Introduction and summary
Nonprofit hospitals comprise more than half of all hospitals in the United States, and many serve as centers for advancing medical research and educating health care professionals. In addition, these hospitals fill gaps in the U.S. health care system and the social safety net. They provide free or reduced-price care to those who are uninsured or unable to pay, working with other community-based organizations to connect patients with affordable housing, food, or resources for chronic-disease management. From their vantage point at the apex of the nation’s acute care system, nonprofit hospitals are also sentinels for public health, identifying hot spots during emergencies such as the COVID-19 pandemic or the Flint water crisis.1 In 2018 alone, nonprofit hospitals provided more than $23.6 billion in uncompensated care, equivalent to about 4 percent of their operating expenses, according to a Center for American Progress analysis of hospital financial data.
At the same time, however, several nonprofit hospitals have generated media negative attention for anticompetitive contracting with insurance companies, aggressive billing tactics, and other egregious financial practices, including suing patients and garnishing wages of low-income workers over unpaid bills—even during the COVID-19 pandemic.2 There is also evidence that the tier of nonprofit hospitals with the highest net income in the United States collectively dedicates the smallest share of those excess earnings to charity care. 3
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The first part of this report examines how nonprofit hospitals differ from their for-profit counterparts and the various ways in which these hospitals carry out their charity care and community benefit obligations. The second part presents policy options to improve the accountability of nonprofit hospitals, including by:
- Setting standards for charity care eligibility and obligations
- Tightening the definition of “community benefit”
- Requiring hospitals to engage the community in needs assessments and implementation plans
- Requiring nonprofit hospitals to participate in public health programs
- Limiting extraordinary debt collection practices
- Empowering the Federal Trade Commission to regulate nonprofit hospital conduct
Together, this suite of policies would help ensure that hospitals better serve patients, local communities, and public health.
How nonprofit hospitals differ from other hospitals
More than half (58 percent) of all nonfederal, acute-care hospitals in the United States are nongovernmental, nonprofit hospitals.4 These hospitals receive exemptions from federal, state, and local taxes. In exchange for these exemptions, the hospitals are required to provide charity care and other benefits to the community in which they operate. As of 2011, the value of the hospitals’ tax exemptions for nonprofit status was $24.6 billion, including the value of “forgone federal and state corporate income taxes, state and local sales taxes, local property taxes, public contributions, and the value of tax-exempt bond financing.”5 The American Hospital Association cites a lower number—$12.4 billion, as of 2019—for the value of “estimated tax revenue forgone.”6
When it comes to quality of care, there is generally little difference between nonprofit hospitals and for-profit hospitals that can be attributed to its ownership status. A 2001 examination of hospital cost, quality, and ownership found no statistically significant differences in survival rates or functional and cognitive status among patients between nonprofit and for-profit hospitals.7 Another study, conducted in 2008, found a similar result; generally, quality differences between for-profit and nonprofit hospitals were better explained by other features, such as geographic region, rather than ownership status.8 Other literature supports this finding: A 2014 examination of the features associated with conversion from nonprofit to for-profit status found no significant difference in improvements in process quality or mortality rates between hospitals that became for-profit and those that remained nonprofit.9 The same study found that regions with overall worse population health, such as the South, are also more likely to have a higher proportion of for-profit hospitals.10
Key definitions
Bad debt: Payment amounts for the provision of services that a hospital considers to be uncollectible.11
Charity care: The value of free care and discounts granted to patients eligible for reduced-price care based on a patient’s ability to pay or in accordance with the hospital’s financial assistance plan.
Community benefit standard: The IRS requirement that nonprofit hospitals demonstrate that they provide “benefits to a class of persons that is broad enough to benefit the community.”12
Nonprofit hospital: A hospital for which net earnings do not inure to the benefit of any private shareholder or individual.13 Nonprofit hospitals—those with “charitable hospital” designation and 501(c)(3) status from the IRS—are exempt from federal or state corporate income taxes.
Uncompensated care: The sum of a hospital’s bad debt and the value of charity care provided, expressed in terms of costs.
