Manatee Memorial Hospital in Bradenton, Fla., is revising its charity care policies due to funding shortfalls, a move the investor-owned hospital called a “difficult, yet responsible, fiscally prudent decision,” according to a June 3 report by the Sarasota Herald-Tribune.
Part of King of Prussia, Pa.-based Universal Health Services, Manatee Memorial Hospital is a 300-bed facility staffed by over 800 physicians, residents, and allied health professionals.
In May, the hospital informed stakeholders it would no longer accept patients enrolled in Manatee County’s healthcare plan or unfunded referrals from the We Care Manatee nonprofit for uninsured, low-income county residents, effective June 1, the Sarasota Herald-Tribune reported.
Emergency room access will be maintained in compliance with the federal Emergency Medical Treatment and Labor Act.
“Our projected deficit from unfunded care, beyond charity care, amounts to several millions of dollars,” Manatee Memorial wrote in a May letter to stakeholders, as reported by the Sarasota Herald-Tribune. “The significant cost of unreimbursed care is unsustainable. We continue to be a supportive community partner and will maintain open discussions with Manatee County regarding solutions, however, we need to make this difficult, yet responsible, fiscally prudent decision.”
In April, Manatee Memorial Hospital CEO Tom McDougal indicated the hospital’s funding for indigent care services was unsustainable. He noted that the hospital’s costs for charity, indigent and uninsured care rose by 47% over two years, reaching $21.2 million in 2023, with an additional $2.9 million in uncollectable care. Last year, the hospital received $2.7 million in indigent funding from Manatee County.
“Ladies and gentlemen, I simply can’t afford to keep doing this without being compensated for it,” Mr. McDougal said at the April 16 public county commission meeting. “It takes away care from other patients.”
McDougal made his remarks at a commission meeting focused on undocumented immigration, acknowledging that specific figures linking undocumented immigrants to the rise in charity care costs were not available. Six percent of patients in the hospital emergency room self-disclosed their status as undocumented immigrants, which Mr. McDougal believes is an undercount.
The latest changes follow Mr. McDougal’s “very uncomfortable decision,” as he put it, in February to stop oncology services and some surgeries for Manatee County health plan enrollees, as the hospital’s costs under the program reached $9 million in 2023, compared to the $2.7 million reimbursement from the county.
As 41% of American adults face medical debt, residents of this southern Colorado city contend their local nonprofit hospitals aren’t providing enough charity care to justify the millions in tax breaks they receive.
The two hospitals in Pueblo, Parkview Medical Center and Centura St. Mary-Corwin, do not pay most federal or state taxes. In exchange for the tax break, they are required to spend money to improve the health of their communities, including providing free care to those who can’t afford their medical bills. Although the hospitals report tens of millions in annual community benefit spending, the vast majority of that is not spent on the types of things advocates and researchers contend actually create community benefits, such as charity care.
And this month, four U.S. senators called on the Treasury’s inspector general for tax administration and the Internal Revenue Service to evaluate nonprofit hospitals’ compliance with tax-exempt requirements and provide information on oversight efforts.
The average hospital in the U.S. spends 1.9% of its operating expenses on charity care, according to an analysis of 2021 data by Johns Hopkins University health policy professor Ge Bai. Last year, Parkview provided 0.75% of its operating expenses, about $4.2 million, in free care.
Centura Health, a chain of 20 tax-exempt hospitals, reports its community benefit spending to the federal government in aggregate and does not break out specific numbers for individual hospitals. But St. Mary-Corwin reported $2.3 million in charity care in fiscal year 2022, according to its state filing. The filing does not specify the hospital’s operating expenses.
The low levels of charity care have translated into more debt for low-income residents.
About 15% of people in Pueblo County have medical debt in collections, compared with 11% statewide and 13% nationwide, according to 2022 data from the Urban Institute. Those Puebloans have median medical debt of $975, about 40% higher than in Colorado and the U.S. as a whole. And all of those numbers are worse for people of color.
“How far into debt do people have to go to get any kind of relief?” said Theresa Trujillo, co-executive director at the Center for Health Progress’ Pueblo office. “Once you understand that there are tens of millions of dollars every single year that hospitals are extracting from our communities that are meant to be reinvested in our communities, you can’t go back from that without saying, ‘Oh my gosh, that is a thread we need to pull on.’”
Trujillo is organizing a group of fed-up residents to engage both hospitals on their community benefit spending. The group of at least a dozen residents believe the hospitals are ignoring the needs identified by the community — things like housing, addiction treatment, behavioral health care, and youth activities — and instead spending those dollars on things that mainly benefit the hospitals and their staffs.
