Calculating Uncompensated Care Costs

$41.1 Billion a Year

Each year hospitals across the country face a mountain of bad debt caused by uncompensated care.  It’s not a small figure.   According to the AHA, the total amount of uncompensated care is tens of billions of dollars a year.  In 2011, it was $41.1 billion, an increase of $2 billion from the previous year.

Defining Uncompensated Care

There are two main areas that comprise uncompensated care: bad debt in the form of unreimbursed services and charity care.  Unreimbursed care is defined by the AHA as services for which hospitals expected to receive payment from a patient or insurer, but didn’t.  Charity care costs are typically services that the hospital never expected payment on because it determined before billing that the patient was not able to pay.

The AHA’s uncompensated care figures do not include underpayments from Medicare and Medicaid, nor do they account for community services and programs or efforts to provide financial assistance to patients with limited incomes.

The 2 Steps to Calculating Uncompensated Care

Step One: Determine the total amount of uncompensated care.  This number is calculated by adding together the amount of unreimbursed services and charity care.  This total is known as a hospital’s uncompensated care charges.

Uncompensated care charges are standard charges for health care services where a hospital has not received any payment.  Uncompensated care is also where a hospital has received partial payment that does not cover the cost of the health care provided to the patient.  Uncompensated care charges do not include any portion of a charge that the hospital has no right to collect under a private health care plan, under an agreement with an individual for a specific amount, under the charge limitations imposed by any program, or any amount that the hospital has received partial payment for.

Step Two: The total uncompensated care charges is multiplied it by the hospital’s cost-to-charge ratio.

The cost-to-charge ratio of a hospital is the ratio between what a day in the hospital actually costs the hospital versus the amount of revenue the hospital generally collects per day.  This number gives a more realistic picture of the actual costs to the hospital not just the amount the hospital wishes to charge.

A simple formula:

Uncompensated Care Charges = Bad Debt Charges + Charity Care Charges

Cost-to-charge Ratio = Total Expenses/Revenue

Uncompensated Care Costs = Uncompensated Care Charges x Cost-to-charge Ratio

The $41.1 Billion in 2011 was calculated by adding uncompensated care costs from hospitals nationwide.  The data used to generate these numbers come from AHA’s Annual Survey of Hospitals.

On a final note, there are “other” uncompensated costs that are not calculated using the formula used by the AHA.  They include food service, education, maintenance, utilities and real estate.  Some have suggested that new guidelines be set up for calculating all costs relating to uncompensated care.