While nonprofit hospitals do not make payments to shareholders in the same way that for-profit hospitals do, they may take in revenues that more than cover the cost of their operations. This excess is then either reinvested into the hospital through capital investments or increased pay for staff or used for other community benefits.14 Because nonprofit hospitals are, by definition, not profit-making institutions, this report uses the term “net income” to describe the amount by which a hospital’s revenues exceed expenses. A hospital’s margin, often used as a measure of financial health or profitability, represents its net income—or debt—as a percentage of hospital revenues.15
A common measure of profitability is operating margin—a measure of a hospital’s revenue in excess of costs for the costs and revenues directly related to patient care. Another is total margin, which takes into account operating revenues and costs in addition to other costs and revenues, such as public funding, investments, and income and costs of affiliated entities.16 On average, for-profit hospitals are more profitable than nonprofit hospitals: CAP’s analysis of the Centers for Medicare and Medicaid Services (CMS) hospital cost report data for 2018 found that the aggregate total margin among all nonprofit hospitals is 9 percent, compared with 14 percent among for-profit hospitals and 7 percent among government-owned hospitals. The aggregate operating margin—a measure of the revenues and expenses related directly to patient care—at the three types of hospitals was 4 percent for nonprofit hospitals, 13 percent for for-profit hospitals, and negative 1 percent for government-owned hospitals, respectively. The aggregate total margin was 8 percent among hospitals overall.
The service lines that hospitals offer can explain, in part, the difference in margins. Nonprofit hospitals are more likely to offer low-margin services, such as an emergency department, burn units, high-level trauma care, and obstetrics.17 A March 2022 Health Affairs study found that for-profit hospitals were more likely than nonprofit hospitals to offer heart surgery, which is a profitable procedure.18 For-profit hospitals were less likely, however, to offer emergency psychiatric care—a largely unprofitable service.19 An earlier study found that for-profit hospitals were also more likely than nonprofit hospitals to respond quickly to variations in a procedure’s profitability.20 This last finding has been affirmed elsewhere in the literature: For-profit hospitals were, for instance, more likely than nonprofit hospitals to reduce unprofitable service delivery in the wake of the 2008 financial crisis.21 This difference in services provided affected how hospitals weathered the early stages of the COVID-19 pandemic. A National Bureau of Economic Research working paper found that for-profit hospitals were more likely to face financial distress in 2020 due to their reliance on higher-profit services to provide their operating income, and many of these services were reduced in order to provide capacity to treat COVID-19 patients.22
Margins present an incomplete picture of financial viability, however. Hospitals with reliable streams of revenue and the ability to extract high prices may face less pressure to contain costs. Arguably, without pressure to maximize shareholder returns, nonprofit hospitals may face comparatively weaker incentives to contain costs and more to make investments unrelated to quality of patient care. Regardless of whether the trend is driven by consumer expectations, hospital management preferences, or competitive pressures, many hospitals are feeling pushed to spend on amenities that make them aesthetically pleasing but do not necessarily contribute toward improving health outcomes. With ornate lobbies and private rooms becoming the standard, health care reporter Elisabeth Rosenthal has raised the question: “Is this a hospital or a hotel?”23 Such expenses can drive up the cost of the care, making a hospital’s margin appear slim despite the institution’s financial robustness.
In some ways, nonprofit hospitals often look like any other profit-maximizing businesses. A 2016 Health Affairs study found that 55 percent of “highly profitable” hospitals—defined as having a per-discharge profit greater than $1,000—were for-profit, while only 39 percent were nonprofit,24 and seven of the country’s 10 most profitable hospitals were nonprofit.25 Likewise, a 2020 study published in Economic Inquiry found that nonprofit hospitals were no more likely to provide more charity care or unprofitable services than for-profit hospitals after a merger.26
In some ways, nonprofit hospitals often look like any other profit-maximizing businesses.
Nonprofit hospitals also operate similarly to their for-profit counterparts when it comes to their capital investments. According to a 2021 Kaiser Health News analysis of nonprofit hospital 2019 tax filings, nonprofit hospitals collectively held more than $283 billion in stocks, private equity, and other investment assets, and only about 7 percent of that was classified as investments devoted to furthering their mission rather than generating income.27
Nonprofit status does not stop powerful hospitals from using their market power to boost revenues, and they, too, charge rates above what is justified by cost. In a September 2019 op-ed, economist Michael Hicks of Ball State University expressed concern that soaring hospital prices in Indiana had risen well above the national average, arguing: “The only factor that can explain this is growing monopoly power among our not-for-profit hospitals.”28 Indeed, in a 2017 speech, the former CEO of the Mayo Clinic, John Noseworthy, instructed employees to “prioritize the commercial insured patients” over those covered by Medicaid and Medicare.29 Nonprofits also expressed opposition to the federal rule requiring hospitals to make negotiated rates public, which resulted in CMS delaying implementation.30
The cost-shift myth
One commonly cited rationale for the high prices charged to privately insured patients is “cost shifting.” The cost-shifting theory claims that the more payment from public payers falls short of a hospital’s costs, the more a hospital must charge private patients to make up the cost.
