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Not-for-profit hospital status coming under increasing scrutiny

Blog | Charity Care

Not-for-profit hospital status coming under increasing scrutiny

  • The New York Times, reporting on a recent JAMA Internal Medicine study, said: Non-profit hospitals “tend to devote the smallest proportion of their earnings to providing free care to uninsured patients and low-income people who struggle to pay their bills.”
  • HFMA’s Chad Mulvany voices concerns about the methodology of the JAMA study, explaining in detail why safety net hospitals are going to provide more charity care than a community hospital and have worse margins.
  • In the current environment, politicians and the general public may not be interested in understanding the true picture of community benefits that hospitals provide in exchange for tax-exempt status, according to HFMA's Chad Mulvany.

In reporting on a recent JAMA Internal Medicine study, The New York Times said that, “Among nonprofit hospitals, those with the highest net incomes, tend to devote the smallest proportion of their earnings to providing free care to uninsured patients and low-income people who struggle to pay their bills, a U.S. study suggests. Overall in 2017, the study found, nonprofit hospitals nationwide generated $47.9 billion in net income, provided $9.7 billion in charity care to uninsured patients and spent another $4.5 billion in charity care for people with insurance who couldn't afford their bills. For every $100 of net income, the top earning hospitals devoted just $11.50 to charity care for the uninsured and $5.10 to free care for other low-income individuals. By contrast, the lowest-earning hospitals - most of which had net losses - dedicated $72.30 of every $100 of net income to charity care for the uninsured and another $40.90 to free care for other low-income patients.” 


I have real methodology concerns about this study. First, safety net hospitals are going to provide more charity care than a community hospital and have worse margins. That’s why we call hospitals in economically challenged areas safety net hospitals. Hospitals in these areas have more challenging payer mixes (including more true self-pay patients and patients without the resources to pay their cost sharing if they are insured). It would be hard to be a high net income hospital in an area with a poor payer mix (where there are more opportunities to provide uncompensated care).

So, it’s probably not surprising to anyone in the industry that profitable hospitals provide relatively less charity care than hospitals with lower (or negative) margins. Second, the article insinuates that some not-for-profit hospitals may not be deserving of their tax-exempt status. However, making that insinuation based on this study is inaccurate. Providing uncompensated care is just one of the many ways hospitals provide the “community benefit” that helps justify tax-exempt status. These activities include:

  • Training the next generation of providers
  • Promoting health and wellness to help prevent chronic conditions
  • Tackling social determinants of health and disparities in care
  • Addressing identified community health needs and strengthening community partnerships

However, by looking only at Medicare cost report data (and not the IRS 990), the JAMA study’s authors missed picking up the cost of these activities. According to a 2019 AHA analysis, tax-exempt hospitals provided $95 billion in total benefits to their communities in 2016 alone, the most recent year for which comprehensive data was available. Notably, this means that hospital and health system community benefit activities outweigh the value of their federal tax exemption — which was $9 billion in 2016 — by a factor of nearly 11 to one.

But I’m not sure the concerns outlined above matter much in the “public square.” There’s a fair amount of attention in the popular press on hospital tax-exempt status as this article and other recent articles illustrate. And like this article, there are commonly technical issues with the reporting. However, what plays better on Twitter? A technically accurate defense of a hospital’s actions or the insinuation (regardless of the accuracy of the insinuation) that the hospital isn’t providing enough charity care to meet its tax-exempt status. And that’s being transmitted from Main Street to Capitol Hill.

In Washington, on the right side of the aisle, this has piqued Senator Charles Grassley’s interest as a long-time critic of tax-exempt providers. On the left side of the aisle, it feeds into growing populist sentiment. Senator Bernie Sanders, one of the frontrunners for the Democratic Presidential nomination says he would “eliminate medical debt” if elected president. A key provision in that plan includes “Instruct(ing) the IRS to review the billing and collection practices of the nearly 3,000 non-profit hospitals to ensure they are in line with the charitable care standards for non-profit tax status and take action against those who are not.”

Should Senator Sanders win the nomination and eventually the 2020 election, most seasoned observers believe his “Medicare for All” plan is dead on arrival. But “taking action” against NFP hospitals that are not “in-line with charitable care standards for non-profit” hospitals is something Sanders could do administratively and reduce the cost of care for some Americans. It might also be a rare opportunity for bipartisanship given Senator Grassley’s interest in the subject.

First, hospitals need to make sure their medical accounts resolution practices are in line with industry guidance. For this key purpose, HFMA and other key stakeholders have developed best practices for resolving medical accounts. Second, many health systems have community benefit reports. However, those reports frequently do not compare the value of the community benefit provided by health systems to the forgone federal, state and local taxes. Health systems should first ensure that the benefits they are providing exceed the foregone taxes. And then develop a strategic communications plan to educate key stakeholders. These stakeholders will include not just state and federal legislators but leaders in the local business, civic and religious communities.

Additionally, HFMA’s Principles and Practices Board has developed several issue analyses papers to help hospitals navigate issues related to tax exempt status and uncompensated care. These include:

About the Author

Chad Mulvany, FHFMA,

is director, healthcare finance policy, strategy and development, HFMA’s Washington, D.C., office.

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