Providing The Bare-Minimum to Stay Tax Exempt? One Study Says Nonprofits Are Cutting Back on Charity Care as Profits Grow

Nonprofit hospitals are seeing substantial growth in operating profits and cash reserves but at the cost of charity care, a new study says.

It seems not all finance leaders are fighting against poor operating profits.

In fact, according to a new study published by Health Affairs, the mean operating profits for nonprofit hospitals grew from $43 million in 2012 to $58.6 million by 2019, while mean cash reserve balances increased from $133.3 million to $224.3 million.

As developing and executing a strategic path to a financially sustainable future is essential for these leaders, it looks like it’s at the expense of charity care, the study says.

While profits grew from 2012 to 2019, the increase was not associated with the provision of more charity care by nonprofit hospitals. In fact, spending on charity care actually dropped during that time period: from $6.7 million in 2012 to $6.4 million.

The IRS has not stated specific quantitative requirements for the community benefits that nonprofit hospitals must provide, the study said. But, “Our results suggest that linking minimum contributions to charity care with profit increases may be helpful,” the study authors wrote.

With operating profits for nonprofit hospitals growing, the share of community health benefits they provide should also be growing to justify their favorable tax treatment, the study said.

The new study published in Health Affairs is not the first to take aim at nonprofit charity care spending as they are required to provide charity care and other community benefits in exchange for their tax-exempt status.

A Lown Institute hospitals index report said nonprofit hospitals collectively failed to invest nearly $17 billion in their communities in 2021, which included charity care spending.

At the time, the hospital index highlighted Vanderbilt University Medical Center and several other nonprofit, blue-chip providers for enjoying large tax breaks while falling short in making appropriate community health investments.

Vanderbilt University Medical Center responded with the following statement defending its charity care spending:

[For fiscal year 2021], Vanderbilt University Medical Center [VUMC] provided more than $829 million in charity care and other community benefits in service to the citizens of Tennessee. These funds support direct patient care and a range of initiatives that positively impact Tennesseans in other ways through improvements in community health.

The analysis by this organization allows only certain financial measures to be counted while intentionally excluding other beneficial activities traditionally supported by academic medical centers like VUMC that require considerable financial commitment.

In addition to the Lown Institute, a report from the state treasurer's office published last year took aim at North Carolina’s nonprofit hospitals. It found that although the nonprofit hospitals in the state received tax exemptions to provide charity care that were valued at more than $1.8 billion in 2020, most didn't provide enough charity care to equal the amount of those tax breaks.

Instead, "North Carolina's nonprofit hospitals billed the poor at an average rate up to almost three times the national average," the report said.

"Nonprofit hospitals are often more profitable than for-profits in North Carolina," the report said. "All the top 10 most profitable hospitals were nonprofits in fiscal year 2019."