With high health bills drowning patients in debt, some lawmakers want nonprofit hospitals to give away more free care. But experts warn that could wind up being bad for patients. 

Sky-high hospital bills have left 100 million Americans struggling with debt — unable to pay for the chemotherapy, diabetes medicine, surgery or other care they need to stay alive and healthy. Nonprofit hospitals are part of the solution, offering free or discounted care to needy patients in exchange for big tax breaks. 

But an analysis by the health policy research group KFF shows the nation’s nearly 3,000 non-profit hospitals provided $16 billion in charity care in 2020 compared to their roughly $28 billion in tax breaks. The $12 billion gap has drawn hard looks from state and federal lawmakers, especially as some nonprofits have sued patients or threatened their credit over unpaid bills.

As aggressive billing practices make headlines and 40% of U.S. adults scramble to pay for their care, pressure mounts on hospitals to pick up a bigger share of the charity care tab, particularly nonprofit institutions.  

“The taxpayers are not getting their fair share when it comes to taxpayer subsidies to nonprofit hospitals,” said Ge Bai, an accounting and health policy professor at Johns Hopkins University. In a study published in 2021, Bai and her co-authors found that for-profit hospitals spend more than nonprofits – with $3.80 of every $100 in expenses going toward charity care, compared to $2.30 spent by nonprofit institutions.

Diving deeper into the numbers reveals a wide variation in how much free and discounted care nonprofit hospitals provide. 

Hospital executives and some researchers argue that charitable giving is just one way to measure “community benefit,” or how nonprofits give back. They warn that policymakers’ proposed remedies could push some nonprofit hospitals to cut services that are expensive but valuable to the community, and even drive some safety-net hospitals out of business — hurting the very patients they’re trying to help.

“I think researchers and also policymakers tend to be overconfident in what policy can do,” Bai said. “If we are too aggressive, the unintended consequences can be worse.”

How Did We Get Here?

The federal government has never defined how much free care or benefit to the community hospitals must provide. The Internal Revenue Code does require health systems to establish policies about how they dole out free or discounted care – and report totals on their tax returns. Government watchdogs say oversight is lax, noting that the IRS has not revoked any hospital’s tax-exempt status over a paucity of charity care in the last decade.

“We see the same hospitals providing a lot and other hospitals providing very little,” said Gary Young, who leads the Center for Health Policy and Health Care Research at Northeastern University. “And that doesn’t seem to change very much over time.”

Research shows some nonprofit hospitals spend close to 10% of their expenses on charity care and other community benefits, while others spend as little as one tenth of one percent.

This disparity has continued for decades, Young said, because of a lack of explicit guidance from the federal government.

States Experiment with Their Own Rules

At least 14 states have issued their own requirements regarding hospital charity care. Proponents say if the state rules work, they might serve as a blueprint for a national fix.

The states have generally taken one of two approaches. The first — maybe best exemplified in Texas and Oregon — requires all nonprofits to devote a certain percentage of total revenue to free care. 

In Texas the number to hit is 4% of revenue. The result has been mixed, according to an independent analysis: Some hospitals in the state increased their giving to meet the new standard, while previously more generous hospitals cut back.

Oregon, taking a similar tack, bases the annual target it sets for each hospital on the hospital’s annual revenue and the amount of free care the institution already provides. So far, that strategy seems to be working: A state report found that, in the first year, Oregon’s nonprofit hospitals spent a total of $2.2 billion on free care and community benefits — one-and-a-half times the state’s target. 

 Eleven states, including Nevada and Washington, have adopted the second approach. These states look at each patient’s income to determine how much free care a hospital must provide that person.

It’s not yet clear if these laws lead to less medical debt among the neediest patients, or to more charity care overall. But proponents say they do at least give regulators a rule to enforce. 

Washington State successfully sued four health systems, including Providence Health, a Seattle-based nonprofit, for violating the state’s charity care policy. As a result of the court decision, Providence agreed earlier this month to refund patients about $158 million for care that should have been free or discounted under state law.

The Downside: Safety-Net Hospitals and Underserved Communities Could Suffer

Critics warn these strategies to reach closer to 1:1 parity with the nonprofits’ tax breaks could have unintended consequences in marginalized neighborhoods.