There are other reasons why Medicare or Medicaid “shortfalls” are correlated with higher private rates. For example, if a hospital has a regional monopoly or has built up a strong reputation, it can successfully demand higher payment rates from private payers, generating a financial cushion that potentially enables it to operate less cost-efficiently or invest in improvements that do not advance patient medical care.31 Such excess spending then appears on balance sheets as higher costs, which in turn widens the perceived public payer shortfall.
A 2017 study of how hospitals responded to the 2008 financial crisis found that nonprofits generally charged the prices the market would bear rather than prices closer to cost. So, rather than raising prices to account for higher levels of uncompensated care during the period following the crisis, nonprofit hospitals largely maintained the same prices.32 The study also found that while hospitals with higher U.S. News and World Report rankings and teaching hospitals typically charged higher prices than others before and after 2008, their prices more closely tracked national economic trends around 2008.33 Other types of hospitals did not appear to respond to financial shocks by adjusting prices.34
Hospital cost data following the Affordable Care Act’s (ACA) expansion of Medicaid are also at odds with the cost-shifting story. Thanks to the ACA’s extension of Medicaid eligibility to all adults with incomes up to 138 percent of the federal poverty level, millions of previously uninsured and underinsured people gained coverage in the states that participated in Medicaid expansion. This meant that Medicaid would pay for care that previously would have been uncompensated. In fact, uncompensated care as a share of hospital operating costs in expansion states dropped sharply, from 3.9 percent in 2013 to 2.3 percent in 2015.35 Had hospitals’ hike in rates for private payers been driven merely by pressures for financial sustainability, one would have expected to observe a corresponding decrease or deceleration in private rates. That has not been the case.
One form of community benefit provided by nonprofit hospitals is uncompensated care, the main component of which is charity care. Among all community hospitals, the amount of uncompensated care as a percentage of revenues declined dramatically as the ACA’s coverage expansion took effect, even as the industry’s aggregate total margin reached its highest level in decades.36 Uncompensated care accounted for about 6 percent of hospital revenues throughout the 1990s but dropped to 4.2 percent by 2015, the final year for which the American Hospital Association (AHA) reported uncompensated care as a percentage of revenues.37 (see Figure 1) While in some ways this is a favorable development—the ACA expanded coverage and reduced medical debt38—it is also evidence that hospitals have chosen to dedicate resources to causes other than offsetting patient costs, even though millions of Americans remain uninsured and underinsured.
Figure 1
While the decline in uncompensated care was less among nonprofit hospitals, the same pattern held, according to CAP analysis of pre-pandemic hospital cost report data from CMS. (see Figure 2) As margins rose, hospitals did not devote a greater share of resources to uncompensated care. While CMS modified the hospital cost report instructions for hospital uncompensated care in fiscal year 2017, preventing valid comparison of data before and after that point, the Medicaid and CHIP Payment Advisory Commission reports that hospital uncompensated care as a share of operating expenses has “remained largely unchanged” since then.39
Figure 2
There is also wide variation in the amount of charity care among individual hospitals. A 2017 Modern Healthcare analysis of nonprofit hospitals found that charity care ranged from 0.46 percent to 16.69 percent of net operating expenses, with an average of 5.21 percent.40 Notably, hospitals with higher net income actually tend to spend a smaller share of their net income on charity care for both the insured and uninsured—according to a study by a team of Johns Hopkins University researchers—even though these hospitals arguably have the greatest resources to fund care for the indigent.41
Another study by researchers at Johns Hopkins University found that, in 2018, nonprofit hospitals overall dedicated a smaller proportion of their expenses to charity care than did government-owned or for-profit hospitals.42 (see Figure 3) A Wall Street Journal analysis of more recent hospital data, from 2019 to 2021, found a similar disparity, “with nonprofits falling short of for profits in how much they spend on charity for every dollar of net patient revenue.”43
Figure 3
The shift from charity care to community benefit
Over the past 50 years, changes to requirements for nonprofit status have broadened beyond the provision of charity care. Prior to 1969, as a condition of their tax-exempt status, nonprofit hospitals were required to provide “to the extent of its financial ability, free or reduced-cost care to patients unable to pay for it.”44 In the Tax Reform Act of 1969, however, Congress expanded the types of activities that would qualify a nonprofit hospital for tax exempt status,45 allowing hospitals to include spending meant to promote community health.46 Decades later, the Affordable Care Act added four new requirements that hospitals must meet in order to qualify as a tax exempt, nonprofit hospital. The requirements, codified in Section 501(r) of the Internal Revenue Code, state that as of 2012, nonprofit hospitals must demonstrate they are:
