Implications of Medicare's prospective payment system for the provision of uncompensated hospital care.

Medicare's prospective payment system (PPS) has the potential to directly affect the level of uncompensated care provided by hospitals. Hospitals that realize deficits for their Medicare patients may have to limit provision of uncompensated care whereas those that realize surpluses may provide more free care. This paper measures these potential effects by combining simulation estimates of PPS's impact on the revenues of high-volume providers of uncompensated care with regression estimates of the impact of changes in hospitals' financial margins on uncompensated care. Our analysis indicates that PPS may result in a slight increase in the aggregate amount of uncompensated care provided by hospitals, but that it will likely reduce care for the indigent in some localities. Potential modifications to PPS--particularly those that limit price increases or reduce the indirect teaching adjustment--could eventually reduce any of the initial positive effects on uncompensated care and enhance the negative effects.