“We have redlined communities in this country in health care,” said Bruce Siegel, president and CEO of America’s Essential Hospitals, a trade group that represents safety-net hospitals — health systems that treat the highest percentage of low-income and uninsured patients. 

Laws pushing for more charity care assume that all nonprofit health systems can afford to give away more care, Siegel said, and that’s not necessarily true. After being battered by COVID, labor costs and inflation, some hospitals face a precarious future. 

While a slice of nonprofit hospitals are in a strong financial position, many safety-net hospitals are barely scraping by. Siegel said the members of his association are in the red, on average, by 9%. And while these 300 safety-net institutions account for just 5% of all U.S. hospitals, they do provide a quarter of all charity care.

“I’m concerned that those who really are delivering on the promise and really are living the mission and are being accountable, are getting mixed together or tarred with the same brush as other parts of the industry,” Siegel said.

Nonprofit hospitals that continue to lose money, he believes, could soon be forced into one of three hard decisions: cut services; sell to a for-profit company or close down.

All of these options, he said, harm patients.

When This Hospital Cut Services, Vital Treatment Was Lost

Denver Health, a major teaching and safety-net hospital system in Colorado’s capital, lost $32 million in 2022 and barely broke even last year. When it chose to eliminate certain kinds of health care to help make ends meet, critical mental health services were cut back.

Though Colorado already ranked 45th out of 50 states in terms of providing sufficient access to mental health services, Denver Health eliminated 15 of its 78 inpatient psychiatry beds. CEO Donna Lynne said her community has taken a hit. 

“I think that there are hundreds of people going without care, because Denver Health cannot open up enough beds to provide the care that they need,” Lynne said. But inpatient psychiatry care is expensive — for each bed the hospital system provides, it loses about $200,000 annually.

Lynne turned to state and local officials to kick in more money to help the system. To date, she said, she’s only managed to secure a few million from state lawmakers.

The financial strain on this nonprofit hospital has forced it to forgo even basic maintenance repairs, Lynne said. The result: a health system that appears to be falling apart at the seams.  

“The pipes froze,” she said. “When it got warm, the pipes burst and we had a flood.”

These types of problems, Lynne said, are indicative of what many safety-net institutions are facing across the country. It’s a reality she’d like more policymakers to recognize.

“Denver Health has been here for 163 years,” Lynne stressed. “We are the oldest hospital in the state of Colorado. And whether it’s COVID or it’s shootings or it’s routine cancer, we are expected to serve this community. We’re essential — but the money isn’t.”

Some financially strapped nonprofits have faced an even bigger transformation when  taken over by a private equity firm or other for-profit enterprise. Over the last five years 29 nonprofit hospitals were acquired by for-profit companies, according to health care analytics firm Levin Associates. 

For-profit hospitals operate differently than nonprofit systems, said UCLA law professor Jill Horwitz who has studied the difference between the two types of hospitals for decades. “They’re just going to follow the money more, because that’s what for-profits do,” she said.  

Providing free and discounted care is only one way nonprofit health institutions give back to the community, Horwitz said. Her research shows nonprofit hospitals are more likely to offer services that tend to lose money, but are highly valuable like burn units, hospice, substance use  treatment and psychiatric care.  

According to Horwitz’s recent study in the journal Health Affairs, nonprofits are 6% more likely than for-profits to offer these services.

“What this tells us,” she said, “is that nonprofit hospitals are focusing more on patient need than profit-making when they’re making their decisions of what services to offer.”

Hospitals Can’t Solve A ‘National Insurance Problem’

Horwitz would like to see lawmakers tap the brakes on their calls to end tax exemptions for nonprofits. Policies that ask hospitals to foot the bill may be well-meaning, she said, but they fail to address bigger systemic problems with the U.S. health care system — namely a lack of universal coverage and high prices. 

Even with Medicare and Medicaid subsidizing health care for patients who are elderly, poor or, in some cases, disabled, nearly 25 million Americans are still uninsured and millions more are underinsured.

“It’s wishful thinking,” Horwitz said, “to think that nonprofit hospitals can solve an enormous, long-standing national insurance problem. I want us to be focusing on the costs of health care and access to care.”

