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Reinsuring the Insurers of Last Resort (WP-22-14)

David Dranove, Craig Garthwaite, and Christopher Ody

Hospitals face large and variable costs from treating indigent care patients. Two methods of “reinsuring” hospitals against these costs are providing these patients with insurance and directly providing hospitals with supplemental payments to cover the expected costs of treating the indigent. Currently, the U.S. uses a hybrid of these approaches, insuring some indigent patients through Medicaid and providing hospitals with supplemental payments through programs such as Medicaid Disproportionate Share. The researchers evaluate the economic fundamentals of supplemental payments in the U.S. safety net. They find that providing indigent care patients with insurance and providing hospitals with supplement payments are imperfect substitutes to hospitals because they differ in the extent to which they protect hospitals from risk, incentivize cost control, and incentivize certain investments. Overall, the authors find that supplemental payments are used to increase access to hospitals in areas with many indigent patients, rather than to provide efficient intertemporal risk-protection to hospitals or incentivize cost control.

David Dranove, Walter J. McNerney Professor of Health Industry Management, Professor of Strategy, Northwestern University

Craig Garthwaite, Professor of Strategy, Herman Smith Research Professor in Hospital and Health Services Management, and IPR Associate, Northwestern University

Christopher Ody, Kellogg School of Management and Manager, Analysis Group

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