Medical debt is a significant burden for many in the United States. Approximately four in ten adults in the US carry some form of medical debt, a figure that climbs to almost six in ten for those with household incomes below $40,000. This widespread issue results in an estimated total of $195 billion or more owed. Emergency care and hospitalizations are frequently cited as major contributors to this debt. For individuals who are uninsured or underinsured, affording necessary medical care can be especially challenging, leading to substantial and long-lasting financial strain for patients and their families. Amidst these growing concerns about medical debt and the affordability of healthcare, hospital charity care programs have emerged as a critical area of focus for policymakers. These programs are designed to offer free or discounted medical services to eligible patients who demonstrate an inability to pay for their care. But What Is Charity Care Program exactly, and how does it function within the healthcare system? This article delves into the essential aspects of hospital charity care programs, exploring their operations, eligibility criteria, and overall significance.
While charity care programs aim to provide crucial financial relief, the extent of their impact varies considerably across hospitals. An analysis of hospital cost reports reveals that for half of all hospitals in 2020, charity care costs constituted 1.4 percent or less of their operating expenses. However, the level of charity care provided differs widely among facilities. For instance, a small percentage of hospitals (8%) reported charity care costs at a minimal 0.1 percent or less of their operating expenses, while another similar portion (9%) reported significantly higher figures, at 7.0 percent or more. This variation likely stems from a combination of factors, including the differing missions and operational practices of hospitals, the varying levels of need for charity care within their patient populations, and the influence of federal, state, and local policies and regulations. The financial backing provided by these levels of government, such as tax benefits for nonprofit hospitals, underpins hospital charity care and may be a factor driving increased regulatory interest in these programs. Despite the availability of charity care, many Americans still struggle with the costs associated with hospital services. In 2022, approximately one in seven adults (14%) reported delaying necessary hospital services due to financial concerns, highlighting the ongoing challenges in healthcare affordability.
Decoding Hospital Charity Care: Definition and Key Aspects
To understand what is charity care program, it’s essential to start with a clear definition. The Internal Revenue Service (IRS) defines charity care, often referred to as “financial assistance,” as “free or discounted health services provided to individuals who meet the organization’s financial assistance eligibility criteria and are unable to pay for all or a portion of their medical services.” This definition clarifies that charity care is intended for those who genuinely cannot afford healthcare costs, based on established eligibility guidelines. It’s important to note that charity care is distinct from “bad debt,” which refers to unpaid patient bills that a hospital attempts to collect but eventually writes off. Charity care is proactively offered, while bad debt arises from unsuccessful collection efforts. Furthermore, charity care doesn’t encompass discounts like those for prompt payments, contractual adjustments with third-party payers, or the difference between Medicaid/Medicare payments and the actual cost of care.
Hospital eligibility criteria for charity care can accommodate both uninsured and insured patients, depending on the specific policies of each institution. A significant portion of community hospitals, nearly three-fifths (58%), are nonprofit and mandated by federal law to provide some level of charity care to maintain their tax-exempt status. Many state governments also have regulations requiring various categories of hospitals to offer charity care to specific patient groups. Within these regulatory frameworks, hospitals have the autonomy to define their charity care policies, resulting in variations in eligibility standards, application processes, and the extent of assistance offered. Although hospitals directly incur the costs of charity care, they may receive support from donors and government funding at various levels to offset these expenses. Research indicates that the tax exemption for nonprofit hospitals alone can cover about half of the combined costs of charity care and other community benefits they provide.
The term “uncompensated care” often arises in discussions about hospital finances, encompassing both charity care and bad debt. Understanding the distinction is crucial: charity care is planned and provided upfront to patients deemed eligible, while bad debt is the result of failed payment collection after services have been rendered. Bad debt can accumulate for various reasons. Some patients who are unable to pay might actually qualify for charity care but may be unaware of the program, find the application process too difficult, have their applications wrongly rejected, or simply choose not to apply. Therefore, addressing what is charity care program and making it more accessible is vital to reducing both medical debt and uncompensated care.
Who Qualifies for Hospital Charity Care? Understanding Eligibility
Delving deeper into what is charity care program, eligibility is a key factor. Hospitals possess considerable discretion in setting their charity care eligibility criteria, leading to significant variations from one institution to another. Income level, often benchmarked against the Federal Poverty Level (FPL), is a primary criterion. For instance, a study analyzing nonprofit hospitals using the FPL in 2018 revealed that about a third imposed strict income limits for free care, requiring patients to have incomes at or below 200% of the FPL (approximately $50,200 for a family of four in 2018) or even lower. The majority, however, adopted more generous income thresholds. For discounted care, around three-fifths of nonprofit hospitals set income eligibility at or below 400% of the FPL or lower, while the remaining portion allowed higher income levels.
