Hospitals: Myth Busters #8: Discovering Uncompensated Care

The fallacy of Roemer’s Law (“a built bed is a filled bed”) spawned an endless series of policy initiatives — national health planning, hospital rate setting, and Certificate of Need — all of which failed miserably and caused enormous destruction in America’s health care system.

One might think that, given this dismal track record, the command-and-control social planners would take a moment and rethink their assumptions.

Hah! One would think that only if one had never met any of these people. Introspection and self-doubt are not among their characteristics.

No, no, no, they think. Our policy prescriptions were spot on, we simply didn’t go far enough. There must be something else we didn’t account for —

What could it be?

The American Hospital Association (that was so supportive of Certificate of Need as a way of preventing competition) would supply the ready answer — uncompensated care!

Their argument:  Hospitals were burdened by providing free care to deadbeats. No wonder all of the remedies had failed.

Never mind questioning the logic, such as why uncompensated care would cause hospital prices or hospital utilization to grow. Why should one lead to the other? Sure, hospital prices might be higher to cover those costs, but why would they continue to grow year after year?

Policy makers didn’t know that answer, but they were happy enough to latch onto this new issue as the reason their previous remedies had failed.

Of course, the next question would be — why was there so much uncompensated care?

This mental process is captured in an article in Health Affairs in 1984 by Gail Wilensky, “Solving hospital uncompensated care: targeting the indigent and the uninsured.”

The article starts out by stating in the abstract:

Uncompensated hospital care is a growing problem facing federal and state legislators, hospitals and doctors, and, indeed, all of society.

But that is not what the article itself says. In the text, the article is not at all sure it is a “growing problem,” and is puzzled over what standard to use as a “deflator in constructing the time series estimate.” If CPI is used, there is one result, if GNP is used it is another, and if hospital prices are used, yet a third. In the latter case, uncompensated care rose from $5.2 billion in 1978 to $6.2 billion in 1982 — hardly a crisis.

Indeed, the article says quite explicitly, “The amount of dollars spent on uncompensated hospital care is surprisingly small” — about 5% of hospital charges or 6% of hospital payments.

It further says, “Little is known directly about the characteristics of individuals who receive care for which the provider is not compensated.” So, it is a tiny “problem” that is barely growing, and caused by people we know nothing about. Sort of a dead end, eh?

Not so fast. There is something we know a lot about:

We do, however, have information available about the types of hospitals that experience uncompensated care, such as the urban public teaching hospitals, other teaching hospitals, and, to a lesser extent, the voluntary hospitals and proprietary hospitals. Both the Sloan study and The Urban Institute study have indicated that hospitals with high concentrations of uncompensated care have disproportionate numbers of patients who are uninsured and low income.

And here comes the great pivot — switching from worrying about one issue — uncompensated care — to an entirely different one — the uninsured.

Dr. Wilensky had already been writing about the uninsured. The year before her uncompensated care article came out in 1984, she had another piece published in Health Affairs on “Poor, Sick, and Uninsured,” in which she looked at expanding Medicaid to cover the approximately 1.4 million people who were uninsured for the entire year, low income, and in poor health according to 1977 data. She estimated that this population had doubled due to the recession on the early 1980s. Here is another example of using temporary economic conditions as a reason to create a permanent program.

So the new concern about uncompensated care simply added another rationale for doing something she was already working on.

Our next article will be about how the uninsured grew into a gigantic issue, but here it’s worth noting that while uncompensated care became one of the cornerstones of the uninsured argument, it was never in fact much of a problem.

Some years later (1997) a team of RAND corporation researchers updated the uncompensated care issue and found it hadn’t grown at all since the Wilensky article in 1984. It was about 6% of hospital costs in the 1984 article, and was still about 6% in the 1997 article. It had grown a bit (to 6.3%) in 1986, but had dropped back to 6.1% or $17.5 billion in 1995.

Look, this is a trivial amount of money. Retailers lose double that amount ($33.3 billion) to shoplifters every year, according to the CrimeDoctor Web site.

In a free society some people take advantage of that freedom. In every sector business owners know that will happen and build the losses into their business models as a cost of doing business. Only in health care does it become a NATIONAL CRISIS worthy of federal intervention.

Comments (14)

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  1. Jan Peter Ozga says:

    Greg’s series on myth busters should be required reading for all policy makers. I recommend packaging them into one volume when finished and give them to our lawmakers and regulators. At least while they are reading it,
    they won’t be passing silly laws and onerous rules.

    Jan Peter Ozga, MPH
    Medical Business Exchange

  2. John R. Graham says:

    The myth of uncompensated care is used to bludgeon us over the head with arguments about the need for universal coverage to eliminate the almost competely imaginary “free-rider” problem. Greg Scandlen’s comparison with shoplifting is commendable.

    Even worse, these hospitals were established by religiously affiliated non-profit societies. Are they not supposed to provide a level of uncompensated care as part of their mission? They receive billions of dollars of private charitable donations every year. Even without EMTALA, which commands them to stabilize anyone who comes into the ER, we should expect them to provide uncompensated care.

