I began my career in health care as a staff accountant for a nonprofit hospital. At the time the prices didn’t seem that outrageous. Prices were high, but not seize your house to pay for a hangnail high. How times have changed.
In the United States about 60% of hospitals are nonprofit organizations. Don’t make the incorrect assumption that nonprofit means firms don’t want to earn a profit. Nonprofit status is a tax election. It means the entity does not distribute profits to shareholders. Rather, it does not pay taxes on its profits and plows profits back into expansion.
The Kaiser Family Foundation estimates that the tax exemption enjoyed by nonprofit hospitals was worth about $28 billion a year in 2020. That exemption is divided about equally between federal ($14.4 billion) and state ($13.7 billion) taxes. A nonprofit hospital pays no federal, state or local income taxes. The tax exemption means nonprofit hospitals don’t pay property tax or sales tax on purchases. Nonprofit hospitals can also accept donations from wealthy donors. In return, the donor gets a tax deduction for their gift and maybe a building named after them. Nonprofit hospitals also get preferential interest rates on bonds.
In return for this generous tax subsidy charity hospitals (I’m using the term charity loosely) only must provide something like 4% to 5% of their net revenue in charity care. Nonprofit hospitals are quick to point out they also provide “other community benefits”. This from the Kaiser Family Foundation:
Hospital charity care programs provide free or discounted services to eligible patients who are unable to afford their care and represent one of several different types of community benefits reported by hospitals. The Internal Revenue Service (IRS) also defines community benefits to include unreimbursed Medicaid expenses, unreimbursed health professions education, and subsidized health services that are not means-tested, among other activities.
An estimate by the Kaiser Family Foundation from a variety of data sources estimates the value of charity care at $16 billion in 2020. At that rate the benefit of the tax exemption exceeds charity care by $12 billion. The problem is: how was the $16 billion in charity care calculated?
When I was a hospital accountant we initially wrote off bad debts to the charity care account. We were later told to stop because the government would not accept bad debts as charity care. Basically, hospitals are supposed to identify poor people and give them charity care. Hospitals are not supposed to treat poor people in the emergency room and later write off to charity care those who couldn’t pay their bill.
Back to the problem of how to calculate charity care. Hospitals have what’s known as a chargemaster price list. These are the outrageous list prices that few patients actually pay. Chargemaster prices are basically a fiction. The primary purpose of the hospital list price is as a starting point for negotiations with health plans. If the fake list prices are high, they can pretend to give insurance companies a 66% discount. The reality is the true market price is probably about 33% of list prices. Even negotiating a 33% discounted price still makes hospitals a hefty profit compared to Medicare prices (which are still above marginal cost). Thus, the problem of how you calculate charity care determines how much charity care hospitals actually provide. If charity care is based on list prices that translates into very little charity care. If charity care is based on private insurance negotiated prices that is about three times the charity care compared to list prices. If charity care is based on Medicare prices that would translate into even more charity care. Charity care calculations should be based on actual costs or even Medicaid prices.
The Lown Institute calculates 77% of nonprofit hospitals spend less on charity care than the tax subsidies they enjoy. The institute further calculates the “fair share” deficit between the tax exemption nonprofit hospitals receive and what they provide in charity care is actually $14.2 billion. This according to the Lown Institute:
Lown Institute analysts identified more than 1,350 hospitals that have “fair share” deficits, meaning that the value of their community investments fails to equal the value of their tax breaks. The combined deficits of nonprofit hospitals totaled $14.2 billion in 2020, enough to relieve the medical debt of 18 million Americans or prevent 600 at-risk rural hospitals from closing.
“Americans desperately need hospitals to use their billions in tax breaks as intended: to promote health while relieving the problems of medical debt and access to care,” said Vikas Saini, MD, president of the Lown Institute. “These are charitable organizations and they should do a better job at prioritizing social responsibility over profitability.”
This analysis suggests the United States would be better off taxing nonprofit hospitals and returning the $28 billion in tax exemptions in the form of charity care payments. The problem with that is such an agency would consume more than $28 billion just to administer its bureaucracy so that would never work. As noted above, how much charity care a hospital provides is subject to interpretation. Hospital consolidation has arguably made the problem worse, but that’s a story for another day.