Those problems, she said, are too big for hospitals to solve on their own.

Tradeoffs’ coverage of health care costs are supported, in part by Arnold Ventures and West Health.

Episode Transcript and Resources

Episode Transcript

Dan Gorenstein: Millions of Americans struggle to afford their medical care.

More and more state and federal lawmakers want nonprofit hospitals to offer more free care in response.

But nonprofit hospitals warn that could backfire.

Today, the push to get nonprofit hospitals to provide more charity care and how those efforts could potentially, hurt the people they are designed to help.

From the studio at the Leonard Davis Institute at the University of Pennsylvania, I’m Dan Gorenstein. This is Tradeoffs.

*****

DG: More than 100 million Americans face some amount of medical debt.

That’s 40 percent of all adults in the country having a hard time getting their broken bones fixed, treatment for their diabetes or chemotherapy for their cancer.

At the same time some nonprofit hospitals have made headlines.

News clips: Methodist sued 8,300 patients between 2014 and 2018, including their own employees.

DG: for employing what are considered aggressive tactics to pursue unpaid bills.

News clips: Johns Hopkins hospital has filed thousands of lawsuits since 2009 against patients with unpaid medical bills…36,000 different accounts were literally sent to debt collectors.

DG: This one-two punch – medical debt and aggressive bill collection – has gotten lawmakers’ attention.

Especially because nonprofit hospitals are tax exempt. And are expected to provide some kind of community benefit in return.

In 2020, tax breaks for nearly all 3,000 nonprofit hospitals were an estimated $28 billion dollars, according to KFF, a health policy research organization.

But they spent just $16 billion giving away free care to low income patients.

Some lawmakers argue that $12 billion dollar gap needs to shrink.

Here’s New Jersey Representative. Bill Pascrell at a congressional hearing last spring.

Rep. Bill Pascrell: I’m committed to robust oversight of our tax-exempt hospitals…Many nonprofit hospital systems can and must do better.

DG: Getting nonprofit hospitals to ‘do better’ is another way of saying getting them to pay for more free care.

And that gap between what hospitals avoid in taxes and what they pay in free care seems to suggest the hospitals could afford it.

Ge Bai: Ge Bai, prof of Accounting at Johns Hopkins Carey Business School.

DG: Ge studies nonprofit hospital charity care and tax status.

She and her co authors found that on average, for profit hospitals spend a higher percentage of expenses on charity care than nonprofits.

That has added ammunition to people who want nonprofit hospitals to do more.

GB: The taxpayers are not getting their fair share when it comes to taxpayer subsidies to non-profit hospitals.

DG: Here’s part of the problem, says Ge, the IRS just requires nonprofit hospitals to have policies about how they dole out charity care and report the amount on their taxes.

But there is no clear-cut definition on how much is enough.

GB: These are players. They’re only playing by the rules designed by the game. Right. So blame the game, not the players. And change the rules.

DG: Ge and others think the vague rules have led to some hospitals spending as much as 10 percent of their expenses on free care and others as little as one-tenth of one percent.

This movie has been on repeat for 30 years, says Northeastern University’s Gary Young.

Gary Young: We see the same hospitals providing a lot and other hospitals providing very little and that doesn’t seem to change very much over time.

DG: Gary has studied nonprofit hospitals for 30 years and leads Northeastern’s Center for Health Policy and Healthcare Research.

He says if we want to see these hospitals beef up their free care, expectations must be spelled out.

GY: The first step might be for policymakers to establish specific criteria in terms of what is expected from nonprofit hospitals regarding community benefits. Some states have already moved in that direction.

DG: In the absence of federal action, at least 14 states have more specific laws about how hospitals provide charity care.

There are two general approaches.

The first – three states require free care based on a percentage of the hospital’s income.

But Ge says there’s a danger in setting this kind of limit.

GB: So the problem is that hospitals, might sense that as the right amount and adjust their behavior. You know, if they provide more care, they might say, oh, that’s not necessary. I’ll just provide less to meet the target.

DG: Hospitals in Texas adjusted their behavior – as Ge says – after the states required all nonprofits to spend 4 percent of their revenue on free care.

