Years of rising operating profits and cash reserves did not translate to greater charity care across the nation’s nonprofit hospitals, according to a study published this week in Health Affairs.
The analysis, conducted by Rice University researchers, reviewed financial data from nearly 2,800 short-term acute care and critical access hospitals submitted to the Centers for Medicare & Medicaid Services between 2012 and 2019.
While the sample’s 564 for-profit hospitals saw a slight rise in charity spending alongside their rising financial positions, 2,219 nonprofits collectively decreased their average spending as their fortunes increased, the researchers found.
“With operating profits for nonprofit hospitals growing, the share of community health benefits they provide should also be growing to justify their favorable tax treatment,” they wrote in Health Affairs.
Mean hospital operating profits at nonprofit hospitals rose from $43 million in 2012 to $58.6 million in 2019, while their cash reserve balances rose from an average of $101.8 million to $224.3 million, according to the study. During the same period, their mean charity care spending dropped from $6.7 million to $6.4 million.
A regression analysis using those numbers found that a one-dollar increase in profit between those years “was not associated with a statistically significant increase in charity care” among nonprofit hospitals, the researchers wrote. However, each dollar increase was associated with a $1.73 increase in cash reserves at nonprofit hospitals.
The results painted for-profit hospitals in a better light. Their mean hospital operating profit rose from $31.9 million to $43.4 million during the study period while average cash reserves grew from $101.8 million to $181.2 million.
Mean charity care spending jumped from $2.3 million to $6.3 million to land roughly on par with nonprofit hospitals’ average charity spend. In the regression analysis, a dollar increase in for-profit hospitals’ profits was significantly associated with a $0.04 rise in charity care spending and a $1.92 increase in cash reserves.
The trends among both hospital ownership types generally persisted in subsequent analyses controlling for highly skewed dependent variables and general sensitivity. Researchers also stressed that their findings don’t imply causality between hospital profits and charity spending and that the analysis did not explore what impact changes in Affordable Care Act subsidies or Medicaid expansion may have had on charity policies.
Cash reserves are a key component of hospitals’ financial sustainability. The money not only helps hospitals pay for facility maintenance and upgrades but also is used to cover unexpected revenue shortfalls and secure higher bond ratings.
Still, the researchers wrote, “significant allocation of profits toward cash reserves relative to charity care would call into question the justification for favorable tax treatment of nonprofit hospitals,” as those tax exemptions are provided under the premise that nonprofit hospitals are deploying their untaxed funds for the benefit of their communities.
Limited charity contributions are concerning in light of the large portion of Americans with medical debt, the researchers wrote, and call into question whether current IRS requirements for nonprofits’ giving should be tightened.
“The IRS has not stated specific quantitative requirements for the community benefits that nonprofit hospitals must provide,” they wrote. “Our results suggest that linking minimum contributions to charity care with profit increases may be helpful.”
The new study joins a slew of data characterizing nonprofits’ tax savings and the impact those funds could have if deployed elsewhere. A March analysis from the Kaiser Family Foundation pegged the sector’s annual collective exemptions at $27.6 billion, while an April report from the Lown Institute suggested that the $14.2 billion difference between 1,773 private nonprofits’ tax breaks and community investments could “rescue the finances of every rural hospital at risk of closure” or wipe the medical debts of 18 million Americans.
The hospital industry typically denounces these analyses for their criteria for which hospital spending is or isn’t considered part of an organization’s community investment. The latest report was no exception as the American Hospital Association (AHA) General Counsel and Secretary Melinda Hatton wrote in a Wednesday blog post that the study "is of no real value to policymakers and other stakeholders" due to its methodology and funding.
Hatton wrote that the National Academy for State Health Policy hospital cost tool used in the study "systematically underrepresents true hospital costs" and inflates hospital profits.
She also pointed to the study author's decision to only focus on charity care and ignores other spending that falls under the IRS' definition of community benefits. In the study, the researchers wrote that they chose to exclude those measures because they are likely overestimated, relatively small in magnitude or are offset by the “marketing-related effects” those actions have on their reputation.
Additionally, Hatton noted that the study was funded by Arnold Ventures, "an organization that has a history of funding misleading and one-sided reports."
"Despite the repeated efforts by some organizations to claim otherwise, it is clear that by examining the facts that tax exempt hospitals and health systems, regardless of size and location, provide a full range of benefits to their patients and communities in exchange for that privilege," Hatton wrote in the post. "In total, all hospitals do far more than any other sector of the healthcare field for those in need and to advance health for all."
The AHA's preferred report concludes that, in 2019, nonprofit hospitals and health systems provided $9 in community benefits for every tax dollar they didn’t pay. That analysis was conducted by Ernst & Young on behalf of the AHA.
Editor's note: This article was updated on June 8 with a response from the American Hospital Association.