For the fiscal year ending June 2022, with total revenue of $593 million, Parkview reported $100 million in community benefit spending. But most of that — more than $77 million — represented the difference between the hospital’s cost of providing care and what Medicaid paid for it.
IRS guidelines allow hospitals to claim Medicaid shortfall as a community benefit, but many academics and health policy experts argue such balance sheet shifts aren’t the same as providing charity care to patients.
Parkview also reported $4.7 million for educating its medical staff and $143,000 in incentives to recruit health professionals as community benefit. The hospital spent only $44,000 on community health improvement projects, which appear to have consisted mainly of launching a new mobile app to streamline appointments and referrals.
Meanwhile, the hospital recently spent $58 million on a new orthopedic facility and $43 million on a new cancer center. Parkview also wrote off $39 million in bad debt in fiscal 2022, although that is different from charity care. The bad debt is money the hospitals tried to collect from patients and ultimately decided they’d never get. But by that time, those patients would likely have been sent to collections and potentially had their credit damaged. And outstanding debt often keeps patients from seeking other needed care.
There is a disconnect between what the community said its biggest health needs were and where Parkview directed its spending. The hospital’s community needs assessment pegged access to care as the top concern, and the hospital said it launched the phone app in response.
The second-largest perceived health need was addressing alcohol and drug use. Yet, the only initiative Parkview cited in response was posting preventive health videos online, including some on alcohol and drug use. Meanwhile, the hospital shut down its inpatient psychiatric unit.
Parkview declined to answer questions about its charity care spending, but hospital spokesperson Todd Seip emailed a statement saying the hospital system “has been committed to providing extensive charity care to our community.”
Seip noted that 80% of Parkview’s patients are covered by Medicare or Medicaid, which pay lower rates than commercial insurance. The hospital posted a net loss of $6.7 million in the 2022 fiscal year, although its charity care wasn’t appreciably higher in previous years in which it posted a net gain.
Centura St. Mary-Corwin reported $16 million in Medicaid shortfall and $2 million in medical staff education in 2022, according to its state filing. The hospital spent about $38,000 for its community health improvement projects, primarily on emergency medical services outreach programs in rural areas. The hospital provided another $96,000 in services, mainly to promote covid-19 vaccination.
Centura also declined to answer questions about its charity care spending. Hospital spokesperson Lindsay Radford emailed a statement saying St. Mary-Corwin was aligning its community health needs assessment process with the Pueblo Department of Public Health and Environment “to develop shared implementation strategies for our community benefit funds, ensuring the resources are targeting the highest needs.”
Trujillo questioned how the hospital has conducted its community health assessments, relying on a social media poll to identify needs. After community members identified 12 concerns, she said, hospital leaders chose their priorities from the list.
“They talk about a community garden like they’re feeding the whole south side of the community,” Trujillo said. The hospital established a community garden in 2021, with 20 beds that could be adopted by residents to grow vegetables. Trujillo did praise the hospital for converting part of its building into dorms for a community college nursing program.
Trujillo’s group has spent much of the summer researching hospital charity spending and showing up at public meetings to have their views heard. They are working to gain seats on hospital and other state boards that influence how community benefit dollars are spent, and are urging hospitals to reconfigure their boards to better represent the demographics of their communities.
“We’ve made folks now aware that we want to be a part of those processes,” Trujillo said. “We’re willing to help them reach deeper into the community.”
Tax-exempt hospitals have been under increased state scrutiny for their charitable spending, especially after the Affordable Care Act and Medicaid expansion drove down the uninsured rate. That in turn cut the amount of care hospitals had to provide without being paid, potentially freeing up money to help more people without insurance or with high-deductible plans.
In Colorado, hospitals’ charity care spending and bad debt write-offs dropped from an average of $680 million a year in the five years prior to the ACA being fully implemented in 2014 to an average of $337 million in the years after, according to the Colorado Healthcare Affordability and Sustainability Enterprise Board, a state advisory group.
In states like Colorado, which used federal funding to expand the number of people covered by Medicaid, hospitals shifted more of their community benefit spending to cover Medicaid reimbursement shortfalls.
A January report from Colorado’s Department of Health Care Policy & Financing concluded that payments from public and private health plans help the state’s hospitals make more than enough money to offset lower Medicaid rates and still turn a profit while providing more true charity care.
Colorado has enacted two bills in the past five years to increase the transparency of hospitals’ charitable efforts with new reporting requirements.
“I think overall, we’re pleased with the amount of money that hospitals are reporting they spent,” said Kim Bimestefer, the executive director of the Department of Health Care Policy & Financing. “Is that money being expended in meaningful ways, ways that improve health and well-being of the community? Our reports right now can’t determine that.”