Some hospitals ponied up to meet the new standard. But an independent analysis from 2010 – the most recent one available – found some more generous ones cut back.

Texas’ experience is a cautionary tale. Figuring out how to increase charity care isn’t as easy as setting a single target.

Oregon also uses hospital income to determine how much hospitals spend on their communities, but the state develops a specific target for each hospital to meet.

Northeastern’s Gary Young – who is studying the state, says the model shows some promising signs.

A state report found in the first year hospitals spent a total of $2.2 billion dollars on community benefits. 150 percent above the target.

GY: I do think this is, you know, an interesting step toward addressing that variation that we have seen for so many years. And then that could be a model for the rest of the country and possibly for the federal government.

DG: Then there’s the second approach: hospitals give discounted or free care based on patient incomes, rather than a hospital’s revenue

11 states including Maryland and Washington do this.

While there’s little evidence on the effectiveness of these policies, Johns Hopkins’ Ge Bai says it at least gives regulators a rule to enforce.

She points to Washington State’s settlement just this month with Seattle-based hospital system Providence Health that led the nonprofit to refund patients $160 million dollars for care that should have been free or discounted.

Ge was an expert witness in this case.

GB: So this success from the state perspective in Washington sends a signal to hospitals that not complying can have severe consequences. So that will make them more likely to comply.

DG: Researchers like Gary and Ge are hopeful state models can help ensure more low-income people access care.

If so they say that could be a blueprint for a federal fix.

But if nonprofits are pushed to pick up a bigger share of the charity care tab, some hospital executives warn that could – ironically – make care for low-income people even harder to access…more on that…after the break.

MIDROLL

DG: Everyone we talked to for this story agrees: sick people should be able to get medical care without going into debt.

The disagreement is who should pay for it.

As we heard before the break, lots of states and some researchers say nonprofit hospitals certainly should be doing more. Again, the logic: nonprofits save billions of dollars every year because of their tax-exempt status.

And more of those savings should cover free care. But that, says Jill Horwitz, a law professor at UCLA, is a double standard.

Jill Horwitz: So we don’t ask museums to provide free admission to everybody who wants to go to the museum. And we don’t ask non-profit universities to give free tuition . Hospitals are just the same.

DG: Critics like Jill – say policies asking hospitals to foot the bill may be well-meaning, but fail to address bigger systemic problems with the U.S. health care system, namely a lack of universal coverage and high prices.

Hospitals argue the problem with the plan to increase charity care requirements is that they could – unintentionally – cut care that low-income communities rely on right now.

Bruce Siegel: Where you live, which is often also defined by who you are, shouldn’t define what kind of care you get.

DG: That’s Bruce Siegel.

He leads America’s Essential Hospitals, a trade group that represents so-called safety net hospitals, those are health systems that see the highest percentage of low-income and uninsured patients.

Bruce says the push for more charity care assumes all hospitals are created equal.

And while a slice of nonprofit hospitals are in a strong financial position, many safety-net hospitals are barely scraping by.

And, Bruce adds, the 300 hospitals he represents provide a quarter of all charity care even though they’re only five percent of all hospitals..

BS: I’m concerned that those who really are delivering on the promise, are getting mixed together or tarred with the same brush as other parts of the industry.

DG: After being battered by COVID, labor costs and inflation, Bruce says this is a precarious moment for the industry.

Even more so for safety net hospitals. On average they are in the red by 9 percent.

If they continue to lose money, Bruce says, that could force one of three hard decisions,

Cut services, the easiest of the three. Sell to a for profit company. Or just close.

BS: When things get really extreme, it becomes a conversation of do we close.

DG: Bruce says his members are facing these tough choices right now.

One is Denver Health.

A combination of factors like high labor costs and spending more on free care has put a hurt on their budget says CEO Donna Lynne.

The system lost more than 30 million in 2022, and barely broke even last year.

Donna Lynne: Cutting back on care is the one I try to avoid the most because the demand for health care services is really strong.

DG: But she says financial pressures forced the system to close 15 of its 78 inpatient psychiatric beds, which it loses about $200,000 on per bed each year.

Colorado already is short on mental health care, ranking 45th out of 50 states for access.

