About four in ten adults (41%) in the United States are grappling with medical debt, a staggering figure that climbs to nearly six in ten (57%) for those with household incomes below $40,000. This financial burden amounts to an estimated $195 billion or more nationwide. Emergency care and hospitalizations are frequently cited as the primary drivers of this debt, affecting a significant portion of Americans, especially those uninsured or underinsured. The repercussions of unpaid hospital bills can be devastating, leading to long-term financial instability for individuals and families. Recent reports highlight that some hospitals, even while operating with healthy profit margins, are situated in regions where residents are heavily burdened by medical debt, raising concerns about healthcare affordability and accessibility. In response to this growing crisis, policymakers are increasingly focusing on strengthening regulations around hospital Charity Care programs. These programs are designed to offer financial relief by providing free or discounted services to eligible patients who cannot afford the full cost of their medical care.
This article delves into the critical aspects of hospital charity care programs. An analysis of hospital cost reports reveals that in 2020, for half of all hospitals, charity care expenses constituted 1.4 percent or less of their total operating expenses. However, there was significant variation across different facilities (as illustrated in Figure 1). For instance, a small percentage of hospitals (8%) reported charity care costs at or below 0.1 percent of their operating expenses, while a similar proportion (9%) reported costs at 7.0 percent or higher. This disparity likely stems from a combination of factors including the hospital’s mission, its operational practices, the level of need for charity care within its patient population, and the influence of federal, state, and local policies and regulations. Government funding, including tax benefits for nonprofit hospitals, plays a role in supporting hospital charity care, which in turn motivates increased scrutiny and regulation of these programs. Despite the vital role of charity care in assisting uninsured and underinsured patients, many Americans still struggle to afford necessary hospital services. In 2022, approximately one in seven adults (14%) reported delaying needed hospital care in the past year due to financial constraints.
Defining Hospital Charity Care and Financial Assistance
The Internal Revenue Service (IRS) provides a clear definition of “charity care,” also known 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 part of their medical services.” It’s crucial to distinguish charity care from “bad debt.” Bad debt refers to unpaid bills that a hospital has attempted to collect but deems uncollectible. Charity care, on the other hand, is care for which hospitals do not expect payment from the outset, provided to patients who qualify based on their financial need. It’s also important to note that charity care, as defined by the IRS, does not include bad debt, discounts for prompt payment or contractual adjustments with third-party payers, or the difference between costs and reimbursements from government programs like Medicaid and Medicare.
Hospitals, depending on their specific policies, may extend charity care to both uninsured and insured patients who meet their eligibility criteria. Federal law mandates that nonprofit hospitals, which constitute nearly three-fifths (58%) of all community hospitals, must provide a certain level of charity care to maintain their tax-exempt status. Many state governments also have regulations requiring some or all hospitals to offer charity care to specific patient groups. Within these regulatory frameworks, hospitals have the autonomy to establish their own charity care policies, which can vary significantly regarding eligibility requirements, application processes, and the extent of financial assistance offered. While hospitals directly incur the costs of providing charity care, they may receive support from donors and government funding at various levels to offset these expenses. Studies suggest that the tax exemption granted to nonprofit hospitals alone can cover a substantial portion (around 50%) of the costs associated with charity care and other community benefits they provide.
The term “uncompensated care” is often used to encompass both charity care and bad debt, representing the total amount of care provided by hospitals for which they do not receive direct payment. Bad debt arises when patients are either unable or unwilling to pay for their medical services. It is possible that some patients classified as bad debt might actually be eligible for charity care but are either unaware of the program, face difficulties in applying, have their applications wrongly denied, or choose not to apply for assistance.
Who Qualifies for Hospital Charity Care Programs?
Eligibility criteria for hospital charity care are not uniform and vary widely across different institutions, as hospitals have considerable discretion in setting their own policies. For example, an analysis examining nonprofit hospitals using the federal poverty level (FPL) as a benchmark for free care eligibility in 2018 revealed significant differences. Approximately one-third (32%) of these hospitals had strict income requirements, offering free care only to patients with incomes at or below 200% of the FPL (which was $50,200 for a family of four in 2018) or even lower. In contrast, the majority (68%) had more lenient income thresholds for free care. For discounted care, about three-fifths (62%) of nonprofit hospitals restricted eligibility to patients with incomes at or below 400% of the FPL or lower, while the remaining 38% had higher income limits.
Beyond income levels tied to the FPL, hospitals may also consider other factors when determining charity care eligibility. These may include limitations on patient assets, residency within the hospital’s service area, or extending eligibility to patients facing substantial medical bills even if their income or assets exceed standard thresholds. One study analyzing charity care policies at 170 large nonprofit and government hospitals found that a significant majority (76%) had streamlined application processes for specific vulnerable groups, such as individuals experiencing homelessness, who are highly likely to qualify for assistance.
