How Charitable are Nonprofit Hospitals?

Research Corner
July 11, 2023

Soleil Shah, MD, MSc, Research Reporter

Soleil Shah writes Tradeoffs’ Research Corner, a weekly newsletter bringing you original analysis, interviews with leading researchers and more to help you stay on top of the latest health policy research.

One of my favorite research topics is around hospitals, their financing and their role in shaping communities. Hospitals typically have one of two main types of corporate structures — for-profit or nonprofit — and while the latter is the focus of this week’s Research Corner, both have their flaws.

If you want to go even deeper on this topic, check out an older Health Affairs article I co-authored about public benefit corporations, a different type of corporate structure that could hold hospitals more accountable as community institutions. 

Happy reading!

How Charitable are Nonprofit Hospitals?

Nonprofit hospitals have been getting a bad rap for being more profit-driven than their name implies: Some have been accused of hiding financial assistance from eligible patients, cutting off care for people who have medical debt or closing campuses in low-income areas while expanding into higher-income regions.

Those types of unflattering headlines have increased public scrutiny of the generous tax breaks — worth an estimated $28 billion or more a year — these hospitals receive from state and federal governments.

In exchange for their favorable tax status, nonprofit hospitals are expected to give back to their communities including by providing free or reduced-cost care to financially needy patients, also known as “charity care.” However, some estimates suggest the amount of charity care provided by nonprofit hospitals pales in comparison to the size of their tax breaks — and even lags behind the amount provided by their for-profit peers.

When met with criticisms about their level of generosity, nonprofit hospitals often point to the financial pressures they continue to face, on the heels of the COVID-19 pandemic, for example.

That common retort got Rice University economists Derek Jenkins and Vivian Ho wondering: Do nonprofit hospitals get more generous as their financial pictures grow rosier?

A nationwide check of the financial records of more than 2,000 hospitals

Jenkins and Ho unpacked financial data from 2,219 nonprofit hospitals between 2012 and 2019. They used a tool from the National Academy for State Health Policy to analyze how increases in earnings affect the amount of money hospitals set aside for charity care and cash reserves (a measure of money on hand for short-term and emergency funding needs).

(One note here about the potentially confusing term “profits” — the researchers define that as any revenue that exceeds a nonprofit hospital’s expenses.)

As nonprofit hospitals do better, cash reserves grow but charity care does not

Controlling for other factors that could affect a hospital’s financial decisions, such as its size or the average income and insurance levels in its region, the researchers found:

  • From 2012 to 2019, nonprofit hospitals increased their average profits by $16 million per hospital.
  • As nonprofit hospitals became more profitable, they set more money aside in cash reserves — about $1.73 for every dollar of extra profit.
  • But the researchers did not find a similar relationship between growing profits and more generous charity care. In fact, nonprofit hospitals actually lowered the amount of money set aside for charity care by an average of $300,000 per nonprofit hospital between 2012 and 2019.

One big limitation to the study is it didn’t look at the community benefits some hospitals provide that go beyond reducing hospital bills. The American Hospital Association, for example, has argued that nonprofit hospitals compensate for lower charity care spending by providing other benefits like housing or other social services for patients and training for future doctors.

Washington mulls stricter reporting and clearer charity requirements for nonprofit hospitals

In a recent congressional hearing, Republican and Democratic representatives grappled with questions raised by studies like this one. 

Representative Gwen Moore, D-WI, posed the question to her colleagues of whether, “we ought to constrict the definition of what community benefits are or leave flexibility there because communities are very different.”

“If the federal government is providing nonprofit hospitals with $27.6 billion in tax relief, we must make sure these hospitals are accurately reporting their value and earning it,” Rep. Kevin Hern, R-OK, said.

Late last year, Rep. Victoria Spartz, R-IN, introduced a bill to raise the bar on how and what these nonprofit hospitals must give back to their communities — but it has yet to move forward.

Elected officials on both sides of the aisle expressed concerns about nonprofit hospitals using their cash reserves to expand their market share, allowing them to charge patients higher prices and possibly harm the very people they’re supposed to help.

 Three Other Studies You Might Have Missed…

  • Relocating people experiencing homelessness away from essential services — through encampment sweeps, move-along orders and other means — leads to higher rates of fatal drug overdoses (Journal of the American Medical Association)

  • From 2013 to 2019, almost 90% of pulmonologists in the U.S. took industry payments for research, sponsorships and other activities, totaling over $1 billion (Annals of the American Thoracic Society)

  • Offering free contraception to uninsured women was associated with a 40% increase in the use of any birth control and a 324% increase in the likelihood of choosing a long-acting, reversible method, such as an intrauterine device (National Bureau of Economic Research)