… conducting a community health needs assessment with an accompanying implementation strategy, establishing a written financial assistance policy for medically necessary and emergency care, complying with specified limitations on hospital charges for those eligible for financial assistance, and complying with specified billing and collections requirements.47
While the intent of the new rules was to quantify the level of benefit nonprofit hospitals provide and ensure that hospitals tailored benefits to community needs, the rules do not specify a minimum value that must be provided in order to qualify for tax-exempt status.48
Over the past 50 years, changes to requirements for nonprofit status have broadened beyond the provision of charity care.
An American Hospital Association analysis estimated that nonprofit hospitals provided more than $110 billion in community benefits in 2019 based on hospitals’ reports to the IRS.49 Examples of what hospitals are claiming as community benefits range from the traditional idea of charity care to investments in population health. The overwhelming majority of community benefits that hospitals claim remains uncompensated care.50 In fact, a 2013 study found that about 85 percent of community benefit spending goes toward uncompensated care.51 Meanwhile, about 9 percent of community benefit spending goes toward population health improvements and community-building activities.52
As one example of innovative population health investments, some hospitals have partnered with community organizations to offer produce at discounted rates and accept as payment food assistance credits through programs such as the Supplemental Nutrition Assistance Program (SNAP) and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC).53 The Mayo Clinic in Rochester, Minnesota, for example, invested more than $7 million in affordable housing units in the city to help combat the impact of housing insecurity on health.54 Hospital funding for housing can spur others to invest: Nationwide Children’s Hospital invested $1.5 million toward home repairs and affordable housing, which attracted $20 million in additional loans and grants from local organizations.55Likewise, multiple hospital systems in Detroit have together invested about $18 million into supporting local businesses, hoping to reduce poverty rates in the city.56
Cincinnati Children’s Hospital Medical Center is among those that have devoted resources to neighborhoods identified as “hot spots”—areas with unusually high rates of health care utilization. The program sought to reduce hospital bed-days among children with asthma by ensuring that they had access to medication at home and school and by coordinating engagement among patients, medical professionals, and school resources post-discharge to prevent future hospitalizations.57 According to a study by Cincinnati Hospital-affiliated researchers published in Health Affairs, the program reduced the number of hospitalizations and inpatient bed days among children in target neighborhoods by about 20 percent.58
Overall, however, the ACA’s new rules on community benefits do not appear to have spurred an increase in community benefit spending. In fact, an investigation by Politico found that community benefit spending declined at several of the nation’s top hospitals.59 A few studies have attempted to quantify the general impact of the provisions on community benefit spending. For instance, one examination of nonprofit hospitals’ IRS filings from 2010 to 2014 found that community benefit spending only increased by 0.5 percent, with the majority of this rise in spending coming from increases in uncompensated care delivery.60 A 2020 study examining community benefit spending in 2016 found that nonprofit hospitals spent an overall median of $63,572 on noncharity care community benefits.61
Another study of nonprofit teaching hospitals suggests that charity care is also declining as a share of total community benefit spending: From 2012 to 2015, community benefit spending increased by 20 percent despite an accompanying 16 percent decrease in charity care spending over the same time period.62 These trends persisted even when controlling for Medicaid expansion status, although hospitals in nonexpansion states spent more on community health improvement than those in expansion states.63
One trade-off policymakers should consider is the value of hospital-funded community benefit programs relative to charity care or programs to address population health or social needs that are not routed through hospital systems. The rules for community health needs assessments (CHNAs) often prevent hospitals from syncing their plans with local public health department assessments, and the current IRS reporting process for community benefit is not conducive to monitoring and evaluation.64 Community benefit initiatives may also have unintended consequences for communities; for example, if a nonprofit hospital acquires real estate as part of a stable housing initiative, that housing stock becomes exempt from local property taxes, potentially depriving local governments of funding that could address social determinants of health more efficiently.65
Who do community benefits help?
