Blog: How hospitals earn tax breaks (sort of)

Nothing in federal law says that hospitals with tax breaks for providing a community benefit must spend money to provide free medical care or subsidize other healthcare services. The standards by which hospitals earn tax breaks are lax, and have been so for more than four decades.

Nonetheless, tax-exempt hospitals must now publicly disclose the amount they spend on such subsidies. The Internal Revenue Service required the disclosure after Congressional scrutiny of the not-for-profit hospital sector, and the first data become available last year. This week, Modern Healthcare reported the latest figures with data provided by GuideStar, a not-for-profit watchdog.

As we reported, hospital margins do not appear to determine what hospitals spend on free medical care for low-income patients (known as charity care) or the subsidized services that federal officials have deemed community benefits, according to an analysis of 2010 reporting to the Internal Revenue Service.

But an analysis of size (as measured by total expenses) shows that larger organizations spend a greater share of their budgets on charity care and community benefits, though the gap was smaller for free and discounted care.

The top 25% of organizations spent 1.97% on charity care and 8.25% on all community benefits. The bottom quarter of organizations spent 1.17% on charity care and 5.58% on community benefits.

For the statically minded, here's a breakdown of charity and community benefit spending, by quartile.

One-quarter of the nation's hospitals reported that charity care accounted for less than 1% (0.77% or less) of their total expenses in 2010.

Another quarter reported charity care accounted for 0.78% to 1.69% of total expenses.

Charity care spending accounted for 1.7% to 3.11% among the third quartile of hospitals.

The top quarter of the nation's hospitals spent 3.12% or more of expenses on charity care.

Here's a similar breakdown for all community benefit costs, including losses on Medicaid, subsidized health services and spending on medical education, research and other donations.

Community benefit spending totaled 4.41% or less among the bottom 25% of hospitals.

The next quarter spent between 4.42% and 7.12% of expenses on community benefits.

Among the third quartile, community benefits as a percentage of expenses ranged from 7.13% and to 10.23%.

Those that spend the most spent at least 10.24% of expenses on benefits to the community.

Finally, federal law may be silent on charity care spending by tax-exempt hospitals, but others have been more vocal. Texas law includes charity care spending in one of three alternative routes by which hospitals may qualify for tax breaks. One 2007 Senate Finance Committee proposal called for hospitals to spend at least 5% of their budgets on charity care alone. As we reported, that would exclude roughly 90% of the organizations that disclosed charity care spending in 2010.

You can follow Melanie Evans on Twitter: @MHmevans.