Who pays hospital bills when patients can't?

A new report by The Hamilton Project, an initiative of the Brookings Institution, looks at a proposal to improve the charity-care system in the U.S. Three researchers at Northwestern University’s Kellogg School of Management—David Dranove, Craig Garthwaite, and Christopher Ody—argue that the supply and demand for charity care are not geographically aligned. That is, hospitals with the most resources to offer charity care aren’t in the places where people most need it. In high-income areas, hospitals are better funded and more able to provide charity care. But it’s in the hospitals in low-income areas where the demand is highest.

To address this mismatch, the researchers propose  a “floor-and-trade” system, where all hospitals are required to provide some charity care to low-income patients. Currently, the average nonprofit hospital devotes 2.3 percent of its operating expenses to charity care. In the proposed system, hospitals would set a “floor,” or a minimum, for the amount of charity care they’ll provide each year.

To incentivize hospitals to provide charity care and rectify the current geographical mismatch, hospitals would be able to purchase and trade charity-care credits. Under this system, a hospital in a low-income area can receive funding allocated for charity care from one in a high-income area that’s not providing as much charity care.