Who Pays Hospital Bills When Patients Can't?

In the U.S., nonprofit hospitals provide billions of dollars to cover unpaid care every year. Is there a way to make sure that money is going to the patients who need it most?

The University of Chicago Medical Center emergency room (M. Spencer Green / AP)

The cost of health care in the U.S. has been ballooning: A recent report found that the U.S. collectively spends about $9,000 per person on health care each year, which adds up to 17 percent of the country’s GDP.

But what happens when patients can’t afford to pay their bills? At nonprofit hospitals, an unpaid bill either becomes bad debt for the patient or is written off as “charity care.” Nationally, this adds up to $57 billion in uncompensated care. But a group of researchers argue that the way charity care is given out could be made more efficient.

A new report by The Hamilton Project, an initiative of the Brookings Institution, looks at a proposal to improve the charity-care system in the U.S. Three researchers at Northwestern University’s Kellogg School of Management—David Dranove, Craig Garthwaite, and Christopher Ody—argue that the supply and demand for charity care are not geographically aligned. That is, hospitals with the most resources to offer charity care aren’t in the places where people most need it. In high-income areas, hospitals are better funded and more able to provide charity care. But it’s in the hospitals in low-income areas where the demand is highest.

To address this mismatch, the researchers propose  a “floor-and-trade” system, where all hospitals are required to provide some charity care to low-income patients. Currently, the average nonprofit hospital devotes 2.3 percent of its operating expenses to charity care. In the proposed system, hospitals would set a “floor,” or a minimum, for the amount of charity care they’ll provide each year.

To incentivize hospitals to provide charity care and rectify the current geographical mismatch, hospitals would be able to purchase and trade charity-care credits. Under this system, a hospital in a low-income area can receive funding allocated for charity care from one in a high-income area that’s not providing as much charity care.

Craig Garthwaite, one of the researchers, says that as the Affordable Care Act has rearranged the flows of patients to hospitals and decreased the number of uninsured Americans, it’s a good time to reconsider how hospitals commit themselves to serving their surrounding communities. “I think it is important to realize that the floor-and-trade aspect of this policy means that we can increase the charity care provided to people falling through the cracks of the ACA in the most efficient way possible,” he says. “It is also important to note that unlike a cap and trade policy this does not create industry wide cost, but instead shifts resources across hospitals.”