In addition to barriers to accurately quantifying the amount and type of charity care or other community benefits that a nonprofit hospital provides, another issue for evaluating the success of community benefit initiatives is identifying who benefits. With charity care, the recipients of financial relief are the hospital’s own patients; with community benefits, the effects on a community’s health and well-being are more challenging to pinpoint and evaluate.
Overall, the evidence is mixed on whether such community interventions can lower costs or utilization. A 2018 Health Affairs study of community-based programs detected only small, statistically insignificant program impacts. For example, community health programs were associated with a decrease of less than 0.15 percent in obesity rates.66 In addition, a new randomized trial cast fresh doubt on the effectiveness of hot spotting as a technique for lowering health care costs. A Massachusetts Institute of Technology study published in the New England Journal of Medicine in January 2020 found that randomly assigning patients to a “hot-spotting” program in Camden, New Jersey, did not lower hospital admissions, raising the question of whether the findings from other, nonrandomized interventions are detecting causal impacts or simply documenting regression to the mean.67
The IRS’ broad definition of community benefit may also be rewarding nonprofit hospitals for activity they should or would undertake anyway. For example, under IRS rules, one of the ways that a hospital can demonstrate benefit to the community is by “using surplus funds to advance its medical training, education, and research programs.”68 While hospitals do play a crucial role in training physicians and other medical professionals, doing so may be in their own self-interest regardless of the tax benefit because of Medicare and Medicaid payment rules. For instance, the residency slots that belonged to the now-closed Hahnemann Hospital in Philadelphia fetched $55 million in a bankruptcy auction.69 One health system offered to pay $60 million,70 far more than the 550 slots’ associated funding allotted from CMS, which suggests that graduate medical education is a lucrative business. Furthermore, for-profit hospitals have increasingly turned to hosting residents to alleviate staffing shortages.71 Participation in graduate medical education may already be in hospitals’ self-interest independent from its status as a community benefit for tax purposes.
Yet more worrisome is that some hospitals have been engaging in practices that are antithetical to charity. The IRS definition of “charitable,” as it applies to 501(c)3 status, includes “relief of the poor, the distressed, or the underprivileged.”72 Nevertheless, some nonprofit hospitals engage in aggressive debt collection, surprise billing, and patient dumping—practices that add to patients’ financial stress and can damage the credit history of those already suffering from poor health.
Some nonprofit hospitals engage in aggressive debt collection, surprise billing, and patient dumping— practices that add to patients’ financial stress and can damage the credit history of those already suffering from poor health.
Several hospitals have routinely sued their own patients over unpaid bills. One of the most egregious examples is the nonprofit University of Virginia Health System, which sued more than 36,000 patients over medical debt. The institution halted the practice only after public outrage following exposure by the news media, and it announced in April 2021 that it would cancel all ongoing lawsuits against households with incomes below 400 percent of the federal poverty level.73 Likewise, the nonprofit Methodist University Hospital in Memphis, Tennessee, routinely sued patients for unpaid bills, according to a ProPublica analysis published in June 2019.74 Notably, only 1 percent of the more than 977,000 patients from whom the Methodist Le Bonheur Healthcare system collected overdue bills since 2014 received financial assistance.75 Later in 2019, the hospital eliminated the debts of more than 5,300 patients and reduced the debts of thousands more.76 Even amid the coronavirus crisis, hospitals have not stopped suing over debt, with thousands of patients being sued in 2020 alone.77
A study by Yale University researchers found that nonprofit hospitals were more likely to sue patients for their medical bills than their for-profit counterparts.78 The same study found that the top 10 percent of hospitals filed more than 40 percent of all lawsuits from 2014 to 2018,79 suggesting that the use of these extraordinary debt collections is concentrated among a small number of especially bad actors.
