Are nonprofit hospitals serving their fair share of Medicaid patients?

Nonprofit hospitals receive billions in tax breaks each year in exchange for providing community benefits that improve health. Of the several types of community benefits hospitals provide, the largest category of spending is Medicaid shortfall, the difference between hospitals’ cost of Medicaid patients and their reimbursements. Nearly half (44%) of nonprofit hospitals’ total community benefit spending was from Medicaid shortfall in 2017.

Hospitals refer to Medicaid shortfall as evidence that they are serving Medicaid patients in their community, and thus fulfilling their community benefit requirement. But do nonprofit hospitals spend more on Medicaid costs than their for-profit counterparts?

In a recent article in JAMA Network Open, professor of accounting at Johns Hopkins University Dr. Ge Bai and colleagues compared reported spending on Medicaid shortfall across 3,446 nonprofit and for-profit hospitals in 2019. They compared hospitals within the same state to adjust for each state’s Medicaid reimbursement rates.

They found that in about half of US states with both types of hospitals, for-profit hospitals had higher unreimbursed Medicaid costs as a share of their expenses compared to nonprofit hospitals. The difference between Medicaid shortfall between nonprofit and for-profit hospitals was similar in states that expanded Medicaid and states that did not. Overall, the average nonprofit hospital saw 2.51% of its expenses going to Medicaid shortfall; for the typical for-profit hospital the rate was 2.53%.

“The nonprofit hospitals have not done enough to deserve their tax subsidy.”

Dr. Ge Bai, in Modern Healthcare

This article is one of many recent studies that call to question whether or not nonprofit hospitals are doing enough to earn their tax-exempt status. Last year, the Lown Institute found that 72% of private nonprofit hospitals spent less on meaningful community benefits than the estimated value of their tax exemption. In total, nonprofit hospitals were short $17 billion in unrealized community investment.

Researchers have questioned whether Medicaid shortfall should be included as a community benefit, given that states set their Medicaid rates at a level believed to be sufficient to cover hospital costs of delivering care. If the IRS does not consider discounts for other insurers, such as Medicare or commercial insurers, to be community benefits, why should Medicaid be different? While charity care spending reflects the amount patients would pay absent of hospital policy, Medicaid shortfall does not convey a hospital policy choice. For these reasons, the Lown Hospitals Index does not include Medicaid shortfall under “meaningful community benefits.”

Yet even if Medicaid shortfall was included, the study from Bai et al. shows that nonprofits still don’t exceed what for-profits spend. “Whether we look at community benefit as a whole or certain components of how the IRS defines it, it doesn’t always appear that not-for-profits are delivering community benefit at levels of magnitude commensurate with what they actually receive in tax subsidies,” said Gary Young, director of the Center for Health Policy and Healthcare Research at Northeastern University, in Modern Healthcare.

Dr. Bai put it more bluntly. “The nonprofit hospitals have not done enough to deserve their tax subsidy. Taxpayers subsidize hospitals to help struggling, working-class Americans, but many nonprofits are not doing enough,” she said.