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Nonprofit Hospitals' Charity Care Falls Short of Favorable Tax Treatment

Analysis  |  By John Commins  
   April 07, 2021

More than half (54%) of government hospitals, 36% of nonprofits, and 43% of for-profits provided less than $1 of charity care for every $100 of expenses.

Tax-exempt nonprofit and government hospitals aren't meeting their obligations for charity care, according to a new study in Health Affairs.

Using 2018 Medicare data that compared charity care at 1,024 government, 2,709 nonprofit, and 930 for-profit hospitals, researchers from Johns Hopkins University’s Carey Business School and Bloomberg School of Public Health found that nonprofit hospitals spent $2.3 on charity care out of every $100 in total expenses, which was lower than government ($4.1) or for-profit ($3.8) hospitals.

The report also found that 54% of government hospitals, 36% of nonprofits, and 43% of for-profits provided less than $1 of charity care for every $100 of expenses.

"A large number of government and nonprofit hospitals provided little charity care," said study lead author Ge Bai, an associate professor at Carey Business School. "That seemed badly out of sync with the favorable tax treatments that these hospitals enjoy. Government and nonprofit hospitals should not have their cake and eat it, too."

The findings come as the nation's hospitals, financially strapped by the year-long public health emergency, are pressing President Joseph R. Biden for a slice of his $1.9 trillion infrastructure bill.

"The reality is that just as other critical infrastructure, including our nation’s roads, bridges and transit systems, have aged, so too have many of our nation’s hospitals," American Hospital Association President and CEO Rick Pollack said in a March 31 letter to the president. "Many hospitals faced financial challenges prior to the pandemic, but COVID-19 has brought unprecedented financial losses."

AHA General Counsel Melinda Hatton on Wednesday challenged the Johns Hopkins findings. She cited a 2017 Ernst and Young report showed that for every dollar invested in non-profit hospitals and health systems through the federal tax exemption, $11 in benefits is delivered back to communities.

"The authors of this report fail to recognize that charity care is only one part of a hospital’s total community benefit," Hatton said in an email to HealthLeaders.

"Looking only at charity care does not account for the numerous programs and services that hospitals provide to meet the varied needs of their community, such as help accessing healthy food, educational programs and health screenings, transportation to ensure patients arrive at needed medical appointments, and assistance with housing and other efforts to address the social determinants of health, among many others," Hatton said.

Bai said hospital charity care obligations aren't a high priority for the Internal Revenue Service, which he said "doesn't specify any requirements for charity care or community benefits offered by a nonprofit hospital."

"On top of that, the IRS faces significant challenges in overseeing these activities or using them to determine tax-exempt eligibility. When charity care is a matter of little consequence, hospitals are not motivated to provide more," Bai said.

To move the needle, the study authors recommended a publicly disclosed ranking system for hospital charity care for all three ownership types.

"As a special form of the transparency approach, [ranking] has the potential to overcome the shortcomings of bright-line rules and promote competition among hospitals to provide more charity care," the researchers said.

“As a special form of the transparency approach, [ranking] has the potential to overcome the shortcomings of bright-line rules and promote competition among hospitals to provide more charity care,” the researchers write.

They also recommend revising the tax code to bring hospitals' provision of charity care more into line with their tax status. 

“Government and nonprofit hospitals should not have their cake and eat it, too.”

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.


KEY TAKEAWAYS

Nonprofit hospitals spent $2.3 on charity care out of every $100 in total expenses, which was lower than government ($4.1) or for-profit ($3.8) hospitals.

The AHA disputes the findings and cited a 2017 report which showed that for every dollar invested in non-profit hospitals through federal tax exemptions, $11 in benefits is delivered back to communities.

The study authors recommended a publicly disclosed ranking system for hospital charity care for all three ownership types.


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