Why Non-Profit Hospitals Don't Profit From Government Interference

Sen. Chuck Grassley’s (R.-Iowa) Finance Committee recently disclosed findings from a review of 10 non-profit hospitals in the United States questioning whether these giant corporations provide enough charity care to merit their tax breaks. Such hospitals have been scrutinized for several years now, and the suspicion surrounding their non-profit status isn’t new.

The main problem is that non-profit hospitals may provide less care to the poor than their for-profit counterparts, or overcharge the uninsured—but this is not completely the fault of the hospitals. In many cases it is simply a response to bad government policy.

The term “charity care” broadly means discounted or free care for the poor and uninsured. The definition varies nationwide, in part because the federal government has variously intervened with non-profit hospitals since the 1940s. Federal flip-flop on the issue is well-established.

In 1946, the Hill-Burton Act provided government grants to non-profit hospitals in exchange for charity or discounted care for poor patients. In 1969, the IRS changed the definition of “charitable services” for non-profit hospitals, removing the requirement that non-profit hospitals provide free or discounted care if they did not have emergency rooms. In 1983, the IRS allowed some hospitals without emergency rooms to have tax-exempt status in order to promote charity care, again.

Finally, the Emergency Medical Treatment and Labor Act (EMTALA) of 1986 stated that hospitals with emergency departments must stabilize patients in emergency condition. But the law does not provide payment for such services to uninsured patients or oversee how hospitals should bill.

The development of Medicare and Medicaid in the 1960s was particularly disastrous for hospitals because the government-imposed prices for care of patients enrolled in these federal programs were ultimately lower than the actual cost of administering care. The fiscal strain of this federal double standard still affects hospitals today.

Hospitals are required to provide vaguely defined charity care to patients with absolutely no guarantee of adequate compensation. The result is that many non-profit hospitals overcharge patients because they can’t afford not to.

Notwithstanding some corrupt behavior, many hospitals are prey to these perverse government policies, specifically price fixing, which complicate the methods by which hospitals might provide discounts on their own. Hospitals’ response to those bad government policies, unfortunately, has been even worse.

Non-profit hospitals have raised their prices for other patients, hence the outrageous fees for those, underinsured uninsured, who don’t quite qualify for charity care. Further, instead of demanding reforms that let them undertake charitable actions without fear of government entanglement, hospitals generally oppose competition with other specialty hospitals, those they accuse of “cherry picking” low-risk patients who can pay top dollar.

Government requirements have only discouraged efficiency and good incentives for non-profit hospitals. No wonder some entertain the idea of revoking non-profit status from hospitals entirely. While others argue that this would limit the necessary resources to offer discounted or charity care, studies show that for-profit and non-profit hospitals generally provide the same amounts of charity care.

If the government taxed these hospitals, where should the income go?  Certainly not to unreformed, money-gobbling programs like Medicaid and Medicare. A more optimistic option would be to fund tax credits that enabled uninsured patients to open Health Savings Accounts. Consumer-directed solutions do not fix the bad incentives created by our tax code and welfare policies, but they are a wise first step to help those who cannot afford their medical bills.

If we choose to preserve hospitals’ time-honored non-profit status, we need to reform the laws that affect them: bureaucratic and convoluted government policies only promote bad behavior. Hospitals must be freed from excessive government restrictions which have hampered competition, but they must be held to a standard for charity care which is clear to patients and hospitals alike. Both will be better off if charity care was clearly defined, and if hospitals didn’t struggle financially to provide it.