I began my career in health care working as an accountant for a nonprofit hospital. One of our senior finance executives did a case study of how much the heath care system saved compared to a for-profit system that had to pay taxes. I don’t recall all the details, but it was in the neighborhood of $100 million dollars in 1990. About that same time the accounting managers were told we could no longer write off bad debts to charity care. Charity care had to be granted to deserving patients; we weren’t allowed to decide after not getting paid that care must have been charity. Furthermore, we were told the Texas Attorney General was looking into how much charity care Texas hospitals provide. At that time, we were required to provide between 4% and 5% of net patient revenue in charity care. In other words, we couldn’t calculate the amount of charity care based on list prices. According to Modern Healthcare:
States are increasing their oversight of nonprofit hospitals’ financial assistance policies, seeking to ensure hospitals are earning their tax exemptions by doing enough to help the poor.
Local officials want to know if what their communities get in terms of tax exemption and is forgone taxes worth the amount of community benefit they receive. At first glance it appears like a bad deal for cities and taxpayers.
The average hospital in the U.S. spends 1.9% of its operating expenses on charity care, according to an analysis of 2021 data by Johns Hopkins University health policy professor Ge Bai.
Indeed, some elected officials at the federal level want more scrutiny of hospital charity care provision. Last week four U.S. Senators wrote a letter to the U.S. Treasury Office of Inspector General for Tax Administration and the Internal Revenue Service. They ask official to evaluate whether nonprofit hospitals are in compliance with their obligations to provide charity care and community benefits in return for their tax-exempt status. The four senators were a diverse group of two Republicans and two Democrats, including Elizabeth Warren. One of the Republicans was conservative senator, Bill Cassidy from Louisiana, who is also a physician.
One community benefit nonprofit hospitals claim to provide are the supposed losses they suffer from treating Medicaid patients.
IRS guidelines allow hospitals to claim Medicaid shortfall as a community benefit, but many academics and health policy experts argue such balance sheet shifts aren’t the same as providing charity care to patients.
I do not believe most hospitals lose money at the margin on Medicaid patients. At the margin is an economics term that assumes a hospital is already in the business of providing care to patients. It assumes a hospital already has doctors and nurses on staff. It assumes the 5-story glass atriums at the entrance are already built and were built to attract privately insured patients not Medicaid patients. At the margin means the incremental cost of treating one more patient (in this case a Medicaid patient) compared to the incremental revenue from treating that (Medicaid) patient is either a very slight loss or possibly a slight gain. Medicaid patients pay far less than privately insured patients but that doesn’t mean hospitals are doing us a huge favor by treating Medicaid patients.
A few months ago in June 2023, the journal Health Affairs reported on a study of nonprofit charity care spending. The study found that as profits and cash reserves grew, there was no accompanying increase in charity care spending. Moreover, nonprofit hospitals receive more benefits in taxes than they provide in benefits. According to Health Affairs:
…previous research has found that 86 percent of nonprofit hospitals did not provide more charity care than the value of their tax exemption.4 Moreover, nonprofit hospitals have been found to have lower ratios of charity care to total expenses than for-profit hospitals.5
Nonprofit hospitals are the dominant form of hospital because of the tax advantages they receive. It seems like each hospital in each community calculates community benefits in a different way, of which much of the community benefits provided are for treating Medicaid patients. For-profit hospitals also treat Medicaid patients and provide some charity care so it’s increasingly difficult to identify the benefits from the tax advantages of nonprofit hospitals. As a tax paying former hospital accountant I welcome the additional scrutiny.
I’m very skeptical of hospital charity care. I suspect a lot of it, maybe most of it, is built into their operational expense base. That expense base is then a component of the reimbursements negotiated with insurance companies. That’s how it’s paid for.
Every company recovers its operations expense by charging its customers. For example, manufacturers recover their warranty costs that way. Grocery stores recover the cost of spoiled produce that way. Department stores recover the cost of inventory shrinkage (shoplifting) that way. And so on. But none of them call that “charity”.
Only hospitals seem to think it’s still charity even though they are charging their customers for it,
That’s why I’m skeptical.
Hospital charity care only happens when a patient is a) uninsured, b) has income within limits that vary state to state and hospital to hospital, and c) completes a fairly complex application and supplies tax returns, pay stubs, etc.
(I did all this when one of my adult children was hospitalized.)
My suspicion is that running this gauntlet is a big reason why real charity care is not very common. My own limited experience suggests that many patients just wait to get their bill, and then try to ignore it.
It is a classic example of America trying to alleviate the rough edges of our health care system — but winding up with a bureaucratic mess. In most other wealthy nations, everyone gets health insurance and pays taxes for it, and every insurance policy treats every hospital the same. Each hospital and each state do not have to devise their own policies and procedures. No one needs to analyze the income and asset status of individual patients.
I am generally not a friend of Medicare for All, but compared to what goes on in American ‘charity care’ it doesn’t look so bad.