Beyond income, hospitals may incorporate other eligibility criteria for free or discounted care. These can include limitations on patient assets, residency within the hospital’s service area, or extending eligibility to individuals facing substantial medical bills even if their income or assets exceed standard thresholds. For example, an analysis of charity care policies at major nonprofit and government hospitals showed that a significant majority (76%) had simplified application processes for groups likely to qualify, such as individuals experiencing homelessness.
Figure 1: Visual representation of charity care costs distribution among hospitals in 2020, highlighting the percentage of operating expenses dedicated to charity care and the variation across different hospitals.
Despite the existence of charity care programs, it remains unclear how many low-income patients are actually eligible and, among those, how many ultimately benefit. Many potentially eligible patients might not receive assistance due to a lack of awareness about the program, misunderstanding their eligibility, difficulties with the application process, wrongful denials, or simply choosing not to apply. Evidence suggests a considerable gap between eligibility and actual benefit. Nonprofit hospitals estimated that in 2019, approximately $2.7 billion of their reported bad debt from prior years (2017 or earlier) originated from patients likely eligible for charity care who did not receive it. This figure, while an estimate from unaudited reports, underscores the potential for improvement in connecting eligible patients with charity care.
The Scale of Hospital Charity Care: Quantifying the Provision
Understanding what is charity care program also requires assessing its scope. According to the Medicaid and CHIP Payment and Access Commission (MACPAC), hospitals reported $28 billion in charity care costs in fiscal year 2019, with the majority ($22 billion) directed towards uninsured individuals. Analysis of hospital cost reports for 2020 indicates that charity care expenses represented 1.4 percent or less of operating expenses for half of all hospitals, although substantial variation exists across different facilities, as illustrated in Figure 1. While the median charity care cost as a percentage of operating expenses was 1.4%, the average was 2.6% in 2020. This difference between median and average values suggests that a smaller number of hospitals are providing a larger share of total charity care.
Factors contributing to the variation in charity care levels across hospitals include their individual missions, operational strategies, the specific needs for charity care within their patient populations, and the impact of federal, state, and local policies and regulations. The Medicare Payment Advisory Commission (MedPAC) has pointed out that the current method for calculating charity costs may favor hospitals with higher markups and has recommended revisions to create a more equitable system and potentially reduce reported charity care costs on average.
Interestingly, recent research indicates that for-profit hospitals allocate a similar proportion of their operating expenses to charity care compared to government hospitals, and a comparable or even larger share than nonprofit hospitals. This might seem unexpected, given that nonprofit hospitals receive significant tax exemptions partly intended to subsidize their charity care. Possible explanations include that for-profit hospitals may be more inclined to offer charity care in some situations due to the tax deductions they can claim for these expenses. Additionally, some nonprofit hospitals might not anticipate rigorous oversight of their charity care practices from regulatory bodies.
Charity Care and Immigrant Populations: A Safety Net
Hospital charity care programs can be particularly crucial for protecting both undocumented and lawfully present immigrants from overwhelming medical expenses. These populations are statistically more likely to have lower incomes and lack health insurance compared to citizens. In 2020, approximately four in ten undocumented and lawfully present nonelderly immigrants had incomes below 200% of the FPL, compared to about a quarter of nonelderly citizens. Furthermore, uninsured rates are significantly higher among nonelderly undocumented immigrants (42%) and lawfully present immigrants (26%) than nonelderly citizens (less than 10%). This disparity is linked to limited access to private health coverage and immigration status-based restrictions in publicly funded health insurance programs.
While charity care programs offer financial aid for some immigrants, research suggests that immigrants, overall, tend to utilize less healthcare, including hospital services, compared to U.S.-born citizens. The extent to which immigrants benefit from charity care programs and how their utilization compares to that of citizens remains an area requiring further investigation. However, for those immigrants who do require hospital care and face financial barriers, charity care programs serve as an essential safety net.
Federal Regulations: Charity Care and Tax-Exempt Status
To fully grasp what is charity care program, it’s vital to understand the regulatory landscape. Federal regulations mandate that nonprofit hospitals must provide a certain level of charity care and other community benefits as a condition for maintaining their tax-exempt status. The IRS defines various categories of community benefits, including patient benefits like charity care, system benefits such as unreimbursed medical education, and community-building activities like addressing environmental health hazards. A study from 2017 indicated that unreimbursed Medicaid expenses constituted the largest portion (44%) of nonprofit hospitals’ community benefit spending, followed by charity care (17%).
