AHA Figures Show Rise in Government Underpayments, Charity Care

Hospitals' cost of providing uncompensated care rose to $36.4 billion in 2008 from $34 billion in 2007, according to the American Hospital Association's annual report on the subject. Nevertheless, uncompensated care-defined as the combined costs of bad debt and charity care-remained at 5.8 percent of hospitals' total revenues.

AHA also released its annual report on the underpayment of hospitals by the Medicare and Medicaid programs. Underpayments are defined as the amount by which the payments fall short of the cost of providing care to patients covered by government programs.

In 2008, the AHA says, the underpayments totaled $32.4 billion, up from $31.9 billion the previous year. While this doesn't look like a big increase, AHA data shows a steady pattern of increasing underpayments, year after year. In 2000, the gap was only $3.8 billion; four years later, it was $22.1 billion.

According to the AHA, the government pays 91 cents of each dollar expended on caring for Medicare patients, and Medicaid pays 89 cents per dollar. The closeness of those two figures is somewhat puzzling, considering that Medicaid pays physicians much less than Medicare does. Perhaps state Medicaid programs have different arrangements with hospitals. In any case, the aggregate underpayment of Medicare is about twice that of Medicaid-a reversal of the ratio in 2000.

Naturally, hospitals try to shift as much of the shortfall from the government programs as possible onto private payers. That cost shifting may fail to compensate for the government underpayments, or it may exceed it, depending on the negotiating ability of particular hospitals and health systems. According to a report from actuarial firm Milliman, Inc., healthcare spending is $1,788 higher for the average family than it would be if Medicare and Medicaid paid providers the same amount that private employers do. Milliman attributes most of that difference to the higher insurance premiums paid as a result of cost shifting.

The participation of hospitals in the government programs is voluntary, but not-for-profit hospitals must participate as a condition of receiving tax exemptions. Considering that hospitals receive 55 percent of their revenues, on average, from Medicare and Medicaid, most would participate in any case.

The AHA argues that the willingness of hospitals to lose money caring for Medicare and Medicaid patients shows their devotion to community benefit. But only 53 percent of hospitals received underpayments from Medicare in 2008, and 56 percent received underpayments from Medicaid.

Another sign of hospitals' commitment to their charitable mission, the AHA says, is the large amount of uncompensated care they provide. In its fact sheet on this topic, the AHA says it "does not take into account the small number of hospitals that derive the majority of their income from tax appropriations, grants and contributions." Fair enough, but how does the AHA account for the Medicare disproportionate share payments and the state charity care payments that many hospitals receive? Some hospitals, especially in poorer areas, depend on such government largesse to keep their doors open. But are all hospitals providing as much charity care as they claim?

If hospitals they didn't give out any freebies, they could double their margins. But most of them don't pay taxes, either. So weep not for hospitals. Let's just figure out a way to moderate hospital spending enough so that we don't all go broke.