Most Hospitals Are No Longer Charities (But Ought To Be)

7 June 2023


(Image: “Barts in Medieval Times” from the Wellcome Collection. St. Bartholemew’s Hospital was one of only two large Catholic hospitals in London that escaped Henry VIII’s “suppression” of religious institutions.)

Through most of history, hospitals were run as charities. True, given the pre-scientific state of medicine, they were to an uncomfortable extent where the poor went to die (the wealthy could die at home under the care of their servants). But they were charities nonetheless. Well into the twentieth century a large portion of hospitals continued to be run by churches and religious orders. I’ve heard many healthcare colleagues describe past experiences negotiating with hard-nosed hospital CEOs who also happened to be nuns.

But this tradition seems to have been left in the past. Only a few purely charitable hospitals still exist, such as the Shriners Hospitals for Children.

In that context, this article in Health Affairs caught my attention: The authors, Derek Jenkins (from Rice University) and Vivian Ho (Rice University and Baylor College of Medicine) looked at cost data submitted by hospitals to CMS from 2012-2019. They found that in 2012, nonprofit hospitals reported somewhat more charity care than for-profit hospitals ($6.6M average per hospital vs $2.3M), but this gap had closed by 2019. The authors also looked at nonprofit hospitals’ margins and cash reserves, which grew quite a bit over time, even though nonprofit hospitals’ charitable spending actually dropped slightly.

A technical note here that is worth pointing out: In addition to the category “charity care,” hospitals also report separate expenses for unreimbursed care of Medicaid patients, as well as other community oriented “benefits.” Jenkins and Ho didn’t include the unreimbursed Medicaid care numbers, because previous research has shown that these numbers are artificially inflated by hospitals (e.g. by using hospital charges rather than true costs as the starting point). The authors also didn’t include the vague category of community benefits, noting (credibly) that these types of activities, including local health fairs and cancer screening outreach, tend to drive revenue for hospitals and are thus better categorized as marketing expenses.

My take: $6 million/year may sound like a lot of money, but given what we know about US healthcare costs, this is tiny. Typical hospital revenue is over $1B, and the average hospital’s 2019 non-profit margin was almost ten times as big as their charity care.

Additional technical note: there’s really no difference between “margin” and “profit.” They’re calculated exactly the same way, by subtracting expenses from revenues to see what’s left over. What defines a nonprofit company is what they’re legally allowed to do with that leftover money. They can’t give it out to investors, but they can pay huge executive salaries and build gleaming new buildings in pursuit of even more revenue.

Two additional sources of evidence on this same theme:

The Lown Institute puts out an annual “Fair share” report comparing nonprofit hospitals’ charitable expenditures against the value of their tax exemptions. (Spoiler alert: roughly 3/4 of hospitals studied spend less on charity care than they receive in tax breaks.)

And Dr. Ge Bai, a professor of accounting at the Johns Hopkins Carey Business School, recently testified in Congress regarding nonprofit hospitals’ failure to deliver community benefits commensurate with their tax breaks.

Final comment: The American Hospital Association likes to point out that in any given year, many hospitals fail to break even, let alone bring in a “healthy” margin. So maybe hospitals are trying to do charity care, but just can’t afford to do very much? It’s a legitimate question to pose. But I think that argument fails on two levels. One is that the Health Affairs article demonstrated that hospitals are increasingly diverting money away from charity care and into cash reserves. The other is that nonprofit hospitals today tend to be run in ways that are indistinguishable from for-profit businesses. They bring in McKinsey consultants to help them squeeze their patients for more money , cut off patients who are overdue on their bills, pay exorbitant executive salaries, and close down care facilities in poor neighborhoods (while expanding services in wealthier neighborhoods) If hospitals don’t act like charities, then why should governmental taxing entities treat them as charities? Even better: why don't they just embrace their historical charitable mission?

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Jamie Larson