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You Already Pay for Charity Care

November 06, 2012 By Aaron Sinner, Policy Associate

Nicholas Kristof recently published a heartfelt column discussing a friend’s terminal illness, and how that friend’s lack of health insurance contributed to the tragedy he faced. Many responses focused on his friend’s lack of personal responsibility in obtaining coverage—but as Kristof points out, “if you object to Obamacare because you don’t want to pay [my friend’s] medical bills, you’re a sucker. You’re already paying those bills.”

In the conversation over health coverage, we sometimes overlook that the U.S. health system is already a universal system in the worst way possible. By law, no one is turned away at the emergency room—perhaps the most expensive, least effective place to manage one’s health. The uninsured still receive care, but when their medical bills break the bank, they’re left broke and their care unfunded.

But those bills still exist, and someone has to pay them. Hospitals have dubbed them “uncompensated care,” made up of two components: “charity care,” or care administered knowing the patient can’t afford the full cost of services, and “bad debt,” or unpaid medical bills. While not all uncompensated care occurs at hospitals, the majority does, despite hospitals being a more costly provider.

Uncompensated care has been climbing over the last decade in Minnesota. The Minnesota Department of Health reports, “Between 2004 and 2008 uncompensated care grew at an average annual rate of 15 percent.” That trend likely continues today, because as Mike Harristhal, Vice President of Public Strategy for Hennepin County Medical Center (HCMC), explains, “Insurance policies are evolving with bigger deductibles and co-pays so that we’re experiencing more uncompensated care through private insurance, versus the traditional uninsured population.” Additionally, the state’s Medical Assistance program became more restrictive this year. Harristhal says uncompensated care totaled $30 million for HCMC in 2011, roughly 4% of operating expenses. That’s up from a state average of 2.2% in 2008.

These ever-higher bills represent real costs the rest of us pay. Don’t let the name “charity care” confuse you: It’s not philanthropy making up the difference in medical bills patients can’t afford. The government plays a major role in financing both charity care and bad debt—that’s your and my tax dollars. Much of the rest is made up through cost-shifting, meaning higher medical bills for everyone.

Government funding accounts for 75% of uncompensated care costs nationally. Much of this funding comes from Disproportionate Share Hospital (DSH) programs within Medicare and Medicaid, which offer additional funding to hospitals that care largely for the poor and uninsured. State and local funding as well as direct care programs such as the Veterans Health Administration and Indian Health Service also contribute toward this total. HCMC’s primary sources of uncompensated care funding are DSH payments and formula-based tax support from Hennepin County.

Another 11% of uncompensated care costs are made up through cost-shifting. Just as stores must raise prices on goods to offset their losses from shoplifting, hospitals must charge more across the board to compensate for their losses. “We do use the margin from some elements of our operation to cover other margins,” Harristhal says. Studies suggest this cost-shifting raises overall medical costs by 1.7% to 5.1%.

The remaining portion of uncompensated care—roughly 14%—tends to be absorbed by doctors as foregone wages.

With the passage of the Affordable Care Act (ACA) in 2010, a number of changes to uncompensated care funding are on the way.

A March 2010 study by the Urban Institute concluded the health reform law will significantly reduce the cost of uncompensated care, dropping from $62.1 billion in 2009 to $46.6 billion in 2019. This is in contrast to a world without reform, in which uncompensated care would rise to an intermediate estimate of $123 billion in 2019.

This doesn’t mean the outlook for safety-net hospitals like HCMC is purely rosy, however. Harristhal says HCMC remains apprehensive about the future. “It’s a good year if we break even,” he reports, meaning any changes, even well-intentioned, could upset a delicate balancing act.

“We hope Minnesota chooses to increase Medicaid eligibility—states do have that option,” Harristhal says. The Supreme Court’s ruling on the ACA made the Medicaid expansion optional, but Harristhal hopes Minnesota takes the federal government up on this offer of expanded coverage. Expanded health insurance would be a good thing for reducing uncompensated care costs, though Harristhal notes that much depends on the quality of that insurance. Competition among insurance companies on the new health insurance exchanges, meant to lower costs, could lead to less comprehensive plans with high deductibles, escalating the trend of insured patients unable to pay their portion of medical bills.

Perhaps inspiring the most trepidation are looming cuts to DSH payments included in the health reforms. Harristhal acknowledges that academically, it makes sense to cut these payments to hospitals when insurance coverage expands, but given the break-even nature of their business, HCMC remains uneasy.

In July 2010, the Urban Institute released a study reporting, “The Congressional Budget Office’s (CBO) projections of the amount of these forgone [DSH] revenues suggests that, as a group, hospitals will not be giving up very much more, if any, revenues than they will gain from newly insured patients.” While each hospital will surely face individual circumstances, generally speaking, the ACA should not weaken uncompensated care funding.

While the ACA should reduce uncompensated care costs, safety-net hospitals like HCMC will be keeping a close eye on uncompensated care funding. But as the law expands insurance coverage, it’s important to remember the coverage will go to pay bills Americans have already been paying for a long time.

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  • Randy McLaughlin says:

    November 13, 2012 at 10:47 am

    Those complaining about having to pay for care of the uninsured usually disregard the huge subsidies that support their own coverage.  Those who receive insurance through their employer receive a huge tax subsidy by being able to exclude the value of that insurance from their taxable income, whereas those who they disparage likely would have to pay for their insurance using after-tax dollars.

    Often insurance companies negotiate better rates for their customers, pushing an inequitable share of the cost of every procedure to the uninsured.  The cost of care to everyone is also significantly elevated due to the cost of overblown provider coding, billing and collection departments.  We all pay dearly for a hugely inefficient payment system.

    A considerable amount of the cost of goods and services, not to mention taxes, we all pay goes to providing insurance coverage for the employees along the supply chain.  And we are all expected to chip in toward cost of health care for the elderly, even if comparable care is not available to us.  The uninsured are playing plenty in hidden fees and subsidies to provide care for others that is not available to them.  The uninsured are paying for health care with nearly every purchase they make and every tax they pay and every dollar that they earn but usually receive no benefit.

    Most who are uninsured were insured at one time.  We have a system that loves to kick people out of the insurance system, drumming up silly excuses like a young person coming of age, getting married or losing a job to discontinue coverage.  Once you are out of the system, it can be very difficult to get back in, especially for someone who is advancing in age or dealing with health issues.  An insurance company can collect premiums from someone for most of their working life and then be absolved of any responsibility for their care should that person lose their job just as illness strikes.

    In America, we all pay dearly for the ability to blame people for their misfortune.  We cling to a highly inefficient and horribly inequitable system of collecting the money needed to provide medical care in order to smugly cling to the notion that we are capable and responsible for the cost of our own care.  The truth is that the cost of a major illness or injury is beyond the capability of all but the richest.  Modern health care simply cannot exist without redistribution of the cost of care.

    Let us work for a fair, equitable and efficient system of paying for medical care rather than getting caught up in blaming those who are victims of the current system’s inequities and inefficiencies.