Uncompensated Care Costs Defined: Causes & Solutions

The challenges modern hospitals face are numerous and constantly changing, but uncompensated care costs are consistently one of the largest. For many years, hospitals and health systems have battled uncompensated care as numbers rose to $745 billion between 2000 and 2020, according to the American Hospital Association’s annual survey.

The first step to combating the revenue issues caused by uncompensated care and taking back control of your finances is understanding it. What is uncompensated care, and how can hospitals begin to manage it?

What is uncompensated care?

Uncompensated care is lost revenue that occurs when a hospital provides care and does not receive payment in return. It is closely linked to the revenue cycle and revenue recovery efforts. 

There are many reasons why provided care ends up uncompensated. A patient may have changed insurance providers or their paperwork may have an unintentional error. In a post-COVID world where hospitals are in need of every penny of revenue, it’s an issue worth addressing within healthcare networks. 

In today’s healthcare revenue environment, finding and recovering uncompensated care can make the difference between turning a profit or ending up in the red. 

What is the Difference Between Charity Care & Bad Debt?

Charity care and bad debt both fall under the umbrella of uncompensated care, but represent two different scenarios. Bad debt occurs when hospitals provide care and expect to receive payment but never do. These accounts are often sent to collections before being written off. 

Charity care, also known as financial assistance, is when hospitals provide services but do not expect to receive payment (likely due to the patient’s financial status) and instead provide free or discounted health services. Hospitals budget for varying levels of charity care each year depending on factors like their financial health, patient need, mission and location. 

However, because both charity care and bad debt are often generated by underinsured patients or patients with lower incomes and both are ultimately written off from the hospital’s budget, the definition often becomes a bit blurry. Official definitions can vary between hospitals. 

The Cost of Uncompensated Care

The monetary costs of uncompensated care are staggering. A Definitive Healthcare survey of 3,855 U.S. hospitals between 2015-2018 found that large hospitals with more than 250 beds saw their uncompensated/unreimbursed costs increase to $39.7 million in 2018, up from $33.2 million in 2015 and growing at an average annual rate of 6.2% a year.

Meanwhile, small hospitals were hit even harder. The average for hospitals with less than 25 beds reached $2.3 million in 2018, up from $1.8 million in 2015 and rising at an average annual rate of 8.5% a year.

More recently, Definitive Health analyzed over 4,500 U.S. hospitals to determine the top 20 hospitals with the highest total uncompensated care costs. The individual hospitals ranged from just under $326 million to over $1 billion in unreimbursed costs. Most of these hospitals were in metropolitan areas.

What causes uncompensated care?

There are several factors contributing to a rise in uncompensated care, including:

Churn

Economic, physical, and emotional effects of the pandemic are still being researched, but the healthcare industry has started reporting major losses in collective knowledge due to numerous long-tenured medical professionals retiring or leaving the field. The major losses in collective knowledge have been causing disruption to workflows.

Medicaid redetermination

In 2023, the Public Health Emergency associated with the COVID-19 pandemic ended, and Medicaid patients were once again required to renew coverage after a three-year pause. As a result of this redetermination process, millions of patients have been removed from Medicaid. Many are no longer eligible, but others were removed despite maintaining eligibility. The redetermination process has created a wave of self-pay patients in need of care coverage, contributing to uncompensated care.

Denials

A denial of claim occurs when the information the provider has on record does not match the patient’s insurance company’s records. When a claim is denied, the insurance company does not send the hospital the appropriate revenue. An estimated 90% of denials are preventable, with many occurring due to simple clerical errors meaning some legitimate claims end up denied by the insurance company and become uncompensated care.

Lack of appropriate tools

Many hospitals use outdated, paper-based systems or third-party vendors to manage insurance claims, leaving room for human error. Having revenue recovery tools can help relieve the burden of resolving uncompensated care cases and help patients avoid self-pay scenarios.

For example, a proper insurance discovery tool can analyze batches of denied claims to determine whether or not patients have billable coverage. This saves employees the time of reviewing denials by hand and offers a reliable, low-effort way to combat uncompensated care.

