Tax-Exempt Hospitals and Charity Care: Should Those Hospitals Do More?

A recent Wall Street Journal report made me wonder about tax-exempt hospitals. 

The story details how a nonprofit organization, RIP Medical Debt, collected tax-deductible donations to pay $282 million in medical debt owed by 82,000 patients of the tax-exempt hospital system Ballad Health. Ballad serves Tennessee, Virginia, North Carolina, and Kentucky. Many of the patients there were eligible for “charity care” but never applied.

Community benefits help make hospitals eligible for tax-exempt status.

About 2,900 US hospitals are tax-exempt, or about half of all hospitals. They are extremely diverse, ranging from stand-alone rural hospitals to huge systems such CommonSpirit that operates more than 100 hospitals in 21 states, to academic medical centers, to big physician-owned systems like the Mayo Clinic.

To maintain their tax-exemption, the IRS requires hospitals to provide community benefits—or programs and services that advance medical or health knowledge, reduce or relieve the burden of government or other community efforts, or improve community health and increase access to health care.

How much is community benefit worth?

The American Hospital Association reports that in 2017, hospitals and health systems distributed total community benefits equal to $95 billion, or 13.8 percent of their total expenses. Half of these benefits represented some form of uncompensated care

In 2002, the Joint Committee on Taxation estimated the nonprofit hospital tax exemption was worth $12.6 billion. That included forgone federal corporate income taxes, state and local taxes, public contributions, and the value of tax-exempt bond financing. By 2011, the most recent year for which data are available, researchers estimated the value of the tax-exemption was $24.6 billion. 

Hospitals and health systems deliver many community benefits as small-scale community-wide events such as health fairs that provide valuable screenings. Then there are larger initiatives, like Kaiser Permanente’s Thriving Communities Fund, which just invested $50 million in supportive housing.  

Efforts like these may keep people out of hospitals, which is good for their communities and can reduce overall healthcare costs. But their benefits are not well-studied.

Charity care is only one small part of those community benefits.

Even so, Bellevue physician Danielle Ofri argues in The New York Times that, rather than the many categories of programs and services identified by the IRS, charity care should drive a hospital’s classification as a tax-exempt entity. And researchers Ge Bai of Johns Hopkins University and David Hyman of Georgetown Law found that for every $100 in total spending, nonprofit hospitals provided $2.30 in charity care compared to $3.80 from for-profits. They conclude that many nonprofit hospitals do not provide enough charity care to justify their tax exemption.

But the story may be more complex. 

After all, for-profit hospitals often have no emergency departments and are under no obligation to treat patients with a non life-threatening emergency. They can release a patient who lacks the ability to pay for further treatment once that patient is out of danger. Those hospitals also claim a tax deduction for losses from uncompensated care. And there’s a large and growing gap between hospitals’ billed charges and actual payments received: The more a for-profit hospital bills and doesn’t collect, the more it can deduct.

Tax-exempt hospitals don’t have those options. They must accept and treat any patient, whether for a life-threatening condition or not, regardless of a patient’s resources. If a hospital can’t work out a payment plan for patients, they tap their community benefit funds to cover the loss, leaving less for broader community programs.

And non-profit hospitals end up carrying other costs. Twelve states have not expanded Medicaid—including some (North Carolina, South Carolina, and Tennessee) served by Ballad Health. Those states shift the cost of uncompensated care to hospitals. 

While much unpaid care is charity care, some represents bad debts by patients who could pay, but don’t. And, increasingly, middle income people with high deductible health plans are not paying those big deductibles. Those costs too are picked up by hospitals.

What can tax-exempt hospitals do to improve delivery of charity care? 

Hospitals could start by limiting lawsuits against patients who they know have no ability to pay. They could also make it easier for patients—like those 82,000 Ballad Health patients—to apply for charity care.

Federal law gives tax-exempt hospitals the freedom to establish their own eligibility criteria for financial aid. That makes sense, since the IRS has no business regulating how a tax-exempt hospital delivers health care and gets paid. But what are tax-exempt hospitals doing with that freedom?

Ballad Health told The Wall Street Journal that it has counselors who help patients manage the voluminous paperwork needed to work out debt, including two years of tax returns, recent pay stubs, and disclosure of monthly household expenses and assets. The Journal reports, however, that state attorneys general, lawmakers, and patient advocates say these financial aid programs are too complicated and are poorly promoted.

Pamela Herd and Donald Moynihan of Georgetown University’s McCourt School of Public Policy argue that administrative burdens of applying for financial assistance may itself undermine applicants’ health. 

Could tax-exempt hospitals—especially larger, well-resourced ones like Ballad—simplify the process for patients needing charity care? Could they do a better job working with uninsured patients to settle debts? Maybe the Ballad Health deal with RIP Medical Debt will prompt tax-exempt hospitals and hospital systems to examine these questions. 

Who knows—it might even benefit the community at large. 


The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.

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