Professor of Strategy; Herman Smith Research Professor in Hospital and Health Services Management; Director of Healthcare at Kellogg
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.”
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.
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 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.
Garthwaite, Craig, Tal Gross, and Matthew Notowidigdo. 2015. “Hospitals as Insurers of Last Resort.” Working Paper.