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.