Another technique hospitals use to collect debt is wage garnishments. Garnishments over medical debt are in fact more likely to have come from nonprofit hospitals, according to an analysis of Virginia garnishment cases published in the Journal of the American Medical Association.80 Likewise, some nonprofit hospitals even place liens on personal assets, including patients’ homes and settlements from accidents.81
A study by Yale University researchers found that nonprofit hospitals were more likely to sue patients for their medical bills than their for-profit counterparts.
Beyond patient debt, some powerful nonprofit health systems have demonstrated other profit-seeking behavior that is seemingly incongruous with their mission. In December 2019, Sutter Health, the sprawling multihospital system that dominates the San Francisco Bay Area, settled with the California attorney general’s office for $575 billion over alleged anticompetitive behavior that drove up prices in Northern California.82 Nonprofit hospitals were also among those that allegedly refused to accept or delayed transfer of COVID-19 patients during the pandemic based on their insurance status.83 Strikingly, a 2021 study of Virginia hospitals published in JAMA Network Open found that although, overall, hospital lawsuits decreased after public pressure, nonprofit hospitals constituted more than 70 percent of the hospitals that continued to sue patients from September 2019 to September 2020.84
Policy recommendations to enhance nonprofit hospitals’ service to communities
A variety of regulations and enforcement mechanisms could help ensure that all nonprofit hospitals are providing meaningful benefits and fully carrying out their charity obligations. This section outlines several policy options for state and federal policymakers to achieve this goal.
Set standards for charity care eligibility and obligations
The IRS requires that hospitals make reasonable efforts to inform patients of their institution’s financial assistance policy. Yet some of the bad debt that hospitals attempt to collect and eventually write off is for people who should have been granted charity care upfront. A 2019 analysis of hospital debt collection by Kaiser Health News found that, “Together, these hospitals estimated they had given up collecting $2.7 billion in bills sent to patients who probably would have qualified for financial assistance under the hospitals’ own policies if they had filled out the applications.”85
Establishing clear, qualitative standards for charity care and other benefits is one way to hold nonprofit hospitals accountable for providing more community benefit directly related to health care. For example, standards could limit the value of the tax exclusions to the amount a hospital provides in charity care. The Alliance for Advancing Nonprofit Healthcare promotes this approach, calling for nonprofit hospitals to either provide charity care equal to the value of their federal tax burden or pay the difference in taxes.86 Illinois, meanwhile, limits nonprofit hospitals’ income tax credit at the “the cost of free or discounted services provided.”87 Similarly, Utah requires nonprofit hospitals’ community benefit spending to exceed their property tax liability for the year to receive an exemption.88 A few states, including Nevada and Georgia, even define charity care obligations as a percentage of hospital revenue,89although a drawback of this type of rule is that a hospital’s net income—the share of revenues in excess of costs—may be a better metric for financial capacity to provide charity care.
Another approach is to establish a clear rule based on the patient’s income. In January 2020, Oregon began requiring hospitals and affiliated clinics to subsidize care to patients with incomes up to 400 percent of the federal poverty level and provide a 100 percent discount to patients with incomes under 200 percent of the poverty level.90 Hospitals have the option to provide additional charity care; the state’s hospital association points out that the “requirements are a floor, not a ceiling.”91 In addition, Oregon created a uniform financial assistance application that patients can use at any hospital.92
State legislatures should also consider giving state officials greater enforcement authority over the requirements to provide charity care. In California, all mergers and acquisitions involving nonprofit health care facilities require approval from the attorney general, which presents the attorney general an opportunity to condition consent on the provision of charity care and other community benefits.93 As attorney general, Xavier Becerra used this power to sue California hospitals for providing insufficient charity care.94
Finally, states could adopt a combination of these measures. Texas nonprofit hospitals, for instance, are required to meet one of three standards: 1) charity care equivalent to state and federal tax-exempt benefits, 2) charity care equivalent to 5 percent of revenues, or 3) charity care “reasonable in relation to the community needs.”95
Tighten the definition of “community benefit”
The IRS currently requires hospitals to submit evidence of a relationship between certain forms of “community building” investments and health improvements, but it does not require such evidence for community health improvement activities.96 By requiring hospitals to set outcome goals for initiatives such as community gardens, community benefit spending may be more directly linked to programs that have an evidence base to support their impact on health outcomes. For example, the National Academy for State Health Policy has developed two model hospital reporting templates to help clarify nonprofit hospitals’ community benefit goals.97 The first focuses on creating a more accurate picture of hospital spending, and the other requires hospitals to explain the goals that community benefit spending strives to achieve, including how those goals are being measured.98