A bipartisan quartet of influential senators is tapping tax regulators within the U.S. Treasury for detailed information on nonprofit hospitals’ reported charity care and community investments, the latest in legislators’ increasing scrutiny of tax-exempt hospitals’ business practices.
In a pair of letters (PDF) sent Monday, Sens. Elizabeth Warren, D-Massachusetts, Raphael Warnock, D-Georgia, Bill Cassidy, M.D., R-Louisiana, and Chuck Grassley, R-Iowa, wrote they “are alarmed by reports that despite their tax-exempt status, certain nonprofit hospitals may be taking advantage of this overly broad definition of ‘community benefit’ and engaging in practices that are not in the best interest of the patient.”
They also outlined studies from academic and policy groups highlighting that the tax-exempt status of the nation’s nonprofit hospitals collectively was worth about $28 billion in 2020 and how this tally paled in comparison to the charity care most of those hospitals had provided during that same period.
Such studies have been quickly contested by the hospital lobby, which highlights that charity care is just one component of the broader activities that constitute a nonprofit hospital’s community benefit spending.
However, that ambiguity was squarely in the crosshairs of the legislators who said the long-standing community benefit standard “is arguably insufficient in its current form to guarantee protection and services to the communities hosting these hospitals.”
They cited a 2020 report from the Government Accountability Office that found oversight of nonprofit hospitals’ tax exemptions was “challenging” due to the vague definition of community benefit.
Though the IRS implemented several of the office’s recommendations from the report, “more is required to ensure nonprofit hospitals’ community benefit information is standardized, consistent and easily identifiable.” Included here could be additional updates to Form 990’s Schedule H, where nonprofits detail their community benefits and related activities.
To get a better handle on the agencies’ current oversight, the legislators requested from the IRS and the Treasury’s Tax Exempt & Government Entities Division a laundry list of information related to nonprofits’ tax filings from the last several years, including “a list of the most commonly reported community benefit activities that qualified a nonprofit hospital for tax exemptions in FY2021 and FY2022.”
They also sought lists of the nonprofit hospitals that were flagged, penalized or had their tax-exempt status revoked for violating community benefit standard requirements.
In another letter to the Treasury’s inspector general for tax administration, they asked the auditor to update their upcoming reviews to evaluate existing standards for financial assistance policy and other “practices that reduce unnecessary medical debt from patients who qualify for free or discounted care.”
The lawmakers also asked the inspector general to explore how often nonprofit hospitals bill patients with “gross charges” and to make sure the IRS is doing enough to ensure hospitals are making “’reasonable efforts’ to determine whether individuals are eligible for financial assistance before initiating extraordinary collection actions.”
Both letters from the senators gave the tax regulators 60 days to provide the requested information.
As first half 2023 financial results are reported and many prepare for a busy last half, strategic planning for healthcare services providers and insurers point to 4 issues requiring attention in every boardroom and C suite:
Private equity maturity wall:
The last half of 2023 (and into 2024) is a buyer’s market for global PE investments in healthcare services: 40% of PE investments in hospitals, medical groups and insurtech will hit their maturity wall in the next 12 months. Valuations of companies in these portfolios are below their targeted range; limited partner’ investing in PE funds is down 28% from pre-pandemic peak while fund raising by large, publicly traded, global funds dominate fund raising lifting PE dry powder to a record $3.7 trillion going into the last half of 2023.
In the U.S. healthcare services market, conditions favor well-capitalized big players—global private equity funds and large cap aggregators (i.e., Optum, CVS, Goldman Sachs, Blackstone et al) who have $1 trillion to invest in deals that enhance their platforms. Deals done via special purpose acquisition corporations (SPACS) and smaller PE funds in physicians, hospitals, ambulatory services and others are especially vulnerable. (see Bain and Pitchbook citations below). Addressing the growing role of large-cap PE and strategic investors as partners, collaborators, competitors or disruptors is table stakes for most organizations recognizing they have the wind at their backs.
Consolidation muscle by DOJ and FTC:
Healthcare is in the crosshair of the FTC and DOJ, especially hospitals and health insurers. Hospital markets have become increasingly concentrated: only 12% of the 306 Hospital Referral Regions is considered unconcentrated vs. 23% in 2008. In the 384 insurance markets, 23% are unconcentrated, down from 35% in 2020. Wages for healthcare workers are lower, prices for consumers are higher and choices fewer in concentrated markets prompting stricter guidelines announced last week by the oversight agencies. Big hospitals and big insurers are vulnerable to intensified scrutiny. (See Regulatory Action section below).
