 52For payments made in fiscal years 2018 and 2019, CMS proposed blending Medicaid 

and Medicare low-income patient days with hospital uncompensated care costs to make 

the payments. Medicare UC payments made in fiscal year 2017 will be based on 

hospitals’ days spent treating Medicaid patients and low-income Medicare patients. 

53The $7.7 billion of Medicare UC payments was estimated by determining each hospital’s 

percentage of total low-income days (Medicaid and SSI) that were based on Medicaid 

days, multiplying the hospital’s total Medicare UC payments by that percentage, then 

summing the total Medicaid-based UC payments across all hospitals. Overall, 85 percent 

of hospitals’ total Medicare UC payments was based on Medicaid days. The $14.1 billion 

in Medicaid payments represents 25 percent of the Medicaid DSH payments attributed to 

services provided to Medicaid patients ($4.5 billion) and all of the Medicaid UPL payments 

that are based on the volume of services provided to Medicaid patients ($9.6 billion). We 

did not include section 1115 demonstration supplemental payments because we were 

unable to determine the extent that these payments were made for uncompensated care 

for Medicaid patients. 

In Determining Medicare 

UC Payments, CMS Does 

Not Consider Medicaid 

Payments That Offset 

Uncompensated Care 

Costs
Page 24 GAO-16-568 Hospital Uncompensated Care

When determining hospital uncompensated care costs for purposes of 

Medicaid DSH payments, states are required to consider Medicare 

payments made on behalf of patients covered by both Medicare and 

Medicaid.54 While the law does not require CMS to take into account 

Medicaid payments that offset uninsured costs when calculating Medicare 

UC payments, CMS officials confirmed they have authority to consider 

such payments but have not taken steps to do so.

Transitioning away from using Medicaid patient days and instead basing 

Medicare UC payments on data showing actual hospital uncompensated 

care costs, would result in a better alignment of Medicare UC payments 

with actual hospital uncompensated care costs. However, this change on 

its own would not be sufficient to account for the fact that hospitals 

eligible to receive UC payments may also be eligible for Medicaid DSH 

payments to offset these same costs. Although the Medicare and 

Medicaid programs define uncompensated care costs somewhat 

differently, a common and significant cost in their definitions is the 

uncompensated care costs for uninsured individuals.55 As a result, in 

determining Medicare UC payments, it is important that CMS, in fulfilling 

its role as an efficient payer of health care services, take into account the 

Medicaid payments eligible hospitals have received for these costs to 

ensure that Medicare UC payments are most effectively aligned with 

hospitals’ actual uncompensated care costs.

Hospital uncompensated care costs are a longstanding concern that have 

the potential to weaken some hospitals’ financial stability and undermine 

their ability to provide care and serve their community. Recognizing the 

importance of financially stable hospitals, certain Medicare and Medicaid 

payments and federal tax laws were established to support hospitals 

providing uncompensated care. The amount of uncompensated care 

incurred by individual hospitals varies across the thousands of hospitals 

 54Medicaid payments that offset uninsured patient costs include Medicaid DSH payments, 

Medicaid payments in excess of a hospital's Medicaid costs, and section 1115 

demonstration supplemental payments for uninsured patient costs.

55For Medicaid DSH payments, the unreimbursed cost of uninsured patients represents 

about, on average, 75 percent of total uncompensated care costs. For Medicare UC 

payment purposes, CMS has indicated that it plans to include hospital charity care—which 

largely represents hospital care to uninsured patients—when it defines hospital 

uncompensated care costs. 

Conclusions
Page 25 GAO-16-568 Hospital Uncompensated Care

in our nation, including private for-profit, private nonprofit, and state and 

local government hospitals. The expansion of health insurance coverage 

as a result of PPACA has and will continue to alter the amount of 

uncompensated care incurred by hospitals. Hospitals in states and 

communities where the number of uninsured individuals has declined are 

likely to incur lower uncompensated care costs.

In view of the changing landscape of hospital uncompensated care, 

Congress reduced the amount of federal support to offset hospital 

uncompensated care costs and also required federal spending to be 

aligned with hospitals’ uncompensated care costs. In particular, a large 

amount of existing federal funding was redirected to establish Medicare 

UC payments, which will decline as the number of uninsured individuals

declines nationally. CMS was directed to distribute these payments on the 

basis of each hospital’s uncompensated care costs. While CMS was 

given flexibility to identify appropriate data for determining such costs, the 

agency’s use of Medicaid patient days as the basis for distributing 

Medicare UC payments to hospitals results in poor alignment of payments 

to hospital uncompensated care costs. Poor alignment results because 

relatively large shares of Medicare UC payment amounts will be 

distributed to hospitals where Medicaid expansion has lowered their 

uncompensated care costs. Particularly in view of the changing 

landscape of health care coverage, including some but not all states 

expanding Medicaid and the impact of such choices on hospital 

uncompensated care costs in different states, CMS has the responsibility 

to use the best data available to allocate payments based on hospitals’

actual uncompensated costs of providing care. In an April 2016 proposed 

rule, the agency announced that it is considering using hospitals’ actual 

uncompensated care costs as the sole basis for making Medicare UC 

payments by fiscal year 2020

Additional steps will be needed to ensure that Medicare UC payments are 

aligned with hospital uncompensated care costs, including taking into

account Medicaid payments that hospitals receive for treating the 

uninsured. Neither the current poor alignment of Medicare UC payments 

with hospital uncompensated care costs nor the lack of accounting for 

reductions in hospital uncompensated care costs for uninsured patients 

resulting from Medicaid payments are consistent with Medicare’s role as 

a prudent payer of health care.
Page 26 GAO-16-568 Hospital Uncompensated Care

To ensure efficient use of federal resources, we recommend that the 

Administrator of CMS take the following two actions:

1. Improve alignment of Medicare UC payments with hospital

uncompensated care costs by basing these payments on hospital

uncompensated care costs; and

2. Account for Medicaid payments a hospital has received that offset

uncompensated care costs when determining hospital

uncompensated care costs for the purposes of making Medicare UC

payments to individual hospitals.