Hospitals located in relatively affluent communities could also be required to invest in the areas in their states with the greatest unmet need, even if those communities are outside of their immediate referral area. State governments should be more prescriptive in targeting hospital community benefits toward high-priority needs by prioritizing types of investments—for example, opioid use disorder, lead abatement in low-income housing, or care for people experiencing homelessness—or geographic areas toward which hospitals must dedicate at least part of their community benefits. For example, a state might require hospitals located in areas without care shortages to support mobile clinics or establish satellite health centers in underserved rural areas or inner-city neighborhoods. Hospitals could also be asked to assist with public health, such as the opioid crisis or initiatives related to social determinants of health. In 2018, for example, California conditioned the merger between Dignity Health and Catholic Healthcare Initiatives on their commitment to invest $20 million over six years in resources for people experiencing homelessness.99
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Require hospitals to engage the community in needs assessments and implementation plans
Another option to improve the value of community benefit activities to the communities served by a nonprofit hospital is to proactively require hospitals to engage communities in their community health needs assessments and include community-stated needs in their plans. Federal requirements for nonprofit hospitals only require them to solicit and take into account input from underserved, low-income, and minority populations, without an explicit requirement to include the needs raised.100
Several states go above this federal requirement in ensuring that nonprofit hospitals meaningfully include the input provided from the communities served. For example, Maryland requires nonprofit hospitals to conduct their CHNAs in consultation with community members, ensuring that they are involved throughout the process.101 Meanwhile, Rhode Island requires representation of racial or ethnic minorities in CHNAs, and California, New Hampshire, and New York all require the same for community organizations.102
All these requirements, however, solely apply to the CHNAs. Previous CAP research has highlighted the success of nonprofit hospitals at addressing community health needs when community members are included in the implementation process as well as the CHNA.103 Just as community members are more aware of the needs their communities face, they are also more aware of the solutions that will work for their communities. States should consider including representation requirements to both CHNAs and implementation plans for the needs those CHNAs document.
Require nonprofit hospitals to participate in public health programs
States could also condition some or all of the benefits of nonprofit status on hospitals’ participation in publicly funded insurance networks or in public health programs. For example, nonprofit hospitals could be required to accept reasonable rates as in-network facilities for Medicaid managed care organizations, state employee health benefit plans, or a public option plan. And in areas with care shortages, they could be required to maintain relatively unprofitable but crucial services, such as obstetrics wards or emergency departments, as a condition for tax-exempt status.
Policymakers could also require nonprofit hospitals to participate in programs to extend the nation’s health care capacity in geographic areas facing shortages or in times of crisis. For example, nonprofit status could be linked to participation in the National Disaster Medical System (NDMS), a network of hospitals that accept patients during a national emergency, with payments set at 110 percent of Medicare rates.104 The Biden administration activated the NDMS during the COVID-19 pandemic—as well as in the aftermath of Hurricane Ida in August 2021—to ensure that hospitals with shortages of space or increased demand were able to respond to these changes.105 Another possibility is to tie nonprofit status to acceptance of all patients during a public health emergency, regardless of ability to pay. For example, several nonprofit hospitals in California turned away COVID-19 patients during 2020 due to financial concerns, which worsened the strain placed on the health system in pandemic hot spots.106
In addition to requiring participation in public programs, regulators should more closely scrutinize nonprofit hospitals’ participation to ensure that they are working in the spirit of those programs. An April 2021 Kaiser Health News analysis of financial reports found that many hospitals took in millions of dollars more from the Provider Relief Fund than was needed to cover their expenses; this even included several hospitals that would have run a surplus in 2020 without relief funds.107 Nonprofit hospitals should be held accountable for contributing toward relief efforts, rather than taking needed public resources from other struggling institutions.
Limit extraordinary debt collection practices
Policymakers should prohibit nonprofit hospitals from engaging in extreme and unfair measures to collect debt. Section 501(r)(6) of the Internal Revenue Code requires that hospitals make a “reasonable effort” to inform patients of financial assistance programs before taking “extraordinary” measures to collect debt—including selling debt to a third party, garnishing wages, placing liens on property, and seizing bank accounts.108 The “reasonable effort” standard can be met by notifying the patient of the hospital’s financial assistance policy, such as by mailing a notice that a patient might not receive or open.