Defamatory attacks on nonprofit health systems:
In the past 3 years, private, not-for-profit multi-hospital systems have been targeted for excess profits, inadequate charity care and executive compensation. Labor unions (i.e., SEIU) and privately funded foundations (i.e., West, Arnold Venture, Lown Institute) have joined national health insurers in claims that NFP systems are price gaugers undeserving of the federal, state and local tax exemptions they enjoy. It comes at a time when faith in the U.S. health system is at a modern-day low (Gallup), healthcare access and affordability concerns among consumers are growing and hospital price transparency still lagging (36% are fully compliant with the 2021 Executive Order).
Notably, over the last 20 years, NFP hospitals have become less dominant as a share of all hospitals (61% in 2002 vs. 58% last year) while investor-owned hospitals have shown dramatic growth (from 15% in 2002 to 24% last year). Thus, the majority of local NFP hospitals have joined systems creating prominent brands and market dominance in most regions. But polling indicates many of these brands is more closely associated with “big business” than “not-for-profit health” so they’re soft targets for critics. It is likely unflattering attention to large, NFP systems will increase in the next 12 months prompting state and federal regulatory actions and erosion of public support. (See New England Journal citation in Quotables below)
Campaign 2024 healthcare rhetoric:
Republican candidates will claim healthcare is not affordable and blame Democrats. Democrats will counter that the Affordable Care Act’s expanded coverage and the Biden administration’s attack on drug prices (vis a vis the Inflation Reduction Act) illustrate their active attention to healthcare in contrast to the GOP’s less specific posturing.
Campaigns in both parties will call for increased regulation of hospitals, prescription drug manufacturers, health insurers and PBMs. All will cast the health industry as a cesspool for greed and corruption, decry its performance on equitable access, affordability, price transparency and improvements in the public’s health and herald its frontline workers (nurses, physicians et al) as innocent victims of a system run amuck.
To date, 16 candidates (12 R, 3 D, 1 I) have announced they’re candidates for the White House while campaigns for state and local office are also ramping up in 46 states where local, state and national elections are synced. Healthcare will figure prominently in all. In campaign season, healthcare is especially vulnerable to misinformation and hyper-attention to its bad actors. Until November 5, 2024, that’s reality.
My take:
These issues frame the near-term context for strategic planning in every sector of U.S. healthcare. They do not define the long-term destination of the system nor roles key sectors and organizations will play. That’s unknown.
What’s known for sure is that AI will modify up to 70% of the tasks in health delivery and financing and disrupt its workforce.
Black Swans like the pandemic will prompt attention to gaps in service delivery and inequities in access.
People will be sick, injured, die and be born.
And the economics of healthcare will force uncomfortable discussions about its value and performance.
In the U.S. system, attention to regulatory issues is a necessary investment by organizations in every state and at the federal level. Details about these efforts is readily accessible on websites for each organization’s trade group. They’re the rule changes, laws and administrative actions to which all are attentive. They’re today’s issues.
Less attention is given the long-term. That focus is often more academic than practical—much the same as Robert Oppenheimer’s early musings about the future of nuclear fusion. But the Manhattan Project produced two bombs (Little Boy and Fat Man) that detonated above the Japanese cities of Hiroshima and Nagasaki in 1945, triggering the end of World War II.
The four issues above should be treated as near and present dangers to the U.S. health system requiring attention in every organization. But responses to these do not define the future of the U.S. system. That’s the Manhattan Project that’s urgently needed in our system.
This brief examines past-due medical debt among nonelderly adults and their families using nationally representative survey data collected in June 2022. The analysis assesses the share of adults ages 18 to 64 with past-due medical bills owed to hospitals and other health care providers as well as the actions taken by hospitals to collect payment or make bills easier to settle.
It focuses on the experiences of adults with family incomes below and above 250 percent of the federal poverty level (FPL), approximating the income cutoff used by many hospitals to determine eligibility for free and discounted care.
WHY THIS MATTERS
In their efforts to protect patients from medical debt, policymakers have increasingly focused on the role of hospital billing and collection practices, with particular scrutiny directed toward nonprofit hospitals’ provision of charity care. Understanding the experiences of people with past-due bills owed to hospitals and other providers can shed light on the potential for new consumer protections to alleviate debt burdens.
WHAT WE FOUND
More than one in seven nonelderly adults (15.4 percent) live in families with past-due medical debt. Nearly two-thirds of these adults have incomes below 250 percent of FPL.
Nearly three in four adults with past-due medical debt (72.9 percent) reported owing at least some of that debt to hospitals, including 27.9 percent owing hospitals only and 45.1 percent owing both hospitals and other providers. Adults with past-due hospital bills generally have much higher total amounts of debt than those with past-due bills only owed to non-hospital providers.
Most adults (60.9 percent) with past-due hospital bills reported that a collection agency contacted them about the debt, but much smaller shares reported that the hospital filed a lawsuit against them (5.2 percent), garnished their wages (3.9 percent), or seized funds from a bank account (1.9 percent).
