HOSPITALS AND UNCOMPENSATED CARE FINANCING

Uncompensated care is usually defined as health care rendered to individuals who are unable to pay and are not covered by private or governmental health insurance plans. This includes both unbilled charity care and bad debts (that is, services billed but not paid). While uncompensated care can be delivered by a variety of health care facilities and providers, most is provided by acute care hospitals. In 1992, the national cost of uncompensated care for hospitals was estimated to be $11.9 billion.(footnote 24) Analysts also make the distinction between uncompensated care and "undercompensated care," which refers to underpayments for services from Medicare, Medicaid, and other government programs. Nationally, undercompensated care amounted to $22.7 billion in 1992.

Uncompensated Care and Cost-Shifting in Connecticut
As noted earlier, Connecticut's 34 acute-care hospitals serve anyone who is admitted, regardless of insurance status or ability to pay. In doing so, they provide the vast majority of uncompensated care to Connecticut's uninsured residents. The Office of Health Care Access (OHCA) estimates that in state fiscal year (SFY) 1993, Connecticut hospitals provided over $237 million in uncompensated care (approximately $53 million in charity care and $184 million in bad debts).(footnote 25)

In addition, the level of underpayments from government programs such as Medicare and Medicaid continues to grow. In order to analyze the effect of these underpayments, OHCA has developed a methodology for measuring cost-shift. Cost-shifting is the practice of charging higher rates to one set of patients (usually privately insured) to make up for revenue lost on another set (publicly insured or uninsured patients). OHCA estimates the total costs shifted onto private payers -- from both un- and under-compensated care -- amounted to $570 million in SFY 1993. In fact, cost-shifting represented about 30 percent of the average private pay hospital bill in Connecticut. OHCA equates this "hidden" cost to a premium tax because it is an unavoidable charge to private payers.(footnote 26)

OHCA also projects that cost-shifting could become much more severe. If current trends continue, the total cost-shift could more than double to about $1.44 billion, or about 70 percent of private pay hospital bills by the year 2000.(footnote 27) It is unclear whether the current system could sustain this amount of pressure or whether other forces would intervene to alleviate the present trends.

The Uncompensated Care Program
In addition to the hidden aspects of uncompensated care financing, there is also a more explicit (though no less complicated) funding mechanism -- the Uncompensated Care Program (UCP). The current UCP was enacted under Public Act 94-9 and has two main policy objectives. First, it was designed to redistribute the burden of uncompensated care from hospitals with higher levels of these costs to those with lower levels. Second, the program helps the State qualify for federal matching funds in the form of disproportionate share hospital (DSH) payments under Medicaid. OHCA notes that the UCP was not devised to reimburse hospitals for all, or even most of the costs of uncompensated care. Even with the UCP, private payers will continue to shoulder most of the burden for those who cannot pay for care.(footnote 28)

The UCP is funded through an appropriation from the state's general fund ($254 million in SFY 1996-97). From this appropriation, DSS makes Disproportionate Share (DSH) payments to hospitals according to a formula in order to compensate them for a portion of the underpayments and services provided to the uninsured. The state receives federal matching funds at a rate of 50 percent on these payments. Revenues to support this program are generated by a 6 percent assessment on hospital services and an 11 percent hospital gross earnings tax.(footnote 29) According to the Office of Fiscal Analysis, the gross receipts tax is expected to raise $192 million and the assessment on hospital services is expected to raise $102 million in SFY 1996-97. Revenues from each of these sources are paid into the general fund.

Prospects for the Future?
If current trends continue, the situation could worsen substantially. Health care costs continue to rise, despite a recent slow-down in growth rates. The uninsured population continues to increase dramatically. A growing proportion of health expenditures are funded by public sources (e.g., Medicare and Medicaid). At the same time, there have been a number of balanced-budget proposals at the national level that would attempt to slow the growth of these programs significantly, thus creating even higher levels of underpayments for hospitals. In addition, the expansion of managed care enrollment among those with private insurance has led to increased price competition, putting more pressure on hospital rates.

Each of these trends makes it more difficult for hospitals to provide care to the uninsured. As both public and private payers seek to limit reimbursement, hospitals will find it more difficult to generate surplus revenue to cover uncompensated care costs. A recent article in Health Affairs, by Joyce Mann, et. al., warned that the situation is particularly acute in California, where most of the factors discussed above have already emerged. As a result, hospitals have provided less care to the medically indigent. The authors estimate that in 1989, without pressures from competition and the financial tightening of public programs, hospitals would have provided 36 percent more uncompensated care than was actually provided.

Mann and her colleagues also note there have been reports that some California hospitals have developed emergency room policies that discourage use by the uninsured, such as increasing fees (for example, cash deposits that must be paid prior to treatment) or transferring indigent patients to public hospitals or academic medical centers. In addition, some hospitals have reportedly discontinued services that are likely to serve as "portals of entry" for the uninsured (such as emergency departments) or services more likely to be used by the uninsured (such as inpatient psychiatric care).

While there are significant differences between Connecticut's network of non-profit hospitals and California's system (which has both public hospitals and private for-profit facilities), the general comparison may be instructive as policy makers look for solutions. The authors warn that California may serve as a harbinger of trends that are likely to appear in other states -- potentially jeopardizing this "invisible safety net" for the poor.(footnote 30)

Back to Comptroller's Home Page
Back to Table of Contents