Does hospitals’ provision of uncompensated care deteriorate their profitability?: A longitudinal study of US hospitals

The purpose of the present study is to investigate the effect of uncompensated care (i.e., bad debt expenses and charity care) on the short-term, general non-profit hospital profitability measured by operating margin. We used hospital financial-year-end reports from the Washington State Department of Health for the 2006 to 2009 time period. We model the effects of bad debt expense and charity care, controlling for many observed time-varying factors such as average length of stay, bed occupancy rate, staff efficiency, Medicare and Medicaid dependency, teaching intensity, proportion of outpatient volume, and hospital fixed effect, which controls for hospital specific time-constant measures. Fixed effect models found the opposite directions of the coefficient estimates of the bad debt expenses between the private hospitals and public hospitals. Specifically, we found 1) a significant negative effect on operating margin among private non- profit hospitals and 2) a significant positive effect on operating margin among public hospitals, even after controlling for many observed time-varying covariates and hospitalfixed effect. There was no evidence that charity care provision had a significant effect on hospital profitability. Hospital executives and policymakers should keep track of profitability among community hospitals that provide large share of charity care and bad debts.