Using the National Academy of State Health Policy Hospital Cost Tool, we compared changes in hospital profits with changes in hospitals’ charity care and cash reserves between 2012 and 2019. We estimated substantial growth in nonprofit hospital operating profits and cash reserves in this period but no corresponding increase in charity care.
Nonprofit hospitals are exempt from paying most federal and state taxes, can issue tax-exempt bonds, and can receive tax-deductible contributions, with the expectation that they will direct proceeds to community benefit. Yet recent news articles assert that some nonprofit health systems are reducing staff, demanding payment from patients who qualify for charity care, and shifting services from low-income to high-income neighborhoods, while increasing profits.
Similarly, previous research has found that 86 percent of nonprofit hospitals did not provide more charity care than the value of their tax exemption. Moreover, nonprofit hospitals have been found to have lower ratios of charity care to total expenses than for-profit hospitals. In this study we compared the changes in charity care spending versus cash reserve balances associated with changes in profits from 2012 to 2019. We found that increases in profit at nonprofit hospitals were not correlated with increases in charity care.
Hospitals rely on cash reserves to cover capital costs such as maintaining facilities and upgrading information systems. They also use cash reserves to cover unexpected shortfalls in reimbursement from private and public payers. Furthermore, hospitals must maintain significant cash holdings to earn higher bond ratings, which lowers the cost of investing in new projects. Although cash reserves are an important component of the financial health of hospitals, significant allocation of profits toward cash reserves relative to charity care would call into question the justification for favorable tax treatment of nonprofit hospitals.
If hospitals prioritize community health over financial gain, then we would expect our research to show larger increases in charity care versus cash reserves for hospitals that increased their profits between 2012 and 2019.
Access the full report in Health Affairs.
