Does state budget pressure matter for uncompensated care spending in hospitals? Findings from Texas and California

This study examined the impact of state budget cuts on uncompensated care at general acute care hospital organizations. This study capitalized on the variations in the states of Texas and California to form a natural experiment testing the joint impact of budget cut status on uncompensated care costs, as well as specific charity care costs and bad debt expenses from indigent patients.

Budget cuts in the state of Texas occurred in the year 2004. Information was obtained from the Texas Department of Health and the California Department of Health Services regarding financial characteristics of hospitals and from the American Hospital Directory annual survey regarding organizational characteristics of hospitals. We created three dependent variables: R(UC) (the ratio of total uncompensated care costs to gross patient revenue), R(CC) (the ratio of charity care to total patient revenue) and R(BD) (the ratio of bad debt expenses to gross patient revenue). Using a two-period panel data set and individual hospital fixed effects, we captured hospital uncompensated care spending that could also have influenced budget cut status. Additionally, the impact of the state budget cut status on hospitals' uncompensated care spending, charity care spending and bad debt expenses was also estimated using the similar methodology.

In this study, we included 416 (in Texas) and 352 (in California) public, not-for-profit (NFP) and for-profit (FP) hospitals that completed the annual survey during the study period 2002-2005.

For the state of Texas, results from the fixed effect model confirmed that the year 2005 was directly related to increased R(UC) and R(CC) . The coefficients of 2005 were significantly and positively associated with R(UC) (0.43, p < 0.05) and R(CC) (0.29, p < 0.05). These results supported the findings that the R(UC) and the R(CC) would be more positively associated with 2005 than any other year, with other things being equal. However, for the state of California, even though the coefficient of 2005 was significant and positively associated with R(CC) (0.31, p < 0.05), the coefficient of uncompensated care spending was not statistically significant for 2005.

The healthcare industry is characterized by increased regulation, a growing number of uninsured patients, increasingly stringent reimbursement and competitive practices among hospitals and other providers. Federal and state healthcare agencies are restricting the criteria for eligibility for outlier payments and uncompensated care provisions. Tax exempt status of many NFP hospitals is being examined and tied to specific performances, particularly the provision of uncompensated care. This study provides evidence of the impact of budget cut pressure on uncompensated care provided in Texas general acute care hospitals.