Association for Public Policy Analysis & Management

Hospitals play a vital role in the social safety net by providing the majority of the nation’s uncompensated care to un- or under-insured patients. The financial implications of uncompensated care are widespread, as providers attempt to cross-subsidize these costs by charging privately insured patients higher prices for services rendered which ultimately results in higher insurance premiums for consumers. The burden of paying for hospital uncompensated care costs also falls heavily on the taxpayer, as public funds are estimated to cover as much as 75 percent of the care. The costs associated with providing high levels of uncompensated care can be detrimental to a hospital’s financial performance, and by extension, the quality of care it delivers. In addition to shifting costs to the privately insured and relying on public funds to recover the financial losses associated with providing uncompensated care, hospitals may also choose to cut back on costly quality improvements, such as investments in infrastructure, equipment, or staff. As far as can be determined, no studies have directly examined the relationship between level of uncompensated care and hospital quality outcomes. One plausible explanation for the lack of research might be that the endogeneity between hospital quality and level of uncompensated care makes the empirical investigation of this relationship a complex one. However, the implementation of the voluntary Medicaid expansion in 2014 provides a natural experiment that can be exploited to better understand this endogenous relationship. The effect of uncompensated care on hospital quality, as measured by patient experience scores, is estimated in this study using a two-stages least squares (2SLS) regression with instrumental variables (IV) approach. In this analysis, a difference-in-differences estimator predicting the effect of the Medicaid expansion on uncompensated care acts as the instrument in the second stage regression which estimates the effect of uncompensated care on quality. Preliminary results indicate an inverse relationship between uncompensated care and hospital patient experience scores, suggesting a reduction in uncompensated care is related to an increase in quality. The findings of this study have implications for hospitals as they navigate changing reimbursement structures and policymakers considering changes to current health policy, particularly pertaining to the Medicaid expansion.