  3. Frank Timmins says:

    “Greg’s series on myth busters should be required reading for all policy makers”

    Unfortunately, it would do little good. The policy makers running the show right now could not care less about the facts. They will kick aside all the facts until they find something that even remotely supports their ideology.

  4. Greg Scandlen says:

    Thanks, guys. Frank is right. There is a very large group of people whose livelihood depends on being the first to discover a “problem” and recommend solutions. So of course they will take any little variation and inflate it into a CRISIS!!!!!!!!! Facts don’t matter, they just get in the way.

  5. Virginia says:

    I was reading Paul Starr’s book, “The Social Transformation of American Medicine,” and read something interesting. Apparently you can look at the accounting records across all time periods (back to the Romans, if you like). They all have some form of uncompensated care. Yet, the profession survives.

    I think it’s a universal truth. There will always be doctors, and there will always be people who can’t/won’t pay for the service.

    We forget that we live only a short time compared to the timeline of history. These things have a tenancy to repeat themselves.

  6. Devon Herrick says:

    The latest figures I’ve seen claim that uncompensated care is about $59 billion per year. That’s around 2.4% of medical expenditures. There are arguably numerous reasons that contribute to uncompensated care. Some uncompensated care is because emergency rooms are afraid to turn away people seeking non-urgent care who claim they cannot pay. Some is uncompensated because hospitals do a poor job of credit and collections. Some is uncompensated because hospital list prices are so inflated the uninsured often feel justified in refusing to pay.
    On average, the uninsured pay for about one-third of their care out of pocket. Uncompensated care is not a huge problem — although some hospitals are especially hard hit. Yet, more could be done. Parkland Memorial in Dallas installed software that helped it identify the county of residence and income for people who claimed they could not pay.

  7. James Lansberry says:

    If a gratuitous plug can be allowed here…Samaritan Ministries is beginning a new project to have deliberately uncompensated care for maternity in the inner cities…returning to a model of true, private, religious charity like John mentioned. If you’re interested check out

  8. John Torinus says:

    Great insights, Greg. Every company has bad debt. The uncompensated care, of course, is paid for. The dead beats don’t pay, but the other payers cover that bad debt expense, just like they cover all the other expenses at of health providers. That’s how every business works.

    Providers are going to have to get a lot better at collections as millions of consumers come on stream as HSAs and HRAs continue to expand. They might help themselves out by explaining what things are going to cost up front. Transparency on prices is step one. Further, the providers might as well do it, because it’s coming on one from other sources any way. They can’t hide behind opaque bills much longer. We’re getting bundled prices from some providers at my company, such as a knee replacement for $27,000 all-in.

  9. James G Knight MD says:

    The solutions these same people designed for compensataed care are the drivers behind any crisis in uncompensated care. For the most part doctors and hospitals can no longer cost-shift for uncompensated care as reimbursement is essentially fixed (Government price fixing and insurance monopsonies), especially for the solo and small group physician.
    Both political persuasions seem bent on further consolidating both providers and payers, and will end up building the infrastructure for complete government-run health care.
    Better a more perfect market, with lots of competing providers, financially responsible consumers and real price transparency…

  10. James G Knight MD says:

    BTW, for those of you who don’t know, there is a growing crisis in getting specialty care on an emergency basis, because a doctor on call must take all commers regardless of the ability to pay.
    Most insureds are fenced off for longterm relationships by closed payer/ provider networks; only the uninsured are up for grabs. In California, a state I recently left, the insurance companies now unilaterally set rates for out-of-network ER care and physicians are prohibited from balanced billing patients.
    Significant hospital/ ER charges essentially deplete the resources of the vast majority of the uninsured, making reimbursement for the specialist exceedingly unlikely. And, the uninsured are often very litiginous, thus specialists when possible are electing not to take call…

  11. ralph says:

    Very good! Of course hospitals report losses at chargemaster rates, and if they billed reasonable rates, like they accept from all paying customers, they’d probably have far less uncompensated care.

  12. Ralph Kristeller says:

    When myths are the order of the day, organized medicine has a responsibility to confuse the public promptly and effectively with the facts based on verifiable data.

    Accordingly, the AMA needs an additional Council – fully staffed and fully funded
    The charge to the new Council should be: Be prepared to publish promptly, concisely and completely articles and verifiable data that refute myths.

    “The only thing necessary for the triumph of evil is for good men to do nothing” – Edmund Burke, 1795

  13. Greg Scandlen says:

    Good thought, Ralph K. But another approach (if anyone is serious about solving problems — which I doubt) would be to value the presence of contrarians. That is what business and the military does. Serious business people build-in contrarian view points to test their assumptions and avoid group think. The military is ALWAYS red-teaming their strategies, i.e.,setting up an opposing force to see if the blue team can prevail.

    But health policy is run by a bunch of politically motivated economists. Politics blinds them from even considering alternatives. Anyone who might express a bit of doubt is shunned as a traitor.

    This lack of intellectual rigor and integrity is destroying the country.

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