Though about one-third (35.7 percent) of adults with past-due hospital bills reported working out a payment plan, only about one-fifth (21.7 percent) received discounted care.
Adults with incomes below 250 percent of FPL were as likely as those with higher incomes to experience hospital debt collection actions and to have received discounted care.
The concentration of past-due medical debt among families with low incomes and the large share who owe a portion of that debt to hospitals suggests that expanded access to hospital charity care and stronger consumer protections could complement health insurance coverage expansions and other efforts to mitigate the impact of unaffordable medical bills.
HOW WE DID IT
This analysis draws on data from the June 2022 round of the Urban Institute’s Health Reform Monitoring Survey (HRMS), a nationally representative, internet-based survey of adults ages 18 to 64 that provides timely information on health insurance coverage, health care access and affordability, and other health topics. Approximately 9,500 adults participated in the June 2022 HRMS.
Large, not-for-profit hospitals/health systems are getting a disproportionate share of unflattering attention these days. Last week was no exception: Here’s a smattering of their coverage:
Jiang et al “Factors Associated with Hospital Commercial Negotiated Price for Magnetic Resonance Imaging of Brain” JAMA Network Open March 21. 2023;6(3):e233875. doi:10.1001/jamanetworkopen.2023.3875
Whaley et al What’s Behind Losses At Large Nonprofit Health Systems? Health Affairs March 24, 2023 10.1377/forefront.20230322.44474
A Pa. hospital’s revoked property tax exemption is a ‘warning shot’ to other nonprofits, expert says KYW Radio Philadelphia March 24, 2023 ww.msn.com/en-us/news/us/a-pa-hospital-s-revoked-property-tax-exemption-is-a-warning-shot-to-other-nonprofits-expert-says
These come on the heals of the Medicare Advisory Commission’s (MedPAC) March 2023 Report to Congress advising that all but safety-net hospitals are in reasonably good shape financially (contrary to industry assertions) and increased lawmaker scrutiny of “ill-gotten gains” in healthcare i.e., Moderna’s vaccine windfall, Medicare Advantage overpayments and employer activism about hospital price-gauging in several states.
Like every sector in healthcare, hospitals enter budget battles with good stories to tell about cost-reductions and progress in price transparency compliance. But in the current political and economic environment, large, not-for-profit hospitals and health systems seem to be targets of more adverse coverage than others as illustrated above. Like many NFP institutions in society (higher education, organized religion, government), erosion of trust is palpable. Not-for-profit hospitals and health systems are no exception.
The themes emerging from last week’s coverage are familiar:
‘Not-for-profit hospitals/health systems, do not provide value commensurate with the tax exemptions they get.’
‘Not for profit hospitals & health systems take advantage of their markets and regulations to create strong brands and generate big profits.’.
‘Not for profit hospitals & health systems charge more than investor-owned hospitals: the victims are employers and consumers who pay higher-than-necessary prices for their services.’
‘NFP operators invest in risky ventures: when the capital market slumps, they are ill-prepared to manage. Risky investments, not workforce and supply chain issues, are the root causes of NFP financial stress. They’re misleading the public purposely.’
‘Executives in NFP systems are overpaid and patient collection policies are more aggressive than for-profits. NFP boards are ineffective.’
The stimulants for this negative attention are equally familiar:
Proprietary studies by think tanks, trade associations, labor unions and consultancies designed to “prove a point” for/against not-for-profit hospitals/health systems.
Government reports about hospital spending, waste, fraud, workforce issues, patient safety, concentration and compliance with transparency rules.
Aggressive national/local reporting by journalists inclined to discount NFP messaging.
Public opinion polls about declining trust in the system and growing concern about price transparency, affordability and equitable access.
Politicians who use soundbites and dog whistles about NFP hospitals to draw attention to themselves.
The cumulative effect of these is confusion, frustration and distrust of not-for-profit hospitals and health systems. Most believe not-for-profit hospitals/health systems do not own the moral high ground they affirm to regulators and their communities (though religiously-affiliated systems have an edge). Most are unaware that more than half of all hospitals (54%) are not-for-profit and distinctions between safety net, rural, DSH, teaching and other forms of NFP ownership are non-specific to their performance.
What’s clear to the majority is that hospitals are expensive and essential. They’re soft targets representing 31.1% of the health system’s total spend ($4.3 trillion in 2021) increasing 4.9% annually in the last decade while inflation and GDP growth were less.
So why are not-for-profit systems bearing the brunt of hospital criticism?
