Who Bears the Cost of the Uninsured? Nonprofit Hospitals.
Skip to content
Healthcare Policy Jun 22, 2015

Who Bears the Cost of the Uninsured? Nonprofit Hospitals.

When governments do not provide health insurance, hospitals must provide it instead.

Based on the research of

Craig Garthwaite

Tal Gross

Matthew J. Notowidigdo

With the Affordable Care Act back in the news, the debate over government-sponsored health insurance programs continues. Supporters of the A.C.A. have argued in favor of expanding the insurance program Medicaid to cover adults who earn up to 138 percent of the poverty level—but so far twenty-one states have decided against such an expansion. For the most part, governors of those states have given the same explanation: they simply cannot afford to pay for their share of the program.

But in new research—based on decades of previously confidential data—Kellogg School assistant professor of strategy Craig Garthwaite and his coauthors find that when the population of uninsured Americans increases, hospitals end up bearing the cost by providing uncompensated care. In fact, their results suggest that each additional uninsured person costs local hospitals $900 per year.

That means hospitals are effectively serving as “insurers of last resort” within the American healthcare sector by providing care to uninsured patients who cannot afford to pay their medical bills. “People are still going to the emergency room,” Garthwaite says, “and they are still receiving treatment—so the cost is still there. When governments do not provide health insurance, hospitals must effectively provide it instead.”

Insurers of Last Resort

Demand for uncompensated care is what Garthwaite calls relatively “inelastic”—it remains constant regardless of changes in healthcare supply. To demonstrate this, he and his coauthors Tal Gross of Columbia University and Matthew Notowidigdo of Northwestern University looked at 359 hospital closures from 1987 through 2000. Whenever a hospital closed, the uncompensated care costs for nearby hospitals rose significantly, suggesting that there was a nearly complete spillover effect. “Again, the cost does not go away,” Garthwaite says. “It’s passed on to the remaining hospitals.”

“Previously, it wasn’t clear exactly what kind of role nonprofit hospitals were playing. This demonstrates that they’re serving to fill in the gaps in the social safety net.”

The spillover arises because the Emergency Medical Treatment and Labor Act, passed in 1985, requires that hospitals treat all individuals in need of emergency care regardless of their insurance status.

The government does provide some compensation to hospitals for treating low-income patients. Most of it is in the form of Disproportionate Share Hospital (DSH) payments, which, according to federal law, are owed to any qualified hospital that serves a large number of Medicaid and uninsured patients. But the research shows it is not enough to offset hospital costs. “The DSH payments are less than the uncompensated care that’s provided,” explains Garthwaite.

Nor does the cost fall on those who hold private insurance policies, as many policymakers assume. “There’s this idea that hospitals simply pass on the costs of uncompensated care to privately insured patients by raising prices,” Garthwaite says—a phenomenon known as “cost-shifting,” which some have also interpreted as a “hidden tax” on all Americans.

“We show evidence that it’s not true. If it were true, we wouldn’t see profits fall—but we see profits fall meaningfully following an increase in the share of the population that is uninsured.” Beyond the empirical evidence, though, Garthwaite says it is not clear that hospitals could shift costs in the way many policymakers assume they do. “Hospitals are sophisticated financial organizations,” he says. “If raising prices would have made them more money, they would have already raised prices.”

Ultimately, hospitals are left to absorb at least two-thirds of the cost of all of this uncompensated care, the researchers estimate.

Burden on Nonprofits

Interestingly, nonprofit hospitals end up absorbing the bulk of this care. A majority of private hospitals in the United States—more than 70 percent—are nonprofit firms and therefore expected to provide a “community benefit” in exchange for tax relief. One key component of this community benefit is charity care for indigent patients. For-profit firms do not face a similar community-benefit standard.

This means that when there are changes in the supply or demand of healthcare services to the poor, most of the burden—in terms of uncompensated care costs—falls on nonprofit hospitals, a finding that sheds new light on the role nonprofits play in the healthcare industry. In contrast to what many believe, nonprofit hospitals are not simply for-profits in disguise. “Previously, it wasn’t clear exactly what kind of role nonprofit hospitals were playing,” he says. “This demonstrates that they’re serving to fill in the gaps in the social safety net.”

The authors note that this burden on hospitals should not be seen as a foregone conclusion that results from health care being a necessary service. “Grocery stores also sell a vital product that is partially financed by the government through food stamps,” Garthwaite says. “But grocery stores that accept food stamps are not required to provide ‘uncompensated food’ for people who aren’t eligible for food stamps or who have already used their monthly benefits.” In both cases—healthcare and food stamps—the government deals with private firms to offer this assistance, but only in the healthcare sector do private firms incur costs beyond what the government compensates for.