Federal and state law should go further to protect patients by restricting extraordinary debt collection practices and raising the standard for showing “reasonable effort.” For example, California protects patients from medical debt collection by all types of hospitals, not just nonprofits. The state’s Hospital Fair Pricing Act limits the circumstances under which hospitals can garnish wages or place liens on a patient’s primary residence.109
A bill sponsored by Sen. Chris Van Hollen (D-MD) would require providers that received federal COVID-19 relief money to “suspend” any “extraordinary collection actions” during and immediately following the public health emergency.110 The COVID-19 Medical Debt Collection Relief Act of 2021 would add crucial protections for patients during the coronavirus crisis, and policymakers should also consider enacting other permanent reforms that would apply to all hospitals’ debt collection practices during public health crises.
Empower the FTC to regulate nonprofit hospital conduct
Despite receiving a break from federal income taxes, nonprofit hospitals are in some ways actually subject to less federal oversight than their for-profit counterparts. For example, current law prohibits the Federal Trade Commission (FTC) from monitoring nonprofits hospitals’ conduct and bringing related enforcement cases. While the antitrust agency can challenge merger activity between nonprofit hospitals, current law hampers its ability to protect consumers from the conduct of nonprofit hospitals.111
Congress should grant the FTC greater authority over nonprofit hospitals. In September 2019, FTC Chairman Joseph Simons told a Senate subcommittee hearing that the statutory limits on the FTC’s authority were preventing the agency from investigating “problematic” conduct by nonprofit hospitals.112States may not always have the resources to bring cases against powerful health systems or analyze trends in the industry, and greater federal oversight could help complement states’ efforts to improve competition in health care markets.
FTC oversight is critical because the IRS’ only enforcement mechanism for Section 501(r) requirements is revocation of nonprofit status.113 The IRS has no ability to fine or otherwise penalize noncompliant hospitals.
Conclusion
Policymakers should question whether giving hospitals carte blanche for community benefits in exchange for tax breaks is the optimal way to allocate resources for public health problems and pay for care for those who cannot afford it. Some hospitals’ excess revenues come at least in part from overcharging patients; in other words, hospitals’ coffers for charity care and community benefits are effectively filled by taxing the sick. Stronger federal regulation and oversight are needed to ensure that all nonprofit hospitals properly fulfill their charitable mission.
States can aid nonprofit hospitals by identifying the most pressing areas of need among the population to ensure maximum effectiveness of community benefit dollars. Many institutions are already making innovative investments to support better health, whether through charity care, housing, or addressing chronic disease. Now, states should encourage and support more hospitals to devote their resources toward evidence-based interventions to improve health and well-being.
Acknowledgments
This publication was made possible in part by a grant from the Peter G. Peterson Foundation. The statements and the views expressed are solely the responsibility of the Center for American Progress.
Thomas Waldrop is a health care policy fellow at the Century Foundation. He contributed to this report while he was a policy analyst at the Center for American Progress.
Methodology
The authors restricted the Healthcare Cost Report Information System (HCRIS) data analysis in this report to a sample of nonfederal acute care hospitals, a subset of all hospitals included in the HCRIS. Since CMS audits only a small portion of the HCRIS reports for data related to hospital financing, many data fields in the cost reports contain unreasonable values and other errors. CAP downloaded HCRIS datasets formatted for Stata statistical software from the National Bureau of Economic Research and supplemented those data with additional variables from the original HCRIS files available from CMS.
Although hospitals are required to file cost reports annually, some reports contain more or fewer than 12 months of data. The current analysis was restricted to hospitals filing reports covering 10 months to 14 months of data, a “full-year” definition suggested by CMS for the purposes of analysis.114 This analysis also excluded hospitals with total margins above 50 percent or below negative 50 percent, values that likely resulted from erroneous data. After exclusions, CAP’s analytic sample for 2018 comprised 3,051 hospitals and 1,931 nongovernmental, nonprofit hospitals.
The authors’ longitudinal analysis of uncompensated care—which CMS defines as the sum of bad debt and charity care—across nonprofit hospitals ends in the year 2016. CMS modified its definition of charity care for the purposes of HCRIS reporting in fiscal year 2017, which means that data points involving charity care before and after that point should not be compared.115