How do Hospitals Set Their Charity Care Policies? Evidence from Nonprofit Tax Returns

Hospitals play an important role in the social insurance system by providing free and discounted care to the uninsured. In 2012, hospitals provided over $46 billion in uncompensated care -- almost 30% of Medicaid inpatient and outpatient spending that year. Despite the large economic cost of uncompensated care to hospitals, relatively little is known about how hospitals determine the amount of uncompensated care they provide.

In this paper, I study how nonprofit hospitals change their policies surrounding charity care in response to changes in local need, hospital income, and regulation/public pressure. To do so, I use data from IRS 990 tax returns for nonprofit hospitals between 2010-2015. These data provide the first opportunity to look at hospitals’ charity care policies over time and across states. A unique feature of the IRS 990 is that hospitals are required to list the federal poverty level (FPL) thresholds at which they provide free and discounted care in addition to addition to disaggregated information about charitable expenditures. I link these outcome measures to a variety of data on changes in state regulations, public funding for low-income care, and measures of need in different markets.

My first finding that hospitals’ charity care spending and policies significantly respond to external pressure. Furthermore, I find that changes in regulation only matter when coupled with significant regulatory oversight. My second finding is that hospital charity policies do not respond to changes in community need/financial status in the two years following Medicaid expansion. These results indicate that extrinsic motivation may be the driving factor behind changes in hospital charity and that altruism-based models of nonprofit behavior do not explain hospital behavior surrounding charity care at the margin.