Despite the availability of charity care programs, it remains unclear what proportion of low-income patients are actually eligible and, among those eligible, how many successfully access these benefits and what portion of their medical expenses are covered. Several barriers can prevent eligible patients from receiving charity care. These include lack of awareness about the existence of charity care programs, misunderstanding of eligibility criteria, complex application procedures, improper denials by hospitals, or a patient’s choice not to apply. Evidence suggests that a considerable number of eligible patients may not be benefiting from charity care. Nonprofit hospitals estimated that approximately $2.7 billion of their reported bad debt in 2019 (related to expenses from 2017 or earlier) originated from patients who were likely eligible for charity care but did not receive it. This figure, while an estimate based on unaudited hospital reports and limited to nonprofit facilities, underscores a potential gap in access to charity care. Moreover, it does not account for instances where eligible patients paid bills that could have been reduced under a hospital’s charity care policy.
The Extent of Charity Care Provided by Hospitals
According to the Medicaid and CHIP Payment and Access Commission (MACPAC), hospitals across the US reported approximately $28 billion in charity care costs in fiscal year 2019, with the majority ($22 billion) allocated to uninsured individuals. Analysis of hospital cost reports for 2020 indicates that for half of all hospitals, charity care costs represented 1.4 percent or less of their operating expenses. However, the level of charity care provision varied significantly across facilities (Figure 1). For example, while some hospitals (8%) reported charity care costs at or below 0.1% of operating expenses, others (9%) reported 7.0% or more. The average charity care cost as a percentage of operating expenses in 2020 was 2.6%, which is higher than the median due to a relatively small number of hospitals reporting substantial charity care amounts. These variations likely reflect differences in hospital missions, operational models, the needs of their patient populations, and the impact of federal, state, and local regulations. The Medicare Payment Advisory Commission (MedPAC) has pointed out that the current methodology for calculating charity care costs may favor hospitals with higher price markups. MedPAC has recommended revisions to create a more equitable system and potentially lower average reported charity care costs.
Figure 1: Charity Care Costs as a Percent of Operating Expenses, 2020
Figure 1: This bar chart illustrates the distribution of charity care costs as a percentage of total operating expenses across US hospitals in 2020. The data highlights the wide variation, with a significant portion of hospitals reporting very low charity care percentages, while a smaller group shows much higher percentages, indicating disparities in charity care provision across the healthcare system.
Recent studies have revealed a somewhat surprising trend: for-profit hospitals, on average, dedicate a similar proportion of their operating expenses to charity care as government hospitals and a comparable or even larger proportion than nonprofit hospitals. This might seem counterintuitive given that nonprofit hospitals benefit from substantial tax exemptions, partly intended to subsidize their charity care provision. Possible explanations for this finding include the fact that for-profit hospitals can claim tax deductions for charity care expenses, potentially incentivizing them to provide such care in certain situations. Additionally, some nonprofit hospitals may face less stringent oversight of their charity care practices from government regulators.
Charity Care and Immigrant Populations
Hospital charity care programs are particularly important for protecting undocumented and lawfully present immigrants from overwhelming medical expenses. These populations are disproportionately likely to have lower incomes and lack health insurance compared to US citizens. In 2020, approximately four in ten undocumented and lawfully present nonelderly immigrants (44% and 39%, respectively) had incomes below 200% of the FPL, compared to about a quarter (26%) of nonelderly citizens. Furthermore, uninsured rates were significantly higher among nonelderly undocumented immigrants (42%) and lawfully present immigrants (26%) compared to nonelderly citizens (8%). This disparity is driven by limited access to private health insurance and restrictions based on immigration status in publicly funded health coverage programs. While charity care offers financial assistance for some immigrants, research indicates that immigrants, in general, utilize less healthcare, including hospital services, than US-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.
Federal Regulations and Tax-Exempt Status for Nonprofit Hospitals
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 (such as charity care), system benefits (like unreimbursed medical education), and community-building activities (e.g., addressing environmental hazards). In 2017, unreimbursed Medicaid expenses constituted the largest portion (44%) of nonprofit hospitals’ community benefit expenditures, followed by charity care (17%), unreimbursed health professions education (15%), and other categories. “Unreimbursed expenses” for Medicaid and other means-tested programs refer to the difference between hospital costs for patients in these programs and the revenues received. Unreimbursed expenses from other payers are generally not included in community benefit calculations.
To maintain their tax-exempt status, nonprofit hospitals are required to adhere to several key federal regulations:
- Establish a Financial Assistance Policy (FAP): The FAP must clearly define eligibility criteria for charity care, the level of assistance provided, and the application process. Hospitals must ensure that the FAP is easily accessible to patients and translated into languages commonly spoken in the community they serve.
- Limit Charges to Charity Care Eligible Patients: Charges to patients eligible for charity care must be capped based on amounts generally billed to insured patients. Federal regulations outline methods for calculating these amounts using Medicare, Medicaid, or commercial insurance payment rates.
