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Do Some Nonprofit Hospitals Deserve Their Status?

The vast majority of hospital care in the U.S. has historically been delivered by nonprofit organizations, which benefit from a wide array of federal, state, and local tax exemptions. In recent years, however, the charitable status of some hospitals and health systems has been called into question. Tighter operating margins and Medicaid expansion have contributed to an overall decline in charity care, while local and state governments are facing budgetary pressures and looking for new revenue sources. The situation has led to a debate over how much benefit nonprofit hospitals should provide to be considered charitable organizations, and the issue is far from settled.

The absence of any objective standard has led to conflicts, one of the most publicized involving UPMC and the city of Pittsburgh. As one of the area’s biggest and highly profitable employers, UPMC’s nonprofit status exempted it from $20 million in payroll, property, and other taxes, according to a 2013 estimate. The mayor sued UPMC in court, claiming it didn’t meet state requirements for nonprofit organizations, primarily by failing to donate a “substantial” amount of its services or operate “entirely free of a profit motive.” The city’s case cited UPMC’s large profit margin, excessive reserve funds, and its closure of facilities with high Medicare populations. The suit was eventually dismissed on technicalities, and the subsequent mayor declined to pursue legal options further, leaving the overall questions unresolved.

The ACA and other legislation attempted to solve part of the problem. Current federal law requires hospitals to conduct a community health needs assessment, establish a written financial assistance policy, reasonably try to determine assistance eligibility prior to collection efforts, and complete additional IRS forms detailing their charity care spending and community benefit programs. However, it does not establish a financial threshold for charitable operations. Advocacy groups like the Alliance for Advancing Nonprofit Health Care have suggested hospitals’ charitable spending be measured against its hypothetical tax burden, with the hospital paying the difference. The proposal would likely ensure organizations meet the monetary value of their nonprofit exemptions, but it had some critics. The AHA argued a hospital’s charitable benefit to the community couldn’t be measured in financial terms. In addition, some hospitals whose actions already exceed the value might be tempted to cut back.

Research suggests that an objective minimum requirement may lead to more charity care spending. Though federal standards are relatively loose, a handful states have adopted more definitive regulations outlining a nonprofit organization’s responsibilities. Texas and Illinois, for instance, require hospitals to provide charity care or incur a Medicaid shortfall to an amount equal to their state and local tax exemptions. A 2016 University of Pennsylvania study found a positive correlation between the strength of state nonprofit hospital mandates and charity care spending. While it attributed much of the increase to regulations limiting collection efforts, minimum spending requirements also had an effect. It also suggested that more enumerated and specific policies had a greater impact on charity care.

Hospital Charity Care, Median Characteristics

Hospital Type Charity Care/Net Patient Revenue Ratio Bad Debt/Net Patient Revenue Ratio Bad Debt (M) Charity Care Costs Total Uncompensated Care
Nonprofit 0.9% 4.7% $5.5 $1.1 $5.9
Governmental 0.8% 8.2% $2.5 $0.2 $2.0
Proprietary 0.3% 10.2% $8.4 $0.3 $3.7

Fig 1 Data from Definitive Healthcare

Even the exact definition of charity care is subject to debate. Most hospitals consider bad debt, payments owed to the organization but deemed noncollectable, to be part of their overall charitable benefit, but federal regulations exclude it. The government considers bad debt a cost of doing business, but from the hospital’s perspective, it represents just as much of a loss as charity care. Of course, bad debt is usually treated as a write off due to collection costs rather than a charitable forgiveness of debts in the traditional sense. Uncompensated care, the amount most hospitals cite in connection with their community benefit, consists mainly of bad debt. According to Definitive Healthcare data, the median charity care to net patient revenue ratio of private nonprofit hospitals was less than one percent, while the median bad debt ratio was 4.7 percent. Given the difficulty of determining the financial assistance eligibility of all patients, it’s likely that some bad debt is incorrectly classified. In their annual filings with the IRS, nonprofit hospitals are allowed to count some bad debt as charity care, but they must describe the methodology used to determine the amount.

Community benefit requirements alone may not always be enough to ensure a proper level of charitable services. As Senator Chuck Grassley (R-Iowa) points out in a recent op-ed, some nonprofit hospitals still skirt rules on collections and financial aid determination. He cites the case of Mosaic Life Care, which reportedly referred patients to its own for-profit collections agency before determining charity care eligibility and later forgave nearly $17 million in debt after an official inquiry. To discourage similar incidents, it’s as important for patients to know and understand their rights as it is to have strong legal regulations in place. Hospitals will need to monitor their billing procedures to ensure their charitable care efforts are delivered properly and that practices fall within federal mandates.

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Definitive Healthcare has the most up-to-date, comprehensive and integrated data on over 7,700 hospitals, 1.4 million physicians, and numerous other healthcare providers. Our databases include detailed clinical and financial metrics for hospitals and other healthcare providers.

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