Medicare adjusts hospital payments upward when hospitals provide substantial uncompensated and charity care to uninsured and underinsured patients. For fiscal year 2026, CMS set aside $7.71 billion in supplemental payments to hospitals through this mechanism, representing a $2 billion increase from the prior year. These adjustments matter to hospital patients because they create financial incentives for hospitals to maintain and expand charity care programs. Understanding how the adjustment system works helps you evaluate whether a hospital is likely to have a robust financial assistance program when you need one.
Official resources:
- Read the original report from CMS — Use this primary source to review the complete report.
- Check eligibility on Everycrsreport’s official study page — Use this page to check the study’s participation requirements.
Table of Contents
- How the Uncompensated Care Payment System Works
- What Medicare Counts as Charity Care
- How Hospitals Report Charity Care and Receive Credit
- Why Uninsured Rates Change the Payment Adjustment
- Nonprofit Hospital Requirements for Charity Care
- July 2026 Court Ruling on DSH Calculation
- Frequently Asked Questions
How the Uncompensated Care Payment System Works
The adjustment originates in the Affordable Care Act, which redirected 75% of traditional Disproportionate Share Hospital (DSH) payments into a separate uncompensated care pool. This pool is then distributed among eligible hospitals based on how much uncompensated care each one actually provided, measured against all participating hospitals nationwide. Hospitals do not receive equal shares.
A hospital's eligibility for supplemental payments depends on how much charity care and bad debt it reported compared to the national total. CMS uses two primary adjustment factors: one reflects changes in the national uninsured population, and the other distributes the pool based on each hospital's documented uncompensated care load.
What Medicare Counts as Charity Care
charity care has a specific definition under Medicare rules: it is any service provided free or at reduced cost according to each hospital's own written financial assistance policy (FAP). Bad debt—where the hospital expected payment but did not receive it—is tracked separately but counts toward uncompensated care totals for adjustment purposes.
A hospital's FAP shapes what counts. One hospital's FAP might cover all services for uninsured patients below 200% of the federal poverty line; another's might cover only emergency care. Neither is federally prescribed. This means the definition of who qualifies for charity care varies by institution, and a policy exists in writing at the hospital rather than in federal regulation.
How Hospitals Report Charity Care and Receive Credit
Hospitals must report charity care, bad debt, and uncompensated care data on Worksheet S-10 of their Medicare cost report. This worksheet is the sole source CMS uses to determine each hospital's share of the annual uncompensated care pool and therefore its adjustment payment. A hospital's claim begins with this report; without it, the hospital receives no supplemental payment regardless of actual charity care provided.
The data flows in one direction: hospitals report on their cost reports, CMS distributes pool funds accordingly. Patients cannot verify these numbers against their own bills or claim forms. The adjustment amount is invisible to patients unless they research their hospital's Medicare payment history.
Why Uninsured Rates Change the Payment Adjustment
The adjustment multiplier—the percentage of the pool each hospital actually receives—depends on how CMS measures the national uninsured rate. For FY 2026, CMS estimated 8.7% of Americans are uninsured, down from 14% in 2013. This decline means the uncompensated care adjustment is set at 62.14%, not higher. Lower uninsurance rates reduce the multiplier even if the absolute pool grows.
CMS increased the FY 2026 pool to $7.71 billion partly to compensate, but the adjustment factor still reflects the real decline in the uninsured population nationwide. A hospital cannot claim a higher adjustment by reporting more uncompensated care if the nationwide uninsured rate stays low.
Nonprofit Hospital Requirements for Charity Care
Nonprofit hospitals must meet Section 501(r) requirements to keep their tax-exempt status, which include a written financial assistance policy, community health needs assessments, limits on balance billing and collection practices, and prohibition of aggressive collection actions before determining eligibility for assistance. However, the IRS does not mandate a minimum percentage of hospital spending or net income devoted to charity care.
This creates flexibility for hospitals but also a compliance gap. A nonprofit can theoretically meet the community benefit standard through other means while offering minimal charity care. The IRS has responded by expanding oversight: beginning in fiscal year 2024, the IRS announced it will examine approximately 3,000 tax-exempt hospitals on a rolling three-year basis to verify that stated charity policies actually deliver significant health services to indigent patients.
July 2026 Court Ruling on DSH Calculation
In July 2026, a federal court vacated a CMS rule that had barred hospitals from claiming Section 1115 uncompensated care pool days for Medicare DSH calculations. This was the second time in two years the same rule was overturned in court. The practical effect is that some hospitals can now count additional days of uncompensated care, which may increase their share of the adjustment pool and their supplemental Medicare payments.
This ruling does not change the total pool size or the national adjustment factor, but it reallocates shares among hospitals. Hospitals that serve higher volumes of Medicaid expansion patients or other safety-net populations may see larger adjustments as a result.
Frequently Asked Questions
If my hospital receives these adjustment payments, does that mean it will have a free care program?
No. The adjustment payments are part of Medicare reimbursement and are not earmarked for charity care. Hospitals decide their own financial assistance policies. Check your hospital's website for its written FAP, which states the income thresholds and services covered.
Why does the uninsured rate affect what my hospital gets paid?
CMS uses the national uninsured rate to set the adjustment multiplier. If fewer Americans are uninsured overall, the payment adjustment is proportionally lower, even if the total pool grows. This reflects a policy decision that fewer uninsured people means less nationwide uncompensated care burden.
Can I find out what my hospital reported for charity care?
Hospital cost reports are public records, but they are not easily searchable by patients. You can file a Freedom of Information Act request with CMS or contact your hospital's financial assistance office and ask for its charity care policy and recent Form 990 Schedule H (if the hospital is nonprofit), which discloses community benefit spending.