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. 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. Patient out-of-pocket spending includes deductibles, coinsurance, copayments, or payments for services not covered by insurance or that exceed coverage limits. 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. 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. 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. 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 three- quarters 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 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. 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. 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. 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 deciding which hospitals will receive a UPL payment, and how to allocate UPL payments among hospitals. 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. 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. 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. Certain states have received approval to make supplemental payments for hospital uncompensated care in their Medicaid demonstrations. 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. 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. 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. 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. 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. 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. In 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. Hospitals that are eligible to receive Medicare DSH payments are automatically eligible to receive Medicare UC payments.