Economics

The United States relies on charitable medical care to serve the uninsured, most of which is offered by hospitals that act as providers of last resort and that constitute the safety net. Traditionally, these hospitals have been able to finance their provision of unfunded care through a complex system of cross-subsidies. The objective of this paper is to analyze the effects that financial pressures have on the provision of charity care by hospitals. To do so we look at the effect of price pressures and at the cost-controlling mechanisms imposed by managed care. Our hypothesis is that price competition and other forms of financial pressures undermine hospitals' ability to cross-subsidize and so challenges their survival. Our results show that managed care has a disproportionately negative effect on the closure of safety net hospitals. Moreover, amongst those that remain open, in areas where managed care penetration increases the most, safety net hospitals react by closing the health services most commonly used by the uninsured (emergency rooms, obstetrics, and alcohol and drug treatments).