To maintain their tax-exempt status, nonprofit hospitals must adhere to several key requirements:
- Establish a Financial Assistance Policy (FAP): The FAP must clearly outline eligibility criteria for charity care, the level of assistance provided, and the application process. Hospitals are required to make their FAP easily accessible to patients and ensure it is translated into languages commonly spoken in the community they serve.
- Limit Charges to Charity Care Eligible Patients: Charges must be capped based on amounts generally billed to insured patients. Federal regulations define methods for calculating these amounts using Medicare rates, Medicaid rates, and/or commercial plan payment rates.
- Conduct Community Health Needs Assessments (CHNAs): Hospitals must conduct a CHNA every three years and implement a strategy to address identified needs. The CHNA should define the community served, assess its health needs with input from local stakeholders, and identify areas for improvement, such as reducing financial barriers to care or addressing social determinants of health.
- Reasonable Efforts for Charity Care Eligibility Determination: Before engaging in certain debt collection practices (like selling debt, reporting to credit agencies, or legal actions), hospitals must make reasonable efforts to determine if a patient is eligible for charity care. This includes notifying patients about the FAP and allowing at least four months to apply after the initial post-discharge bill.
Despite these federal regulations, loopholes and inadequate oversight can sometimes result in hospitals providing minimal charity care. Current federal regulations do not specify minimum standards for charity care eligibility or assistance levels. A 2020 Government Accountability Office (GAO) report raised concerns about the enforcement of community benefit requirements. It highlighted that the IRS had not revoked any hospital’s nonprofit status in the preceding decade due to insufficient community benefits.
State-Level Charity Care Mandates: Expanding the Safety Net
In addition to federal requirements, many states have implemented their own charity care regulations, further shaping what is charity care program looks like across the country. Over half of all states (26 states and DC) mandate that some or all hospitals extend charity care eligibility to certain patient groups. Among these, 11 states (CA, CO, CT, IL, MD, ME, NJ, NV, NY, RI, and WA) apply minimum standards broadly to for-profit, nonprofit, and government hospitals. The remaining state laws target narrower hospital categories, such as nonprofit or government hospitals, hospitals receiving specific government funding for low-income care, or hospitals seeking approval for expansion or new facilities.
State regulations also vary in terms of eligibility criteria and assistance levels. For example, Nevada requires specific hospitals to offer free care to uninsured patients with very low incomes, while Maryland mandates all acute and chronic care hospitals to provide free care to both insured and uninsured patients below 200% of the FPL and discounted care to those with higher incomes. Beyond eligibility, several states have implemented rules to enhance charity care uptake and protect potentially eligible patients from aggressive debt collection. These include requirements for hospitals to screen patients for charity care eligibility, notify patients about charity care options, and establish appeal processes for charity care denials.
However, information on the effectiveness and enforcement of these state regulations is limited. Recent examples of state enforcement actions include California’s Attorney General issuing alerts to hospitals for failing to provide charity care policy descriptions in patients’ languages and Washington State’s Attorney General filing a lawsuit against hospitals for violating state charity care requirements, including sending bills to collections for patients known to be charity care eligible.
Government Programs: Supporting Hospitals and Charity Care
Government programs, particularly Medicaid and Medicare, play a critical role in helping hospitals manage charity care expenses and reducing overall uncompensated care. Medicaid, by providing health coverage to low-income individuals, directly reduces the demand for hospital charity care. The impact of Medicaid expansion under the Affordable Care Act (ACA) in 2014 vividly illustrates this. In states that expanded Medicaid, total uncompensated care costs for hospitals decreased significantly, while in non-expansion states, the decrease was minimal.
Both Medicaid and Medicare offer supplemental payments to hospitals partly intended to offset charity care and other uncompensated care costs. These include:
- Medicaid Disproportionate Share Hospital (DSH) payments: These payments are allocated to hospitals serving a high proportion of low-income patients.
- Medicare DSH payments: Similar to Medicaid DSH, these payments support hospitals treating a substantial number of low-income Medicare beneficiaries.
Other state and federal programs further support hospitals, indirectly reducing the financial burden of charity care. Some state and local governments operate programs beyond Medicaid to provide coverage or offset uncompensated care costs. The 340B Drug Pricing Program, for example, offers significant financial support primarily to hospitals serving a large low-income population by requiring drug manufacturers to provide discounted outpatient drugs. These additional revenues help hospitals cover operational costs, including charity care provision.
Charity Care During the Pandemic: Stability Amidst Disruption
The COVID-19 pandemic significantly disrupted hospital operations, but government relief efforts helped stabilize hospital finances and maintain charity care spending. While hospital admissions initially declined sharply, they rebounded, and substantial government funding, primarily through the federal Provider Relief Fund (PRF), was allocated to hospitals and other providers to cover pandemic-related expenses and lost revenues. The PRF program, totaling $134 billion as of late 2022, initially distributed funds based on total patient revenue, later earmarking $16 billion for safety-net hospitals. Additionally, the government reimbursed providers for treating uninsured COVID-19 patients, totaling $5.8 billion until funding ceased in March 2022.