Simply put: many NFP systems act more like Big Business than shepherds of community health. In fact, 4 of the top 10 multi-hospital system operators is investor owned: HCA (184), CHS (84), LifePoint (84), Tenet (65). In addition, 3 others are in the top 50: Ardent (30), UHS (26), Quorum (22). So, corporatization of hospital care using private capital and public markets for growth is firmly entrenched in the sector exposing not-for-profit operators to competition that’s better funded and more nimble. And, per industry studies, not-for-profits tend to stay in markets longer and operate unprofitable services more frequently than their investor-owned competitors. But does this matter to insurers, community leaders, legislators, employers, hospital employees and physicians? Some but not much.
My take:
There are no easy answers for not-for-profit hospitals/heath systems. The issue is about more than messaging and PR. It’s about more than Medicare reimbursement (7.5% below cost), protecting programs like 340B, keeping tax exemptions and maintaining barriers against physician-owned hospitals. The issue is NOT about operating income vs. investment income: in every business, both are essential and in each, economic cycles impact gains/losses. Each of these is important but only band-aids on an open wound in U.S. healthcare.
Near-term (the next 2 years), opportunities for not-for-profit hospitals involve administrative simplification to reduce costs and improve the efficiencies and effectiveness of the workforce. Clinical documentation using ChatGPT/Bard-like tools can have a massive positive impact—that’s just a start. Advocacy, public education and Board preparedness require bigger investments of time and resources. But that’s true for every hospital, regardless of ownership. These are table stakes to stay afloat.
The longer-term issue for NFPs is bigger:
It’s about defining the future of the U.S. health system in 2030 and beyond—the roles to be played and resources necessary for it to skate to where the puck is going. It’s about defining the role played by private employers and whether they’ll pay 220% more than Medicare pays to keep providers and insurers solvent. It’s about how underserved and unhealthy people are managed. It’s about defining systemness in healthcare and standardizing processes. It’s about defining sources of funding and optimal use of resources. Not-for-profit systems should drive these discussions in the communities they serve and at a national level.
MedPAC’s 17 member Commission will play a vital role, but equally important to this design process are inputs from employers, consumers and thought leaders who bring fresh insight. Until then, not-for-profit health systems will be soft targets for unflattering media because protecting the status quo is paramount to insiders who benefit from its dysfunction. Incrementalism defined as innovation is a recipe for failure.
It’s time to begin a discussion about the future of the U.S. health system—all of it, not just high-profile sectors like not-for-profit hospitals/health systems who are currently its soft target.
Over the years, somepolicymakers have questioned whether nonprofit hospitals—which account for nearly three-fifths (58%) of community hospitals—provide sufficient benefit to their communities to justify their exemption from federal, state, and local taxes.
This issue has been the subject of renewed interest in light of reports of nonprofit hospitals taking aggressive steps to collect unpaid medical bills, including suingpatients over unpaid medical debt, including patients who are likely eligible for financial assistance. Further, recent research indicates that nonprofithospitals devote a similar or smaller share of their operating expenses to charity care in comparison to for-profit hospitals. In light of these concerns, several policy ideas have been floated to better align the level of community benefits provided by nonprofit hospitals with the value of their tax exemption.
This data note provides an estimate of the value of tax exemption for nonprofit facilities based on hospital cost reports, filings with the Internal Revenue Service (IRS), and American Hospital Association (AHA) survey data (see Methods for additional details). We define the value of tax exemption as the benefit of not having to pay federal and state corporate income taxes, typically not having to pay state and local sales taxes and local property taxes, and any increases in charitable contributions and decreases in bond interest rate payments that might arise due to receiving tax-exempt status.
Results
The total estimated value of tax exemption for nonprofit hospitals was about $28 billion in 2020 (Figure 1). This represented over two-fifths (44%) of net income (i.e., revenues minus expenses) earned by nonprofit facilities in that year. To put the value of tax exemption in perspective, our estimate is similar to the total value of Medicare and Medicaid disproportionate share hospital (DSH) payments in the same year ($31.9 billion in fiscal year 2020) (i.e., supplemental payments to hospitals that care for a disproportionate share of low-income patients which are intended, in part, to offset the costs of charity care and other uncompensated care).
The estimated value of federal tax-exempt status was $14.4 billion in 2020, which represents about half (51%) of the total value of tax exemption. This is primarily due to the estimated value of not having to pay federal corporate income taxes ($10.3 billion). In addition, we assumed that individuals contribute more to tax-exempt hospitals because they can deduct donations from their income tax base ($2.5 billion) and issue bonds at lower interest rates because the interest is not taxed ($1.6 billion). Our estimates of changes in charitable contributions and interest rates on bonds only account for federal tax rates for simplicity and may therefore understate the total value of tax exemption because they do not account for the effects of state taxes.
