Are nonprofit hospitals contributing their fair share of financial assistance?

Nonprofit hospitals are not only expected to take care of individual patients, but to provide for their communities. As a condition of their tax-exempt status (a benefit worth an estimated $24.6 billion in 2011), they are required to offer financial assistance–also known as charity care–to uninsured or underinsured patients.

For many years, researchers that study hospital spending on financial assistance and other community benefits have been skeptical that the tax exemption is the right way to encourage hospitals to spend on community benefits. That’s because the tax exemption is not designed to benefit hospitals that spend more on community benefits, but is given to all nonprofit hospitals, regardless of their spending. In fact, larger and wealthier hospitals benefit more from the tax exemption than smaller hospitals, because the value of their tax exemption (especially property taxes) is higher.

“Policymakers should be aware that the tax exemption is a rather blunt instrument, with many nonprofits benefiting greatly from it while providing relatively few community benefits.”

Dr. Bradley Herring et al., Comparing the Value of Nonprofit Hospitals’ Tax Exemption to Their Community Benefits, 2018

A 2020 study compared nonprofit and for-profit hospital spending on financial assistance, and found no significant difference between the hospital types and their charity care spending as a share of expenses, on average. When stratifying by size, they found that large for-profit hospitals (with 350 beds or more) spent more than larger nonprofit hospitals, and very small nonprofit hospitals (with fewer than 100 beds) spent more than very small for-profits.

Now a new study in Health Affairs from researchers at the Johns Hopkins Bloomberg School of Public Health expands on these findings by adding public hospitals into the mix. They used 2018 Medicare Hospital Cost Reports to compare charity care provision across 1,024 government, 2,709 nonprofit, and 930 for-profit hospitals.

Financial assistance by hospital type

They found that in aggregate (adding up all financial assistance spending and dividing by total expenses for all hospitals), private nonprofit hospitals are behind public and for-profit hospitals. Private nonprofits 2.3% of their total expenses on charity care, while public hospitals spent 4.1% and for-profits spent 3.8%. However, the typical rate of spending for public hospitals (0.9%) was significantly less than that of nonprofit hospitals (1.5%) and for-profit hospitals (1.4%), indicating that there are certain public hospitals that are spending much more than others on charity care.

These findings match up with the results on the Lown Institute Hospitals Index, which show that some public hospitals spent more than 15% of their total expenses on charity care alone. At the same time, about 150 hospitals (many of them nonprofits) spent less than 0.1% of their expenses on charity care and other community benefits.

Geographic factors

One would expect to see differences in financial assistance on a geographic level, because there is a greater need for charity care in regions where there are more uninsured people. The authors controlled for these geographic factors by doing an analysis of hospitals in counties with high uninsurance rates compared to those in counties with low insurance rates. In both types of counties they found similar patterns: public hospitals spent more overall but had more variation, and for-profit hospitals spent slightly more on financial assistance than private nonprofits.

The authors also wanted to see whether certain types of hospitals spent more or less on charity care when they were in proximity to other hospitals, so they did a subset analysis of hospital referral regions that included all three hospital types. In regions that had all three types of hospital, government hospitals spent more than the other hospital types on charity care (6% of expenses compared to 3.4% for private nonprofits and 3.5% for for-profits), which makes sense given that private hospitals often “funnel” uninsured patients toward public hospitals. Yet the authors noted that in nearly half of these regions, for-profits actually spent more than nonprofits or public hospitals on charity care.

Behind the patterns

The fact that private nonprofits receive significant tax exemptions, one would expect these hospitals to spend much more than for-profits on charity care. Why are for-profits spending about the same amount?

Government incentives might play a role. While nonprofit hospitals are mandated to provide financial assistance and receive tax benefits for doing so, the amount of the tax benefits are not tied to how much they spend– it’s “all or nothing.” But for-profit hospitals can deduct the amount they spend on charity care from the taxes they have to pay, giving them an incentive to spend more on financial assistance.

For-profit hospitals may also see community health programs as being good for business, because it helps them become well-known and trusted in their communities. Research on for-profit hospitals from the Anchor Institute shows that for-profits can play an important role in promoting community health. “There is nothing better for the delivery of care, and also good business, than to be completely wedded to the communities we serve,” said a for-profit official in governmental relations.

Creating balance 

It’s obvious that many nonprofit hospitals are not spending their fair share on financial assistance, given the amount in tax benefits they receive. How do we create better incentives for nonprofit hospitals to spend on uninsured and underinsured patients?

In the Health Affairs piece, the authors write that having a ranking system for hospitals that allows an objective comparison of their financial assistance spending “has the potential to promote competition among hospitals to provide more charity care…[and] highlight the change in hospitals’ relative standings over time.” Fortunately, the Lown Institute Hospitals Index does just that, by measuring hospitals’ charity care and other community benefit spending as a share of expenses.

“If we truly want to encourage hospitals to do the right thing, we should tie the value of the subsidy to the amount of charity care that is provided.”

Ge Bai and David Hyman, StatNews

Beyond rankings, the authors suggest the IRS revisit the rules for tax exemptions for nonprofit hospitals, perhaps by adding a floor for charity care spending or tying the value of the tax exemption to the amount hospitals spend. In an op-ed in Stat News, Dr. Ge Bai, associate professor of health policy and management at Johns Hopkins Bloomberg School of Public Health and one of the study authors, and David Hyman, professor of health law and policy at Georgetown University Law Center, argue for potentially doing away with the tax exemption entirely:

“In its current form, tax exemption provides no assurance that nonprofit hospitals will behave in accordance with their charitable mission. If nonprofit hospitals are unwilling to provide sufficient charity care to justify the amount of their current tax exemption, there is no reason we should deprive local communities of the property tax revenues that allow them to fund local schools, parks, and other public services.”

Nonprofit hospitals won’t give up their valuable tax exemption so easily, but there need to be more ways to hold accountable the hospitals that don’t spend their fair share on financial assistance. Tools like the Lown Hospitals Index can provide the information, but we need to organize and create policies around that data to maximize taxpayers’ contributions to hospitals that go towards improving community health.