Nonprofit Hospitals Offer Less Charity Care Despite Rising Profits

Nonprofit hospitals are directing profit increases toward cash reserves instead of charity care, a study published in Health Affairs found.

Hospitals use cash reserves to cover capital costs, offset unexpected shortfalls in reimbursement, and earn higher bond ratings. However, allocating more profits to cash reserves than to charity care raises concerns about the mission of nonprofit hospitals.

Researchers from Rice University’s Baker Institute for Public Policy used Medicare cost reports from 2012 to 2019 and the National Academy for State Health Policy’s (NASHP) Hospital Cost Tool to assess the changes in nonprofit and for-profit hospitals’ profits, cash reserves, and charity care spending.

The sample included 2,219 nonprofit hospitals and 564 for-profit hospitals. From 2012 to 2019, the mean hospital operating profit of nonprofit hospitals increased from $43.01 million to $58.61 million. Cash reserve balances also grew, rising from $133.34 million to $224.33 million.

Meanwhile, nonprofit hospitals’ charity care spending decreased from $6.65 million in 2012 to $6.36 million in 2019.

The mean operating profit of for-profit hospitals grew from $31.85 million in 2012 to $43.38 million in 2019, while cash reserves rose from $101.81 million to $181.15 million.

Unlike nonprofit hospitals, for-profit hospitals’ spending on charity care increased from $2.29 million to $6.30 million during this time. For-profit hospitals had a four-cent increase in charity care spending associated with each one-dollar increase in profit.

For all hospitals in the sample, each one-dollar increase in profit was associated with a $1.74 increase in cash reserves. The growth in cash reserves was $1.73 for nonprofit hospitals and $1.92 for for-profit hospitals.

Every one-dollar rise in profit was associated with a two-cent increase in charity care spending for for-profit hospitals. The association between profit changes and charity care spending changes for nonprofit hospitals was statistically insignificant, the study noted.

The findings suggest that nonprofit hospitals are using profit increases to bolster their cash reserves instead of increasing their spending on charity care and other community benefits.

Directing more hospital profits to charity care could help minimize the financial challenges people face in the US, given that 41 percent of adults have medical debt and 24 percent have past-due medical bills, per KFF.

“There are several actions that policymakers could take to ensure that nonprofit hospitals fulfill their obligations to their communities,” Derek Jenkins, a post-doctoral scholar in health economics at the Baker Institute and co-author of the study, said in a press release.

“There should be more careful auditing of community benefits provided by hospitals, minimum requirements for community benefit spending, increased hospital price transparency, and mandatory representation of external advocates for patient access and affordability on hospital boards.”

In order to justify nonprofit hospitals’ tax exemption status, community health benefits should be growing as profits increase, researchers stated.

A KFF analysis found that tax exemptions for nonprofit hospitals totaled $26.7 billion in 2020, while these hospitals spent just $16 billion on charity care. However, the American Hospital Association (AHA) noted that the analysis only considered financial assistance, which is only one aspect of community benefits.