Fact Sheet: Uncompensated Hospital Care Cost

February 2022

Each year, the American Hospital Association (AHA) publishes aggregate information on the level of uncompensated care – care provided for which no payment is received – delivered by all types of U.S. hospitals. The data used to generate these numbers come from the AHA’s Annual Survey of Hospitals, which is the nation’s most comprehensive source of hospital financial data. This fact sheet provides the definition of uncompensated care and technical information on how this figure is calculated on a cost basis.

Please note, this information includes only two components within the universe of benefits that hospitals provide to their communities. While this fact sheet contains important information, it does not account for the many other services and programs that hospitals provide to meet identified community needs. It also may not fully account for other ways in which hospitals provide financial assistance to patients of limited means^.i

DEFINING UNCOMPENSATED CARE COSTS

What is Uncompensated Care?

Uncompensated care is an overall measure of hospital care provided for which no payment was received from the patient or insurer. It is the sum of a hospital's bad debt and the financial assistance it provides. Financial assistance includes care for which hospitals never expected to be reimbursed and care provided at a reduced cost for those in need. A hospital incurs bad debt when it cannot obtain reimbursement for care provided; this happens when patients are unable to pay their bills, but do not apply for financial assistance, or are unwilling to pay their bills. Uncompensated care excludes other unfunded costs of care, such as underpayment from Medicaid and Medicare.

Bad Debt and Financial Assistance

The AHA combines the hospital’s bad debt and financial assistance costs to arrive at the hospital’s total costs of unreimbursed care provided to patients. In terms of accounting, bad debt consists of services for which hospitals anticipated but did not receive payment. Financial assistance, in contrast, consists of services for which hospitals neither received, nor expected to receive, payment because they had determined the patient’s inability to pay. In practice, however, hospitals often have difficulty in distinguishing bad debt from financial assistance.

Hospitals provide varying levels of financial assistance, which must be budgeted for and financed by the hospital depending on the hospital’s mission, financial condition, geographic location and other factors. Hospitals have processes in place to identify who can and cannot afford to pay, in advance of billing, in order to anticipate whether the patient’s care needs to be funded through an alternative source. Hospitals also continue efforts to identify patients who are unable to pay during the billing and any collection process. Depending on a variety of factors, including whether a patient completes an application for financial assistance, care may be classified as either financial assistance or bad debt. Bad debt is often generated by medically indigent and/or uninsured patients, making the distinctions between the two categories arbitrary at best.

Uncompensated care data are sometimes expressed in terms of hospital charges, but charge data can be misleading, particularly when comparisons are being made among types of hospitals, or hospitals with very different payer mixes. For this reason, the AHA data on hospitals’ uncompensated care are expressed in terms of costs not charges. It should be noted that the uncompensated care figures do not include Medicaid or Medicare underpayment costs.

CALCULATING UNCOMPENSATED CARE COSTS

Uncompensated care is first calculated on a hospital by hospital basis. Bad debt and financial assistance (including charity care)ⁱⁱ are reported as charges in the AHA Annual Survey. These two numbers are added together and then multiplied by the hospital's cost-to-charge ratio, or the ratio of total expenses to gross patient and other operating revenue.

§ Uncompensated Care Charges = Bad Debt Charges + Financial Assistance Charges

§ Cost-to-Charge Ratio =                 Total Expenses Exclusive of Bad Debt
                                                      ___________________________________
                                               Gross Patient Revenue + Other Operating Revenue

§ Uncompensated Care Costs = Uncompensated Care Charges x Cost-to-Charge Ratio

Combining bad debt and financial assistance to arrive at the hospital’s total uncompensated care cost allows for comparability across hospitals.