Despite operational disruptions and financial strains from the pandemic, average charity care costs as a percentage of operating expenses remained relatively stable, at 2.7% in 2019 and 2.6% in 2020. A study of large nonprofit and government hospitals revealed that about 31% expanded their charity care policies between 2019 and 2021, while only a small percentage (less than 10%) moved towards more restrictive policies.
However, recent reports suggest a deteriorating financial outlook for hospitals, potentially impacting their ability to sustain current charity care levels. Ongoing challenges like labor shortages, decreased government relief, rising drug costs, and broader economic pressures necessitate continued monitoring of hospital financial health and its implications for charity care provision.
The Future of Charity Care: Policy Directions
Looking ahead, persistent concerns about hospital care affordability and medical debt are driving policy discussions at both federal and state levels to strengthen hospital charity care programs. These discussions include potential changes to tax-exemption requirements for nonprofit hospitals and broader reforms applicable to all hospitals. Specific policy proposals include:
- Mandating Charity Care for Patients Below Specific Income Thresholds: Establishing clear income-based eligibility criteria for charity care across all hospitals.
- Setting Minimum Community Benefit Requirements for Nonprofit Hospitals: Requiring nonprofit hospitals to provide a minimum level of community benefits, including charity care, to justify their tax-exempt status.
- Implementing Floor-and-Trade Systems: Creating systems where hospitals must either provide a minimum level of charity care or financially support other hospitals that do.
- Enhancing Charity Care Uptake: Introducing policies to improve patient awareness of and access to charity care programs, simplifying application processes, and ensuring fair eligibility determinations.
- Strengthening Oversight and Enforcement: Increasing regulatory scrutiny and enforcement of community benefit requirements to ensure hospitals fulfill their charity care obligations.
- Restructuring Tax Exemptions: Reforming the tax exemption for nonprofit hospitals to more closely align government subsidies with the value of charity care and other community benefits provided.
- Aligning Community Benefits with Local Needs: Developing strategies to better align hospital community benefit programs with specific local or regional health needs, potentially influencing charity care provision.
Recent policy activity has been primarily at the state level, with states like California, Washington, Colorado, and Illinois expanding charity care mandates, enhancing enforcement mechanisms, and introducing new reporting requirements. State and federal policymakers are also considering broader strategies to reduce medical debt and improve healthcare affordability, such as Medicaid expansion, healthcare price regulation, and enhanced consumer protections against medical debt.
Expanding hospital charity care programs inevitably involves trade-offs, particularly concerning the potential financial impact on hospitals from providing free or discounted care to patients unable to pay. However, in the face of persistent healthcare affordability challenges, strengthening charity care programs remains a vital strategy to ensure access to essential hospital services for vulnerable populations.
Methods
Our analysis of reported charity care costs as a percentage of operating expenses is based on 2019-2020 RAND Hospital Data, which is a processed version of annual cost report data submitted by hospitals to the Healthcare Cost Report Information System (HCRIS). HCRIS data includes cost reports from all US hospitals certified by Medicare, excluding federal hospitals and some children’s hospitals. HCRIS guidelines specify that hospitals should report both charity care and uninsured discounts as part of their charity care costs. The Medicare Payment Advisory Commission (MedPAC) has noted that current HCRIS calculations may favor hospitals with higher markups and suggested revisions for a more equitable comparison of charity care costs. Our analysis used a calendar year version of the RAND Hospital Data, which adjusts data for hospitals with non-calendar year reporting periods. We focused on short-term general hospitals in all 50 states and DC. Missing charity care costs were recoded as $0 if total unreimbursed and uncompensated care costs were reported (affecting approximately 3% of hospitals), and left as missing otherwise. There were no other instances of $0 charity care costs in our sample. Hospitals with incomplete calendar year data, missing or negative operating expenses or charity care costs, or outlier charity care percentages (≥38.0%) were excluded. The final sample for 2020 included 4,279 short-term general hospitals. For the 2019-2020 comparison, the sample was restricted to 4,236 hospitals present in both years. We tested adjustments to our analysis, such as dropping all hospitals with missing charity care costs or restricting the sample to calendar year reporters, and found no substantial changes to our primary findings.
This work was supported in part by Arnold Ventures. KFF maintains full editorial control over all of its policy analysis, polling, and journalism activities.
Topics: Health Costs, Health Coverage and Access
Tags: Charity Care, Community Benefits, Hospitals, Uninsured
