This DataWatch examines the impact of hospital competition, the Medicare prospective payment system (PPS), and Medi-Cal selective contracting on the provision of uncompensated care by private hospitals in California during 1980-1989. It finds that hospitals subject to more intense competition and greater f iscal pressure f rom Medicare and Medi-Cal reduced their provision of uncompensated care relative to hospitals facing less pressure from these sources. We estimate that had hospitals not been subjected to increasing price competition from growth of managed care plans and financial tightening in public programs, they would have provided 36 percent more uncompensated care than was actually provided in 1989. Hospitals historically have taken it upon themselves to fill some of the gaps in the U.S. health insurance system by treating uninsured patients and then charging more to those who can pay to offset the costs. This practice, known as cost shifting, distinguishes the hospital sector from nearly all other sectors of the economy. Some $13.4 billion in uncompensated hospital services was provided in 1990, much of it to the medically indigent.’ With the failure of significant health care reform, reliance on charity assumes even greater importance in protecting the poor and ensuring continued access to health care services. The ability of providers to continue to deliver uncompensated care is being threatened by powerful trends within the health care system, trends driven by both demandand supply-side factors. Despite efforts to expand coverage, demand for uncompensated care has continued to increase as work-force changes have left a growing number of persons uninsured in the United States. Increased price competition as a result of substantial growth in managed care enrollment in health maintenance organizations (HMOs) and preferred provider organizations (PPOs) has begun to force hospital prices down in many states. At the same time, state Medicaid programs across the country are shifting toward mandatory managed care, and federal budget deficits may well lead to further tightening of the Medicare prospecJoyce Mann is a resident consulant at RAND in Santa Monica, California. Glenn Melnick is an associate professor at the University of California, Los Angeles, and also is a resident consultant at RAND. And Bamezai is president of Western Policy Research in Santa Monica. Jack Zwanziger is an assistant professor at the University of Rochester (New York). on A uust 7, 2017 by H W T am H ealth A fairs by http://conealthaffairs.org/ D ow nladed fom 264 HEALTH AFFAIRS | Spring 1995 tive payment system (PPS). As long as hospitals can pass on the costs of uncompensated care, funding indigent care through a combination of explicit public subsidies to government-owned hospitals and hidden cross-subsidies generated within hospitals remains a viable mechanism. However, as more and more payers seek to limit reimbursement, hospitals may find it increasingly difficult to generate surplus revenue to cover uncompensated care costs. Some hospitals are reported to have developed emergency room policies that discourage use by the uninsured, such as increasing fees (for example, cash deposits that must be paid prior to treatment) or transferring indigent patients to public hospitals or academic medical centers. There also are reports that hospitals have discontinued services that are likely to serve as portals of entry for the uninsured (such as emergency departments) or services likely to be used by the uninsured (such as inpatient psychiatric care). In this DataWatch we estimate the effects of payment pressures on the provision of uncompensated care by private hospitals in California. The experience in California is particularly relevant for several reasons. First, price competition is a major force in the California market for hospital services as a result of the explosive growth of managed care and the widespread use of selective contracting by government and private payers. Second, California hospitals were especially affected by Medicare PPS and the adoption of national payment rates, which penalize states with high costs per admission. Third, the use of selective contracting by the state Medicaid program, Medi-Cal, has forced hospitals to compete for both Medi-Cal and insured patients. The state has held down Medi-Cal rate increases, further contributing to an environment of constrained revenue. As a result of these changes, California hospitals have been financially constrained for some time now. Hospitals in other parts of the country are feeling similar pressures. Thus, the experience in California can serve as a harbinger of trends that are likely to appear in other states.