With health-care prices and medical debt skyrocketing, it’s not surprising to see headlines calling for the government to expand Medicaid programs to help poorer patients. Another approach exists, however, that would cover low-income patients, avoid Medicaid’s lackluster health outcomes, and cost taxpayers much less.

Though few may be aware of it, nonprofit hospitals offer a private safety net that Americans can opt into right now. It’s called charity care—and nonprofit hospitals should take it more seriously. If government can give hospitals clearer guidelines, Americans could benefit from lower taxes, while fewer low-income patients would get sent to debt collectors.

IRS Section 501(r) requires all nonprofit hospitals exempt from federal and state taxes to set forth a “financial assistance policy”—that is, to establish charity programs that offer free or discounted care to low-income patients. Considering that 76 percent of U.S. community hospitals are nonprofits, charity care should be accessible to many Americans. One study even found that one in three hospitals offers comprehensive charity care to patients earning less than 200 percent of the federal poverty level—if this were an industry standard everywhere, nearly 90 million Americans could qualify for charity care.

But recent evidence suggests that few Americans are benefiting from this option. Many revenue-rich nonprofit hospitals are not offering enough charity care to offset the $24 billion in tax breaks they get—in fact, they’re offering less of it than their for-profit counterparts. In 2019, hospitals reported spending $28 billion covering uncompensated care, which sounds impressive until you consider that the U.S. spends $4 trillion a year on health care, so that $28 billion represents just 0.7 percent of total spending. The Kaiser Family Foundation found that, at half of all reporting hospitals, charity care accounted for only 1.4 percent or less of operating expenses. This suggests that many hospitals could spend far more on charity care, and that too many eligible patients are unaware of the programs.

Douglas Aldeen, a consultant and attorney who works with organizations that help patients with charity-care applications, says that “when reviewing nonprofit hospitals’ charity care percentages relative to gross revenue, it’s not uncommon to see less than 3% of its gross revenue allocated to charity care.”

What can be done to increase the use of charity care? Most state governments have vague charity-care guidelines, but few have effective ways in place to audit, update, or evaluate hospitals’ charity-care performance. Many states also defer to hospitals to report on charity-care policies as they please. Hospitals thus face no accountability for lackluster charity-care policies, or for investing in adjacent community projects that add more value for the hospital than the community.

Simple policy changes in disclosure, transparency, and reporting about hospitals’ charity-care programs could make a big difference. Not all hospitals have the same resources; nor do they serve communities with equal incomes. Every region has different needs, meaning solutions will look different from state to state. For some states, the answer could be as simple as removing an outdated print newspaper ad disclosure requirement and replacing it with intake-disclosure forms to inform patients about charity-care options. For others, it could be setting a statewide income floor for charity-care eligibility. For hospitals with a history of illegal or dishonest practices, the solution could be to establish a formal penalty process for failing to offer adequate charity care.

In some cases, states have held nonprofit hospitals accountable. Some courts have ruled that underperforming hospitals must start paying state taxes. Additionally, a few states, after conducting legislative audits that have uncovered inconsistencies in charity-care spending, are demanding more transparency. But these instances are rare and do not necessarily expand the amount of charity care provided to patients in need.

Nonprofit hospitals play a key role in communities and often save lives. But states have granted these organizations multibillion-dollar tax benefits, expecting them to invest most of these savings into the communities they serve. With tax exemptions comes community responsibility.

The controversy over Medicaid expansion will continue. But with one in ten adults saddled with medical debt, and with Medicaid swelling to more than 90 million enrollees, it’s time to do more than just hand out coverage cards that have been shown to deliver little value. We need to explore solutions that expand access.

Photo: 123light/iStock


City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next