hile the Trump administration and the Republican-led Congress failed to repeal and replace the Affordable Care Act, a number of ACA-weakening strategies put forward by the administration are already underway. These include inadequate enforcement of the individual mandate, imposition of work requirements on Medicaid recipients, and failure to promote enrollment through advertising and outreach. An unintended consequence of these strategies is likely to be an increase in the amount of uncompensated care provided by America’s hospitals.
The American Hospital Association defines uncompensated care as all hospital care provided for which no payment is received. This includes bad debt (services for which a hospital anticipated payment but did not receive it) and financial assistance or free care (care or services that hospitals provided but did not expect to receive payment). It does not include shortfalls in payments from Medicaid or Medicare, which also contribute to financial challenges for hospitals.
In 2013, $84.9 billion in uncompensated care was provided to individuals who could not pay all or part of their bills. Of all uncompensated medical expenses, the majority (60 percent) occur in hospitals. But there is no “free lunch.” Whenever possible, hospitals attempt to shift the costs associated with free care and bad debt onto other payers, like commercial insurers. Like pressing on one side of a balloon only to see another side bulge out, shifting the costs of uncompensated care eventually results in higher premiums for everyone else. Of additional concern, hospitals that care for the poor are less able to shift costs, since they have far less revenue from commercial payers, resulting in uneven and possibly unsustainable financial burdens.
The link between Medicaid expansion, the uninsured, and uncompensated care
Between 2013 and 2015, states that expanded Medicaid under the ACA saw uncompensated care costs drop from 3.9 percent of operating costs to 2.3 percent, while they remained fairly flat in non-expansion states. Given that the average operating margin for a nonprofit hospital is around 2.7 percent, even small reductions in the level of uncompensated care can represent the difference between financial success or failure.
The savings can be substantial. If the 19 states that did not expand Medicaid had instead adopted it, uncompensated hospital costs would have decreased by an estimated $6.2 billion. These results are consistent with other analyses that showed that hospitals located in states that implemented Medicaid expansions significantly increased their Medicaid revenue, decreased their uncompensated care costs, and improved their profit margins compared to hospitals located in states that did not expand. This was especially true among hospitals serving a disproportionate share of low-income patients, so-called Disproportionate Share Hospitals.
Rolling back the ACA would likely have repercussions for uncompensated care far beyond Medicaid expansion states. In fact, the number of uninsured individuals in the U.S. is directly related to uncompensated care levels, nationally. The American Hospital Association estimated the value of uncompensated care across all hospitals over a 10-year period. It increased from $28.9 billion, or 5.6 percent of total operating expenses, in 2005 to a peak of $46.4 billion in 2013, and then declined to $35.7 billion in 2015, five years after the passage of the ACA.
The graph below illustrates the relationship between the number of people who lack health insurance and the amount hospitals have reported in uncompensated care. In this graph, we examine trends looking at current (or actual) dollars as well as constant (2005) or real dollars, the latter to account for the effects of medical inflation over the period.
Clearly, the number of uninsured individuals declined during the latter part of this period, and there is a strong positive correlation between the number of uninsured individuals and uncompensated hospital costs in constant dollars. Before implementation of the ACA in 2010, constant uncompensated care costs were relatively stable at around $29 billion. After 2012, when several key provisions of the ACA started to take effect, constant uncompensated care costs began to decline. By 2015, they were down to $20.4 billion in 2005 dollars — their lowest level in a decade and roughly 20 percent lower in real terms than in 2005.
Using actual dollars, for every decrease of 100 uninsured persons between 2013 and 2015, uncompensated hospital care costs dropped $67,295. The implication of a return to pre-ACA levels of uninsured Americans is that an additional $10 billion in uncompensated care costs would be borne by hospitals.
Opportunities to improve coverage rates and reduce uncompensated care
Helping U.S. hospitals means lowering the number of uninsured patients who get treated in them. Before the efforts throughout the summer of 2017 to undo the ACA, health care insurance markets were trending toward stabilization and potentially generating modest profits for 2017. Despite suffering financial losses in the early phases of health insurance expansion — when millions of new customers with very little prior documented medical history became insured and entered the market — insurance companies have since learned about their members and made necessary premium adjustments to cover their risks. Current enrollment projections do not indicate sharp declines despite premium hikes.
Since taking office, President Trump has created uncertainty as to whether the federal government will continue to reimburse insurance companies for cost-sharing measures required under the ACA. The effect of this uncertainty is that some insurers are abandoning the individual market. Current marketplace challenges could be addressed with a number of legislative measures, all of which would reduce the amount of uncompensated care that hospitals provide. We recommend that the federal government:
- Prompt states that have not expanded Medicaid to do so. If the 19 states that did not expand Medicaid reconsidered, about 4 million additional people could gain coverage. That would help stabilize the individual insurance markets by removing some of the sick and poor from subsidized programs.
- Enforce the individual mandate and employer participation rules.
- Continue — and even increase — subsidies to insurers aimed at cost-sharing reductions, which could reduce the number and size of unpaid bills.
- Make necessary reforms to individual markets, such as a reinsurance program, to ensure they function well.
- Offer a public insurance option in markets that carriers have been unwilling to service.
- Avoid enacting legislation that will make insurance useless when it’s most needed. Sen. Ted Cruz’s move to loosen insurance regulations by allowing insurers to offer plans with minimal coverage and high deductibles would harm millions of Americans with preexisting conditions, leading to millions of additional dollars of uncompensated care.
Implementing these measures would serve to strengthen the ACA rather than weaken it. Choosing such a path will also have the dual benefits of maintaining access to health insurance for those who gained coverage under the law (and potentially extending its reach), as well as reducing uncompensated care costs for hospitals.
Uncompensated care in hospitals will not disappear as long as there remain low-income patients who cannot qualify for Medicaid or insurance premium subsidies, including undocumented immigrants or others who cannot afford their copayments. Nevertheless, supporting measures that increase insurance coverage for as many people as possible would improve the financial well-being of our hospital system, help stabilize the individual insurance markets, reduce the cost shifting of uncompensated care dollars onto other insured individuals, and ultimately benefit the health of all Americans.
Joel S. Weissman, Ph.D., is chief scientific officer for the Center for Surgery and Public Health at Brigham and Women’s Hospital in Boston and professor of surgery (health policy) at Harvard Medical School. Marc A. Cohen, Ph.D., is research director at the Center for Consumer Engagement in Health Innovation and clinical professor and director of the LeadingAge LTSS Center at the University of Massachusetts, Boston. Amanda J. Reich, Ph.D., is a research scientist and senior project manager at the Center for Surgery and Public Health.