As nonprofit hospitals' cash reserves grew, charity care spending fell

While the cash reserves of hospitals grew between 2012 and 2019, spending on charity care decreased among nonprofit hospitals and increased among for-profit hospitals, according to a study published in Health Affairs

The study examines 2,783 hospitals — 2,219 nonprofit and 564 for-profit — and their Medicare Cost Reports for 2012 and 2019. It is authored by Derek Jenkins, PhD, and Vivian Ho, PhD, both affiliated with Rice University in Houston.

Cash reserve balances grew for hospitals of each profit status. Nonprofit hospitals increased their mean cash reserve balance from 2012 to 2019, going from $133.34 million to $224.33 million, an increase of 68 percent. For-profit hospitals saw an increase from $101.81 million to $181.15 million, an increase of 78 percent. 

By contrast, spending on charity care diverged for nonprofit and for-profit hospitals. For-profit hospitals' charity care spending grew from $2.29 million to $6.30 million, an increase of 175 percent. The study authors note that while charity care is not required for for-profit hospitals, spending on charity care is tax deductible. Nonprofit hospitals' charity care spending fell from $6.65 million in 2012 to $6.36 million in 2019, a drop of about 4.4 percent. 

Nonprofit hospitals' allocation of profits toward cash reserves rather than charity care has important policy implications.

"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," the authors wrote. "These new locations are often in wealthier areas, and hospitals' prioritizing market expansion over community benefits invalidates their rationale for favorable tax treatment."

The study zeroes in on 2012 compared to 2019, which pre-dates the COVID-19 pandemic that strongly affected hospital finances and margins. Data from KFF found that the $27.6 billion in estimated tax exemptions for nonprofit hospitals still exceeded their total estimated charity care costs of $16 billion in 2020.

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