The total estimated value of state and local tax-exempt status was $13.7 billion in 2020, which represents about half (49%) of the total value of tax exemption. This amount includes the estimated value of not having to pay state or local sales taxes ($5.7 billion), local property taxes ($5.0 billion) or state corporate income taxes ($3.0 billion).
The total estimated value of tax exemption (about $28 billion) exceeded total estimated charity care costs ($16 billion) among nonprofit hospitals in 2020 (Figure 2), though charity care represents only a portion of the community benefits reported by these facilities. Hospital charity care programs provide free or discounted services to eligible patients who are unable to afford their care and represent one of several different types of community benefits reported by hospitals.
The Internal Revenue Service (IRS) also defines community benefits to include unreimbursed Medicaid expenses, unreimbursed health professions education, and subsidized health services that are not means-tested, among other activities. One study estimated that the value of tax exemption exceeded the value of community benefits broadly for about one-fifth (19%) of nonprofit hospitals during 2011-2018 or about two-fifths (39%) when considering the incremental value of community benefits provided relative to for-profit facilities. Other research suggests that nonprofithospitalsdevote a similar or smaller share of their operating expenses to charity care and unreimbursed Medicaid costs—which accounted for most of the value of community benefits in 2017—when compared to for-profit hospitals.
The value of tax exemption grew from about $19 billion in 2011 to about $28 billion in 2020, representing a 45 percent increase (Figure 3). The value of tax exemption increased in most of the years (7 out of 9) in our analysis, though there was a notable decrease of $5.8 billion in 2018. The largest single-year increase was $4.1 billion in 2020. The large decrease in the value of tax exemption in 2018 coincided with the implementation of the Tax Cuts and Jobs Act of 2017, which permanently reduced the federal corporate income tax rate from 35 to 21 percent and therefore decreased the value of being exempt from federal income taxes.
The large increase in the value of tax exemption in 2020 overlapped with the start of the COVID-19 pandemic. This increase primarily reflects a large increase in aggregate net income for nonprofit hospitals in 2020. Although there were disruptions in hospital operations in 2020, hospitals received substantial amounts of government relief, and it is possible that other sources of revenue, such as from investment income, may have also increased. Increases in net income in turn increased the value of not having to pay federal and state income taxes.
Increases in the estimated value of tax exemption over time also reflect net income growth that preceded the pandemic as well as increases in estimated property values, supply expenses, and charitable contributions, each of which would carry tax implications if hospitals lost their tax-exempt status (e.g., with some supply expenses being subject to sales taxes). Even when setting aside the strong financial performance of nonprofit hospitals in 2020 as a potential outlier, total net income among nonprofit facilities increased substantially in the preceding years, before increasing further in 2020. Although we are not able to directly observe the value of the real estate owned by hospitals, the estimated value of exemption from local property taxes—which is based on our analysis of property taxes paid by for-profit hospitals—increased by 63 percent from 2011 to 2019. Finally, the supply expenses in our analysis increased by 44 percent and charitable contributions increased by 49 percent from 2011 to 2019.
Discussion
The estimated value of tax exemption for nonprofit hospitals increased from about $19 billion in 2011 to about $28 billion in 2020. The rising value of tax exemption means that federal, state, and local governments have been forgoing increasing amounts of revenue over time to provide tax benefits to nonprofit hospitals, crowding out other uses of those funds. This has raised questions about whether nonprofit facilities provide sufficient benefit to their communities to justify this tax benefit. Federal regulations require, among other things, that nonprofit hospitals provide some level of charity care and other community benefits as a condition of receiving tax-exempt status. However, a 2020 Government Accountability Office (GAO) report raised questions about whether the government has adequately enforced this requirement. Further, some argue that the federal definition of “community benefits” is too broad—e.g., by including medical training and research that could benefit hospitals directly—though others believe that the definition is too narrow. Most states have additional community benefit requirements for nonprofit or broader groups of hospitals—such as providing charity care to patients below a specified income threshold—though there is little information about the effectiveness of these regulations or the extent to which they are enforced.
Several policy ideas have been floated at the federal and state level that would increase the regulation of community benefits spending among nonprofit hospitals or among hospitals more generally. These include proposals to create or expand state requirements that hospitals provide charity care to patients below a specified income threshold, mandate that nonprofit hospitals provide a minimum amount of community benefits, establish a floor-and-trade system where hospitals would be required to either provide a minimum amount of charity care or subsidize other hospitals that do so, create mechanisms to increase the uptake of charity care, expandoversight and enforcement of community benefit requirements, replace current tax benefits with a subsidy that is tied to the value of community benefits provided, and introducereforms intended to better align community benefits with local or regional needs.
These policy options would inevitably involve tradeoffs. While they may expand the provision of certain community benefits, hospitals would incur new costs as a result, which could in turn have implications for what services they offer, how much they charge commercially insured patients, and how much they invest in the quality of care.
