Nonprofit Hospitals: Profitable or Not?

Nonprofit hospitals netted $24.6 billion in tax exemptions in 2011. In 2017, these hospitals had higher net income than for-profit institutions, which are not tax-exempt. Those nonprofit hospitals that generated substantial profit provided disproportionally low amounts of charity care compared with those that incurred a net loss. The tax-exempt status of nonprofit hospitals has been challenged recently. For example, Pennsylvania local courts are requiring nonprofit hospitals to pay property taxes, and Senator Chuck Grassley (R-IA) is seeking similar measures on a federal level.

A recent study published in Health Affairs by Bai et al sought to examine the relationship between hospitals’ profit status and the charity care they provide. The authors examined 4,663 general acute care hospitals in the 2018 Medicare Cost Report. Surprisingly, the authors discovered that nonprofit hospitals provided the least charity care, $2.3 per $100 of total expense compared to $4.1 in governmental and $3.8 in for profit hospitals. 

Bai et al’s unexpected result implies that the substantial tax benefits and earmarked federal funds given to nonprofits may not result in efficient fulfillment of their intended objective: providing free medical care to those who need it most. Instead of awarding tax benefits based purely on profit status, the authors recommend that state and local governments create a ranking system according to a hospital’s charity-care-to-expense ratio. Alternatively, all hospital types should have a certain charity care requirement they must meet in order to receive tax exemption, and could subsidize other hospitals in needier communities to receive “charity credits” to meet minimum charity requirements. Regardless of which proposed solution would be more effective, the results of this study certainly warrant a closer look at the current tax exempt status of nonprofit hospitals.

This Health Policy Journal Club review is a collaboration between Policy Prescriptions® and the Emergency Medicine Residents’ Association. This review was written by Kyle Stucker, MD an EMRA member and emergency medicine resident at the University of Louisville.

Abstract

The different tax treatment of government, nonprofit, and for-profit hospitals implies different charity care obligations, with the greatest obligation for government hospitals and the least for for-profit hospitals. Prior research has not examined charity care provision among all three ownership types at the national level. Using 2018 Medicare Hospital Cost Reports, we compared charity care provision across 1,024 government, 2,709 nonprofit, and 930 for-profit hospitals. In aggregate, nonprofit hospitals spent $2.3 of every $100 in total expenses incurred on charity care, which was less than government ($4.1) or for-profit ($3.8) hospitals. No hospital ownership type outperformed the other two types with respect to charity care provision in a majority of hospital service areas containing all three types. Using different kinds of analyses, we also found wide variation in charity care provision within ownership types and a lack of a consistent pattern across ownership types. These results suggest that many government and nonprofit hospitals’ charity care provision was not aligned with their charity care obligations arising from their favorable tax treatment. Policy makers may consider initiatives to enhance hospitals’ charity care provision, particularly hospitals with government and nonprofit ownership.

Bai et al. Health Aff. 2021 Apr; 40 (4): 629-636.