Uncompensated hospital care: charitable mission or profitable business decision?

Abstract

Provision of hospital uncompensated care is generally assumed to be adversely affected as increased healthcare competition decreases demand for compensated hospital services. Economic theory, however, suggests the question is more complex. Non-profit hospitals are assumed in this paper to maximize utility as a function of uncompensated care, subject to the constraint that revenues cover costs. For-profit hospitals, in contrast, are assumed to maximize profit while recognizing that failure to meet community expectations regarding provision of uncompensated care could negatively impact profits. Therefore, for-profit hospital supply of uncompensated care focuses on balancing the hospital's marginal costs and marginal benefits. These models predict that non-profit hospitals will respond to increased competition by reducing the supply of uncompensated care. In contrast, for-profit hospitals will increase the supply of uncompensated care when market demand decreases since the concurrent decrease in compensated care reduces the marginal cost of producing uncompensated care. The models also predict that for-profit hospitals will respond to changes in community expectations regarding the provision of uncompensated care.