Despite Tax Breaks, Nonprofit Hospitals Often Lag in Providing Charity Care

By Scott Baltic

April 30, 2021

NEW YORK (Reuters Health) - Their favorable tax treatment notwithstanding, nonprofit hospitals generally provided proportionately less charity care than did government or for-profit hospitals, based on 2018 Medicare information, according to a new U.S. study.

For example, in nearly half of the hospital service areas with at least one hospital of each type, government or nonprofit hospitals contributed a lower proportion of expenses to charity care than for-profit hospitals did.

Researchers also found wide variation in charity care provided by individual hospitals of the same ownership type, especially government hospitals.

"These results suggest that many government and nonprofit hospitals' charity care provision was not aligned with their charity care obligations arising from their favorable tax treatment," they conclude in Health Affairs.

They add, however, that because charity-care expenses are fully tax-deductible and thus reduce taxes paid by for-profit hospitals, "the direct marginal financial cost for providing charity care is lower for for-profit hospitals."

Favorable tax treatment in the United States can include exemptions from state and federal income, property and sales taxes.

Both U.S. tax law and the Affordable Care Act (ACA) require nonprofit hospitals to provide charity care, such as charging financially disadvantaged patients less than usual, or nothing. But the report notes that neither one specifies appropriate, quantifiable criteria for charity care.

Dr. Ge Bai of Johns Hopkins University's Carey Business School and Bloomberg School of Public Health, in Washington, D.C., evaluated data from the 2018 Medicare Hospital Cost Reports on 4,663 general acute-care hospitals, comprising 1,024 government, 2,709 nonprofit and 930 for-profit.

These hospitals provided $6.9 billion, $16.0 billion, and $4.1 billion in charity care, respectively.

The median ratio of charity care to total expenses was 0.9% for government hospitals, which was significantly less than at nonprofit hospitals (1.5%) and for-profit hospitals (1.4%).

Approximately 54% of government hospitals, 36% of nonprofit hospitals, and 43% of for-profit hospitals provided less than $1 of charity care per $100 of expense, or in other words, had a charity-care-to-expense ratio of less than 1%.

In aggregate, for every $100 of expenses incurred, nonprofit hospitals spent less on charity care ($2.3) than for-profit ($3.8) or government hospitals ($4.1).

The authors offered three policy recommendations for state and federal policy-makers to consider: a transparent ranking system for charity care; a "floor-and-trade" system mandating a minimum provision of charity care, but allowing hospitals to trade credits with other institutions; and a review of the tax exemption rules for nonprofit hospitals.

"The political feasibility of these options at the federal level is limited, considering the divided control of Congress. However, state governments may find some of these options palatable, especially given that a major component of tax exemption for nonprofit hospitals is local property tax," Dr. Bai told Reuters Health by email.

She added that to her knowledge, this is the first study to examine charity care provision among all three types of hospitals on a national scale.

Dr. Gary Young, director of the Center for Health Policy and Healthcare Research at Northeastern University, in Boston, told Reuters Health by phone, "The non-profits appear to be underperforming."

He noted, however, that by 2018 the percentage of uninsured Americans was roughly half what it had been before the ACA was enacted, or about 8.5% versus about 16%, which presumably created less demand for charity care.

A key question, said Dr. Young, who was not involved in the study, is whether nonprofits are devoting more efforts to other kinds of community benefits. Sometimes, he said, such hospitals are under pressure to provide more community-health initiatives, including blood pressure checks, nutritional counseling and chronic-disease management.

Dr. Simone Rauscher Singh of the Department of Health Management and Policy at the University of Michigan School of Public Health, in Ann Arbor, told Reuters Health by email that the study "adds to the existing literature by using data for the most recent year available (2018), which allows the authors to capture the impact of the ACA on hospitals' provision of charity care."

The study, she added, "shows that the additional requirements for nonprofit hospitals included in the ACA have not compelled most nonprofit hospitals to meaningfully increase their provision of charity care."

Of the authors' proposed options, Dr. Singh said, a ranking system to encourage more charity care would be the easiest to implement, yet "will likely not be a strong enough incentive for hospitals to increase their charity care spending."

"Floor and trade" would be challenging to implement, she added, given likely opposition from hospitals, based in part on the fact that they provide a range of community benefits beyond charity care.

And although changing the tax-exemption rules for nonprofit hospitals "has the greatest potential to better align hospitals' community benefit spending with their tax benefits," Dr. Singh cautioned that "there currently appears to be little appetite for such changes at the federal level."

The study was supported by the Commonwealth Fund and the Episcopal Health Foundation. Dr. Bai has served as an expert witness for plaintiffs in lawsuits in which some hospitals were the defendants. All five authors receive funding from Arnold Ventures.

SOURCE: Health Affairs, online April 5, 2021.