The health of a community is measured by the health of its individual members, and the health of its members depends on their access to local, high-quality medical care. Health coverage is a key indicator of the health and wellness of an individual. When people have health insurance, they have greater access to care, reduced mortality, and better health outcomes, according to a report from the American Hospital Association.
However, the current approach taken by some of the nation’s largest health insurers, or payers, is putting this at jeopardy as payers focus on profits and quarterly earnings, strip rates and put the long-term viability of health systems at risk. With hospitals in the middle of the worst economic performance in decades, it is time for payers to own up to how their actions negatively impact the communities and those they claim to serve.
As a physician and the chief of population health at a large metro-area health system, Northeast Georgia Health System, my patients’ ability to readily access medical care at our facilities — and have that care be covered by insurance — matters greatly. Any disruption in a patient’s experience, such as restricting access to care by their health plan or going out of network with an insurance company, can wreak havoc on population health. It’s no secret that many health systems across the country have felt the weight of increased administrative and contractual burdens from health insurers as denial rates continue to creep upwards.
Health insurance companies, like the nation’s largest, UnitedHealthcare, have seen profits soar in recent years. UnitedHeatlhcare’s profits were up 28 percent during the third quarter of 2022 – achieving a profit of $5.3 billion in just those three months – before closing the year at $28.4 billion in net earnings in 2023. Elevance (formerly Anthem), Cigna, and Aetna have also posted record profits recently.
We have seen the impact of the pressure payers are putting on hospitals across the country. Nearly 200 hospitals have closed since 2005, according to the Sheps Center for Health Services Research at the University of North Carolina. Many of these hospitals have closed because they failed to receive fair contracted rates from large payers and thus were insolvent.
Community benefits like charity care, health education and economic impact are provided by hundreds of hospitals nationally, but that impact is at risk if they are not fairly compensated for the services they provide.
Drawing on a report published by the North Carolina State Health Plan for Teachers and State Employees, a recent Kaiser Health News article shines a light on the lack of transparency in financial reporting of not-for-profit hospitals’ community benefit obligations.
The report claims many North Carolina hospitals—including the state’s largest system, Atrium Health—show profits on Medicare patients in their cost report filings, while at the same time claiming sizable unrecouped losses on Medicare patients as a part of their overall community benefit analyses.
The Gist: These kind of reporting discrepancies draw attention to the controversial issue of whether not-for-profit hospitals provide sufficient community benefit to compensate for their tax-exempt status, which was worth nearly $2 billion in 2020 for North Carolina hospitals alone.
Greater transparency around charity care, community benefit, and losses sustained from public payerscould go a long way toward shoring up stakeholder support for not-for-profit institutions at a time when their political goodwill has deteriorated. Hospitals should be proactive on this front, as political leaders increasingly train their sites on high hospital spending in the current tight economic environment.
U.S. Senator Patty Murray of Washington is seeking answers from Renton, Wash.-based Providence’s CEO following a Sept. 24 New York Timesreport detailing the system’s alleged debt collection practices.
“According to recent reports, over the past several years, Providence has increasingly extracted payments from low-income patients, even when patients qualified for free or discounted care,” Ms. Murray said in a Sept. 28 letter to CEO Rod Hochman. “The reports allege several disturbing practices, including high-pressure billing conversations at hospital beds when patients are vulnerable, the use of extraordinary collection actions by debt collectors, and patients eligible for free or discounted care being billed for outstanding balances. As a result, patients have gone without food or heat, have seen their credit scores plummet, and have been afraid to seek out further medical care due to the cost—all as a result of practices that potentially violate both state and federal laws.”
Ms. Murray said in the letter she is seeking answers on how many patients Providence has served in recent years who qualified for free or discounted care and how many it referred to debt collection services. She is also seeking information about the system’s billing and debt collection policies, and how much it paid consulting firm McKinsey & Co. for a program designed to increase its revenue. She is seeking answers by Oct. 12.
Washington state’s attorney general filed a lawsuit against Providence in February, alleging that 14 of its hospitals engaged in aggressive tactics to collect payment, failed to ensure discounts for eligible low-income patients, and steered poor patients to debt collectors.
A Providence spokesperson expressed discontent and disagreement with the attorney general’s charges in a statement shared with Becker’s.
“The Providence family of organizations is extremely disappointed that the Office of the Washington State Attorney General has chosen to file inaccurate and unfair charges against us regarding our charity care and financial assistance practices,” the spokesperson said. “Serving every person who comes to us, regardless of ability to pay, is a central tenet of our mission as a not-for-profit organization. We take this responsibility seriously.”
HENRY KOTULA 