Health Affairs
"Substantial growth in nonprofit hospital operating profits and cash reserves" yielded no "corresponding increase in charity care," a new study in Health Affairs said. The American Hospital Association strongly criticized the report's methodology and the findings.

Nonprofit Hospitals’ Profits Are Up But Charity Care Is Not, Study Finds

Nonprofit hospitals’ profits and cash reserves grew substantially between 2012 and 2019 without a corresponding rise in spending on charity care, a new study in the June issue of Health Affairs found.

The American Hospital Association quickly issued a rebuttal. It said the study “uses a flawed, debunked methodology to justify preconceived conclusions about how hospitals manage their finances.”

Nonprofit hospitals get the majority of 340B drug discounts. Drug manufacturers want to focus hospitals’ 340B participation tightly on care for patients who cannot pay. Hospitals say policymakers should not tamper with providers’ broad discretion about how to use 340B revenue.

Arnold Ventures and 340B

Rice University researcher Derek Jenkins, and Vivian Ho, a researcher with Rice University and Baylor College of Medicine, conducted the study. It was funded by Arnold Ventures, a philanthropy founded by a former hedge fund manager that devotes significant attention to drug pricing.

Last month, Health Affairs published a study that found that that 340B hospitals are less likely than others to use biosimilar drugs, “possibly as a result of financial incentives making reference drugs more profitable than biosimilar medications.” Its lead researcher reported receiving grants from Arnold Ventures. Arnold currently is financing a research project, due to end in August 2024, entitled “Generating Evidence on 340B for Future Policy Debates.”

Study’s Findings

“Mean hospital profits grew from 2012 to 2019, but this increase was not associated with provision of more charity care by nonprofit hospitals, even though their cash reserve balances increased,” the new study in Health Affairs said. “In contrast, although charity care is not required for for-profit hospitals, an increase in profit was associated with an increase in charity care for them; this may be because spending on charity care is tax deductible.”

They added, “Nonprofit hospitals are exempt from paying most federal and state taxes, can issue tax-exempt bonds, and can receive tax-deductible contributions, with the expectation that they will direct proceeds to community benefit. Yet recent news articles assert that some nonprofit health systems are reducing staff, demanding payment from patients who qualify for charity care, and shifting services from low-income to high-income neighborhoods, while increasing profits.”

The Health Affairs study focused on 2,219 nonprofit hospitals and 564 for-profit hospitals and used the National Academy of State Health Policy (NASHP) Hospital Cost Tool to compare changes in hospital profits with changes in hospitals’ charity care and cash reserves. NASHP is an Arnold Ventures grantee.

The study found that, from 2012 to 2019:

  • Nonprofit hospitals’ mean operating profits rose to $58.6 million from $43 million, while for-profit hospitals’ mean operating profits grew to $43.4 million from $31.9 million.
  • Nonprofit hospitals’ cash reserve balances increased to $224.3 million from $133.3 million, while for-profit hospitals’ cash reserve balances jumped to $181.2 million from $101.8 million.
  • Nonprofit hospitals’ charity care spending dropped to $6.4 million from $6.7 million, while for-profit hospitals charity care spending rose to $6.3 million from $2.3 million.

“The allocation of nonprofit hospital profits toward cash reserves rather than charity care has important policy implications,” the researchers said, noting that more emphasis on charity care would help ease U.S. families’ financial stress. 

“Although hospitals must maintain cash reserves to weather financial crises, they may also be borrowing on these reserves to build facilities in new locations to expand their market share,” they said. These new locations are often in wealthier areas, they said.

They added, “Our results suggest that linking minimum contributions to charity care with profit increases may be helpful. With operating profits for nonprofit hospitals growing, the share of community health benefits they provide should also be growing to justify their favorable tax treatment.”

AHA’s Response

AHA General Counsel and Secretary Melinda Hatton wrote in a June 7 blog post, “Despite the repeated efforts by some organizations to claim otherwise, it is clear that by examining the facts that tax exempt hospitals and health systems, regardless of size and location, provide a full range of benefits to their patients and communities in exchange for that privilege. In total, all hospitals do far more than any other sector of the health care field for those in need and to advance health for all.”

Hatton said the study has an “irreconcilable limitation” by not accounting for broader coverage trends that may directly affect how financial assistance was measured. “As a result, this article is of no real value to policymakers and other stakeholders,” she said. 

The study is also flawed due to its heavy reliance on the NASHP cost tool, which Hatton said inflates hospital profits, and its failure to account for significant health care coverage growth due to the Affordable Care Act. 

Also, the study misrepresents federal requirements on tax exemption by focusing almost solely on charity care instead of the full spectrum of community benefits, she said, 

Hatton also charged that study sponsor Arnold Ventures “has a history of funding misleading and one-sided reports.”

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