DL: I think that there are hundreds of people going without care, because Denver Health cannot open up enough beds to provide the care that they need.

DG: Donna has turned to state and local officials to kick in more money to help the system. But so far she’s only gotten a few million from the state.

And still Denver Health has forgone even basic maintenance repairs…the result…a system seemingly falling apart at the seams.

DL: The pipes froze. Guess what happened? When it got warm, the pipes burst and we had a flood.

DG: Donna says the time has come for policymakers to stop taking the hospital for granted.

DL: Denver Health has been here for 163 years. We are the oldest hospital in the state of Colorado. And whether it’s Covid or it’s shootings or it’s routine cancer, we are expected to serve this community…We’re essential. But the money isn’t.

DG: A more extreme move is for financially stressed hospitals to sell to a for-profit or private equity firm.

That’s happened at least 29 times in the last five years according to health care analytics firm Levin Associates.

UCLA law professor Jill Horwitz says nonprofits and for profit hospitals have different priorities.

JH: They’re just going to follow the money more because that’s what for-profits do.

DG: Jill has studied the differences between the two kinds of hospitals for decades.

She explains free care is just one way the nonprofits give back to the community.

Jill’s research shows nonprofits provide more services that are more likely to lose money. Things like burn units, hospice treatment and psychiatric care.

Her recent study in Health Affairs, found nonprofits are six percent more likely than for-profits to offer these services.

JH: So what this tells us is that nonprofit hospitals are focusing more on patient need than profit making when they’re making their decisions of what services to offer.

DG: Jill would like to see lawmakers tap the brakes on the talk to end tax exemptions and policies that are forcing the nonprofits to pay for more of this care.

The fewer nonprofits, the less care there is for substance use, mental illness and pregnancy care.

The third, most drastic option. Close the doors and shut off the lights.

Bruce Siegel at America’s Essential Hospital is worried.

BS: I got hospitals today, on average in our membership who are in the red.. you can’t survive like that. So, you know, this is a fundamentally an existential issue for them.

DG: This has happened at least three times over the last several years in Cleveland, Philadelphia and Atlanta

After the 460-bed Atlanta Medical Center shut down in 2022, the trade journal Modern Healthcare reported that nearby hospitals struggled to handle the influx of patients.

Wait times for emergency rooms and procedures increased.

The country has watched some hospitals offer lots of charity care…and others very little for decades.

States like Washington, Texas and Oregon have taken steps to get hospitals to pay more with varying degrees of success.

But who should pay for this care? That’s the question UCLA’s Jill Horwitz wants the country to ask.

JH: If these policies or some similar federal fix end up compromising this country’s safety net hospitals, it’s impossible to say that we’d be better off.

DG: Jill says to help the 100 million Americans in debt, we must address the root of the problem – a lack of insurance and high prices.

Those issues, she says, are too big for hospitals to solve on their own.

I’m Dan Gorenstein, this is Tradeoffs.

Episode Resources

Selected Research and Reporting on Nonprofit Hospitals:

Episode Credits

Guests:

  • Ge Bai, PhD, CPA, Professor of Accounting at Carey Business School, Professor of Health Policy at Bloomberg School of Public Health, Johns Hopkins University
  • Jill Horwitz, PhD, JD, MPP, David Sanders Professor of Law and Medicine and Founding Faculty Director, Lowell Milken Center for Philanthropy and Nonprofits, UCLA
  • Donna Lynne, DrPH, CEO, Denver Health
  • Bruce Siegel, MD, MPH, President and CEO, America’s Essential Hospitals
  • Gary Young, PhD, JD, Director of the Center for Health Policy and Healthcare Research, Northeastern University

The Tradeoffs theme song was composed by Ty Citerman, with additional music this episode from Blue Dot Sessions and Epidemic Sound.

This episode was reported by Alex Olgin, edited by Deborah Franklin and Dan Gorenstein, and mixed by Andrew Parrella and Cedric Wilson.

Thanks to the Tradeoffs Advisory Board and our stellar staff!

Alex Olgin is a former reporter/producer at Tradeoffs. Prior to her role at Tradeoffs, Alex covered health care for six years at local public radio stations, including working as the sole reporter in Charleston...