The charity offering

In 2010, Memorial Medical Center, a small hospital in rural San Augustine, Texas, saw its financial losses grow along with demand from patients who could not afford to pay. The hospital's subsidies for free medical care to low-income patients swallowed 4.5% of its budget by the end of the year.

One of Oklahoma's largest hospitals spent a similar share of its fiscal 2010 budget—roughly 5%—to cover the cost of medical care for patients who were unable to pay. But St. John's Medical Center in Tulsa did so with one enviable difference: The hospital finished 2010 solidly in the black with a margin of 10.8%.

Both are among the roughly 60% of private U.S. hospitals that receive local, state and federal tax breaks in exchange for operations that benefit the community.

The two hospitals' largely similar spending to subsidize medical care despite a yawning gap in their margins is not unusual. The income gulf between the nation's wealthiest hospitals and those with razor-thin or negative margins is wide. When it comes to spending on free medical care and other subsidized services, the difference largely disappears.

Modern Healthcare found no correlation between margins and spending on free care in an analysis of roughly 2,500 tax records for organizations that operate tax-exempt hospitals.

The results suggest that profits do not determine what hospitals spend on free and discounted care and other subsidized services to benefit the community, experts said.

“The first thing that it suggests is that the community benefit expenditures depends upon factors other than how well they're doing economically,” said Bradford Gray, a senior fellow with the Urban Institute, who studies not-for-profit hospital operations. Varying needs for free medical care or other subsidized services could influence what hospitals spend, he said. So might the priorities of the governing board. “Hospital boards have the ability to say we aren't doing enough on charity and we should be doing more,” he said.

Capital plans that prompt hospitals to seek to build reserves to invest may also influence what hospitals spend on community benefits, he said. 

The same held true in an analysis of spending on a broader group of hospital activities the Internal Revenue Service counts as “community benefits,” such as community health services, donations, medical education and research.

Data analyzed by Modern Healthcare, provided by the not-for-profit charity watchdog GuideStar, includes 2009 and 2010 figures reported under new disclosure rules intended to yield a clearer accounting of the public benefits that tax-exempt hospitals provide.

The aggregate income for the set of hospitals improved to $37.4 billion in 2010 from $26.5 billion in 2009, a 41% jump. The overall increases in charity care and community benefits were less than 1%.

A correlation, were there one, would likely emerge between hospitals with smaller margins and greater spending on charity care because the charitable expense lowers margins, said Nancy Kane, a professor of management with the Harvard University School of Public Health. However, Kane said, it's largely irrelevant to the broader public debate about how much of a financial boost hospitals receive from their tax breaks and whether they spend at least as much on free care and other subsidized services.

In that debate, the value of tax breaks, not income, is what matters, she said. That figure—the financial boon from tax breaks—is estimated between 3% to 5% of hospital patient revenues, Kane said, based on research and a dated estimate from the Congressional Joint Committee on Taxation.

Hospitals' tax breaks amounted to $12 billion, the congressional committee estimated in 2002. Iowa hospitals received an estimated $58 million in tax breaks, the Des Moines Register reported in December 2011. Meanwhile, that state's not-for-profit hospitals reported combined income of $295 million, the newspaper's analysis found.

Hospitals are not held to any federal threshold for spending on community benefits or charity care, and until recently, were not required to report such data. Tax-exempt hospitals have operated for decades with only loose standards and limited or voluntary public accounting for how they earn those tax breaks.

Demand from patient advocates, states and Congress for greater transparency led at the end of the past decade to new federal disclosure rules. And last year, hospitals released for the first time an itemized, standard list of subsidies for medical care and other services that more broadly benefit the public, such as training for doctors and research.

One proposal to create such as standard, put forward by the Senate Finance Committee in 2007, called for at least 5% of hospitals' budgets to be spent on free and discounted care. By that measure, roughly nine out of 10 tax-exempt hospital organizations that reported charity care as a percentage of expenses in 2010 would fall short.

Texas requires hospitals to meet one of three standards to earn tax breaks, including one that requires spending on subsidies for research, education and healthcare to total 5% of patient revenue.

Of that, Texas requires that 4% must be spending on free and discounted care or losses for patients enrolled in public safety net insurance, such as Medicaid. Slightly more than one- third of the nation's hospitals would fail to meet that requirement, based on an analysis of spending on charity care and Medicaid shortfalls and revenue that excluded investment income.

San Augustine's Memorial Medical Center spent 9.58% of its revenue on free care and Medicaid losses. Memorial Health System of East Texas, which includes the hospital, subsidizes its losses, said Kristi Gay, chief financial officer for the system.

Nationally, free and discounted care as a percentage of expenses increased in 2010. The median hospital reported 1.7% of total expenses went toward charity care, from 1.5% the prior year. The median total amount also increased to $1.3 million from $1.2 million the prior year.

Modern Healthcare included only those hospitals with data for both years, which excluded roughly 100 organizations for which 2010 data was available, but 2009 figures were not.

Health policy experts and industry executives say comparisons of charity care spending do not capture the dynamics of insurance coverage in markets where hospitals operate. A highly insured, affluent community will need less free medical care but could benefit from other subsidized services. Hospitals in states with more generous Medicaid eligibility may also see fewer uninsured patients.

Nearly two-thirds of patients of Sanford Health of Northern Minnesota, which operates the Sanford Bemidji (Minn.) Medical Center, are covered by Medicare and Medicaid, a fact that reflects the community's age and low incomes, said Joy Johnson, the organization's chief operating officer.

Sanford Health of Northern Minnesota, a subsidiary of Sioux Falls, S.D.-based Sanford Health, closed the year that ended in September 2011 with a net margin of roughly 15%. Free and discounted care totaled $405,519 that year, but the organization did not report losses on Medicaid.

Hospital officials also say an exclusive focus on subsidies for free care unfairly excludes other subsidized services that meet unmet needs and benefit communities. Community benefit spending at the median hospital in 2010 accounted for 7.1% of total expenses. The median hospital spent $5.6 million on all community benefits that year.

Tim Loch, chief financial officer for Excela Health, which owns three Pennsylvania hospitals, said the system's trustees monitor total spending on benefits to the community and increased such spending in 2010 after an outside consultant said the amount should total more than 5% of expenses.

Excela Health's spending solely on free care was among the lowest in the nation in 2010, by percentage of expenses, at 0.23% or $893,308. But total community benefit spending accounted for 6.25% of its budget, which includes residency programs, behavioral healthcare and other community programs. “We're comfortable” with that figure, Loch said.

At Poudre Valley Health System in Colorado, efforts under way since 2009 to expand low-income patients' access to primary care and urgent care has sharply increased spending on subsidized healthcare to $26.1 million in 2010 from $8.8 million in 2009, said Rulon Stacey, president of the University of Colorado Health, which includes Poudre Valley Health System and the University of Colorado Hospitals.

That figure includes free and discounted care for low-income patients not reflected in charity care, which only captures aid for hospital patients. Subsidized care such as clinics and urgent-care centers accounted for 7.4% of Poudre Valley Health System's 2010 expenses. Free and discounted care for hospital patients accounted for 0.71% of expenses that year.

And as hospitals seek to improve medical care to prevent avoidable hospital visits and trips to the emergency room, the shift toward greater subsidies outside the hospital will accelerate, he said. “Today, it's all changed,” Stacey said.

TAKEAWAY: Margins don't appear to affect how much tax-exempt hospitals spend on free and discounted care or other community benefits.