Insurance Coverage Gaps 

If a patient experiences a temporary lapse in coverage but requires care for a medical emergency during that lapse, they often have no way to pay out of pocket and the care is left uncompensated. This can occur when a patient:

• is between jobs.
• just started a new job.
• experiences an increase in income, making them ineligible for certain programs like Medicaid.
• experiences a decrease in income, making coverage unaffordable. 
• has just turned 26 and been removed from their parent’s health insurance without finding their own coverage.

The Impact of Uncompensated Care

Uncompensated care has far-reaching implications beyond a hospital’s bottom line. Consequences of rising uncompensated care costs may include:

Financial Strain

Rising uncompensated care costs often result in lower financial margins. As a natural response to mitigate financial constraints, hospitals can opt to tighten purse strings by cutting back on facility improvements, staff training, new equipment or hiring employees.

Healthcare Quality & Accessibility

Studies show a direct correlation between a hospital’s financial health and its patient outcomes. The more funding a hospital has to invest in improvements, the better its level of care. High uncompensated care can prevent a hospital from making critical upgrades to infrastructure and processes, which ultimately filters down to lower quality care. 

Administrative Burden for Staff

With more patient accounts left unsettled, staff must work that much harder to keep up with workflows, correct mistakes, re-bill claims and reach out to patients for demographic information. While uncompensated care continues to grow at an exponential rate, hospital finance teams often stay the same size (or even shrink!), putting a significant strain on labor resources.

Additionally, a stressed out team is an unproductive and dissatisfied team. Too much overwhelm could result in high staff turnover and further contribute to churn, which in turn drives uncompensated care costs, creating a vicious cycle.

Negative Implications for Patient Experience

Saddling patients with medical bills and avoiding hospital upgrades due to a tough financial situation has consequences. One study found that higher uncompensated care costs led to overall lower patient experience scores. According to the results, “financially strained hospitals that are able to substantially reduce higher-than-average levels of uncompensated care may see meaningful improvements in patient experience scores.”

It’s simple: More money on the table leads to more resources, which leads to higher quality care, which leads to improved patient outcomes and an overall better experience. 

What hospitals can do about uncompensated care

Hospitals can take several strategic actions to mitigate uncompensated care. We suggest starting with the following: 

Optimize Billing & Reimbursement Processes 

Take a holistic approach to optimize medical billing by examining the process from start to finish. Is the patient’s information captured at check-in? Are there systems, like a patient portal and online communication, to collect patient information after the fact, if needed?

The right technology is crucial here, too. By introducing automation and workflows into an integrated system, staff are required to put in fewer labor hours while reducing the potential for mistakes or chances of any one account slipping through the cracks.

Insurance Discovery Solutions from Office Ally

Insurance discovery involves running an exhaustive check of government and commercial payers to determine if any accounts classified as uncompensated care can be covered by an insurance source. Office Ally’s industry-leading team provides Insurance Discovery that consistently finds revenue opportunities at an average of 10-30% in previously unidentified eligible claims.

To prove Insurance Discovery will yield results for your organization, we offer a free assessment using standard file extracts. The assessment does not require technical resources from the organization and there is no fee unless the tool recovers revenue for you.

Click here to schedule your free Insurance Discovery assessment with Office Ally.

Educate & Communicate with Patients

Hospital finance departments should be an educational resource above all else. Staff across departments should be trained to answer frequently asked questions and provide excellent service. Patients should appreciate rather than dread a helpful chat with the billing department.

Finance teams can also be proactive by providing resources for understanding insurance in the patient portal, in-person brochures or via email. If your hospital provides a regular newsletter for patients, ask if you can create an educational series on insurance that answers common questions. In many cases, education is the best form of proactivity.

The cost of uncompensated care is huge, and still growing year-over-year. Now is the time to get it under control and inject some life back into your hospital’s financial health. Take your first step today.

Explore our Uncompensated Care & Insurance Discovery glossary.

Whether you’re actively looking for a new insurance discovery tool, or are simply curious to see if there’s any revenue out there that you could recover, you have nothing to lose.