The Costs of Disenrollment

The fact that hospitals, not governments, bear this cost has profound implications for the debate over Medicaid expansion. For evidence of what happens when millions of people lose their insurance, Garthwaite and his coauthors look at two recent case studies of large-scale disenrollment.

In 2005, citing severe budget constraints, Missouri and Tennessee both chose to cut back their public insurance programs. The disenrollments had a significant impact on local hospitals. In Missouri, whose program mostly supported low-income parents, the cost of uncompensated care was estimated at $556–786 for each newly uninsured citizen. In Tennessee—where four percent of the non-elderly population lost its public insurance—the uncompensated care cost reached $1,048–1,678. (Tennessee’s population was more costly because it included people who could afford to buy their way onto the state health insurance, but who may have had preexisting conditions).

Given that public insurance benefits hospitals as much low-income patients, it is no wonder that hospital groups are lobbying for its expansion. “We even see state hospital associations offering to pay more taxes,” Garthwaite says. “You don’t hear industry organizations say that very often.”

Garthwaite says this research was meant to understand the true cost of public insurance programs. “We want a debate about the Affordable Care Act and the Medicaid expansion and public insurance in general to be based on economic facts,” he says. “There are people who say it costs too much. What do we mean when we say it costs too much?”

For policymakers who want to balance state budgets while also offering public health insurance, factoring in the costs of uncompensated care might help them make more informed decisions about how to design statewide programs. “There will always be a minimum level of care that people are going to consume,” Garthwaite says. “So we need to have a conversation about how to most efficiently provide that care—otherwise we’re left with sloppy arguments. Choosing to ignore this population doesn’t mean the cost of that care is ever going to go away.”

Photo credit belongs to Taber Andrew Bain. Published under a Creative Commons license.

Featured Faculty

Professor of Strategy; Herman Smith Research Professor in Hospital and Health Services Management; Director of Healthcare at Kellogg

About the Writer
Drew Calvert is a freelance writer based in Chicago.
About the Research

Garthwaite, Craig, Tal Gross, and Matthew Notowidigdo. 2015. “Hospitals as Insurers of Last Resort.” Working Paper.

Most Popular This Week
  1. One Key to a Happy Marriage? A Joint Bank Account.
    Merging finances helps newlyweds align their financial goals and avoid scorekeeping.
    married couple standing at bank teller's window
  2. Take 5: Yikes! When Unintended Consequences Strike
    Good intentions don’t always mean good results. Here’s why humility, and a lot of monitoring, are so important when making big changes.
    People pass an e-cigarette billboard
  3. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  4. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  5. Entrepreneurship Through Acquisition Is Still Entrepreneurship
    ETA is one of the fastest-growing paths to entrepreneurship. Here's how to think about it.
    An entrepreneur strides toward a business for sale.
  6. Take 5: Research-Backed Tips for Scheduling Your Day
    Kellogg faculty offer ideas for working smarter and not harder.
    A to-do list with easy and hard tasks
  7. How to Manage a Disengaged Employee—and Get Them Excited about Work Again
    Don’t give up on checked-out team members. Try these strategies instead.
    CEO cheering on team with pom-poms
  8. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  9. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  10. The Appeal of Handmade in an Era of Automation
    This excerpt from the book “The Power of Human" explains why we continue to equate human effort with value.
    person, robot, and elephant make still life drawing.
  11. 2 Factors Will Determine How Much AI Transforms Our Economy
    They’ll also dictate how workers stand to fare.
    robot waiter serves couple in restaurant
  12. When Do Open Borders Make Economic Sense?
    A new study provides a window into the logic behind various immigration policies.
    How immigration affects the economy depends on taxation and worker skills.
  13. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  14. Sitting Near a High-Performer Can Make You Better at Your Job
    “Spillover” from certain coworkers can boost our productivity—or jeopardize our employment.
    The spillover effect in offices impacts workers in close physical proximity.
  15. How the Wormhole Decade (2000–2010) Changed the World
    Five implications no one can afford to ignore.
    The rise of the internet resulted in a global culture shift that changed the world.
  16. What’s at Stake in the Debt-Ceiling Standoff?
    Defaulting would be an unmitigated disaster, quickly felt by ordinary Americans.
    two groups of politicians negotiate while dangling upside down from the ceiling of a room
  17. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
  18. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  19. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  20. 3 Traits of Successful Market-Creating Entrepreneurs
    Creating a market isn’t for the faint of heart. But a dose of humility can go a long way.
    man standing on hilltop overlooking city
More in Healthcare