We provided a draft of this report to the Secretary of Health and Human 

Services and the Commissioner of the Internal Revenue Service. We 

received written comments from HHS, which are reprinted in appendix I. 

In addition, HHS and IRS provided technical comments that we 

incorporated as appropriate. 

In its written comments, HHS concurred with both our recommendations. 

HHS concurred with our first recommendation to better align Medicare UC 

payments with hospitals’ actual uncompensated care costs, noting the 

April 2016 proposed rule that outlines a proposal to do so. HHS stated it 

would consider all stakeholder comments before issuing a final rule later 

this year. HHS also concurred with our second recommendation to 

account for hospitals’ Medicaid payments that offset uncompensated care 

costs when determining these costs for purposes of making Medicare UC 

payments. HHS agreed that it is important to align uncompensated care 

payments with actual uncompensated care costs and that doing so would 

help ensure that HHS is directing the payments to hospitals appropriately. 

HHS stated that the Department would continue to review the definition of 

uncompensated care as appropriate, particularly in the event it finalizes 

the proposal to begin using uncompensated care cost data to determine 

the distribution of these payments. Taking steps to better align these 

payments is important to improving the distribution of significant amounts 

of federal funds for hospital uncompensated care.

As agreed with your offices, unless you publicly announce the contents of 

the report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to the 

Secretary of Health and Human Services and other interested parties. In 

addition, the report is available at no charge on the GAO website at 

http://www.gao.gov. 

Recommendations 

for Executive Action 

Agency Comments 

and Our Evaluation 
Page 27 GAO-16-568 Hospital Uncompensated Care

If you or your staffs have any questions about this report, please contact 

me at (202) 512-7114 or iritanik@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of the report. GAO staff that made key contributions to this report is 

listed in appendix II.

Katherine M. Iritani

Director, Health Care
Appendix I: Comments from the Department of 

Health and Human Services

Page 28 GAO-16-568 Hospital Uncompensated Care

Appendix I: Comments from the Department 

of Health and Human Services
Appendix I: Comments from the Department of 

Health and Human Services

Page 29 GAO-16-568 Hospital Uncompensated Care
Appendix I: Comments from the Department of 

Health and Human Services

Page 30 GAO-16-568 Hospital Uncompensated Care
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 31 GAO-16-568 Hospital Uncompensated Care

Katherine Iritani, (202) 512-7114 or iritanik@gao.gov

In addition to the contact named above, Tim Bushfield, Assistant Director; 

Leonard Brown; Christine Davis; Iola D’Souza; Carolyn Fitzgerald, 

Sandra George; Peter Mann-King; and Laurie Pachter made key 

contributions to this report.

Appendix II: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments
Related GAO Products

Page 32 GAO-16-568 Hospital Uncompensated Care

Medicaid: Federal Guidance Needed to Address Concerns About 

Distribution of Supplemental Payments. GAO-16-108. Washington D.C.: 

February 5, 2016.

Medicaid: Improving Transparency and Accountability of Supplemental 

Payments and State Financing Methods. GAO-16-195T. Washington 

D.C.: November 3, 2015.

Medicaid: Additional Efforts Needed to Ensure that State Spending is 

Appropriately Matched with Federal Funds. GAO-16-53. Washington 

D.C.: October 16, 2015.

Medicaid: Key Issues Facing the Program. GAO-15-667. Washington, 

D.C.: July 30, 2015

Medicare: Legislative Modifications Have Resulted in Payment 

Adjustments for Most Hospitals. GAO-13-334. Washington, D.C.: April 17, 

2013.

High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 

2013.

Medicaid: States Reported Billions More in Supplemental Payments in 

Recent Years. GAO-12-694. Washington, D.C.: July 20, 2012.

High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 

2011.

Medicaid: Ongoing Federal Oversight of Payments to Offset 

Uncompensated Hospital Care Costs Is Warranted. GAO-10-69. 

Washington, D.C.: November 20, 2009.

Nonprofit Hospitals: Variation in Standards and Guidance Limits 

Comparison of How Hospitals Meet Community Benefit Requirements. 

GAO-08-880. Washington, D.C.: September 12, 2008.

Medicaid: CMS Needs More Information on the Billions of Dollars Spent 

on Supplemental Payments. GAO-08-614. Washington, D.C.: May 30, 

2008.

Medicaid: States’ Efforts to Maximize Federal Reimbursements Highlight 

Need for Improved Federal Oversight. GAO-05-836T. Washington, D.C.: 

June 28, 2005.

Related GAO Products
Related GAO Products

Page 33 GAO-16-568 Hospital Uncompensated Care

Nonprofit, For-Profit and Government Hospitals: Uncompensated Care 

and Other Community Benefits. GAO-05-743T. Washington, D.C.: May 

26, 2005.

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