- Conduct Community Health Needs Assessments (CHNAs): Nonprofit hospitals must conduct a CHNA every three years and implement a strategy to address identified community health needs. The CHNA should define the hospital’s service community and assess its health needs, incorporating input from local stakeholders. These needs can include reducing financial barriers to healthcare or improving social determinants of health.
- Reasonable Efforts for Charity Care Eligibility Determination: Hospitals must make reasonable efforts to determine if a patient is eligible for charity care before engaging in specific debt collection actions, such as selling debt to third parties, reporting to credit agencies, or initiating legal action. “Reasonable efforts” can include notifying patients about the FAP and providing at least four months to apply after the initial post-discharge bill.
Despite these regulations, gaps in federal oversight and enforcement may allow some hospitals to provide minimal levels of charity care. Current federal regulations do not specify minimum standards for charity care eligibility or the level of assistance that must be provided. A 2020 report from the Government Accountability Office (GAO) raised concerns about the adequacy of enforcement of community benefit requirements, including charity care. The report noted that the IRS had not revoked any hospital’s nonprofit status for insufficient community benefits in the preceding decade.
State-Level Charity Care Requirements
Over half of US states (26 states and Washington DC) have implemented additional charity care requirements for some or all hospitals, as reported by the National Consumer Law Center in 2021. Eleven of these states (California, Colorado, Connecticut, Illinois, Maryland, Maine, New Jersey, Nevada, New York, Rhode Island, and Washington) broadly apply minimum standards to for-profit, nonprofit, and government hospitals. The remaining 16 states have laws that apply to more specific groups of hospitals, such as nonprofit or government hospitals, hospitals receiving certain types of government funding for low-income care, or hospitals seeking approval for expansion or new construction. These state regulations also vary in terms of eligibility criteria and the level of assistance required. For instance, Nevada mandates free care for uninsured patients with extremely low incomes at certain hospitals, while Maryland requires all acute and chronic care hospitals to provide free care to both insured and uninsured patients below 200% of the FPL and discounted care for those with higher incomes.
In addition to setting eligibility standards, several states have implemented regulations to improve charity care uptake among eligible patients and protect potentially eligible patients from aggressive debt collection practices. For example, some states require hospitals to screen patients for charity care eligibility, notify patients about charity care availability before or during collections, and establish appeal processes for denied charity care applications.
Information on the effectiveness and enforcement of these state regulations is limited. Recent enforcement actions include the California Attorney General sending letters to hospitals regarding the translation of charity care policies and a lawsuit by the Washington Attorney General against 14 hospitals for violating state charity care requirements, including sending bills to collections for patients known to be eligible for assistance.
The Role of Government Programs in Supporting Charity Care
Government programs, particularly Medicaid and Medicare, play a crucial role in supporting hospitals and reducing the need for charity care. Medicaid, by providing health coverage to low-income individuals, significantly reduces uncompensated care costs and the demand for hospital charity care. This was particularly evident after the expansion of Medicaid under the Affordable Care Act (ACA) in many states in 2014. Hospitals in states that expanded Medicaid saw a 34% decrease in total uncompensated care costs between 2013 and 2014, compared to a minimal 1% decrease in non-expansion states.
Both Medicaid and Medicare provide supplemental payments to hospitals, partly intended to offset charity care and other uncompensated care expenses. These include:
- Medicaid Disproportionate Share Hospital (DSH) Payments: These payments are specifically designed to support hospitals that serve a high proportion of low-income patients.
- Medicare DSH Payments: Similar to Medicaid DSH payments, Medicare DSH payments provide financial assistance to hospitals serving a significant number of low-income patients covered by Medicare.
Other federal and state programs also contribute to hospital financial stability, indirectly reducing the burden of charity care. For example, some state and local governments have programs beyond Medicaid to provide coverage or offset uncompensated care costs. The 340B Drug Pricing Program provides substantial financial support, primarily to hospitals serving a large low-income population, by requiring drug manufacturers to offer discounted outpatient drugs to participating hospitals. Sales of 340B drugs totaled an estimated $44 billion in 2021, with DSH hospitals accounting for the majority (78%) of these sales. These additional revenues help hospitals cover operating expenses, including costs related to charity care provision.
Charity Care Provision During the COVID-19 Pandemic
The COVID-19 pandemic caused significant disruptions to hospital operations, but government relief funding helped stabilize hospital finances and charity care spending. While hospital admissions initially declined sharply, they later rebounded. The federal Provider Relief Fund (PRF) program distributed a substantial $134 billion to hospitals and other providers by early October 2022 to address pandemic-related expenses and lost revenues. Although initial PRF distributions favored hospitals with higher revenues from private insurance, later allocations included $16 billion specifically for safety-net hospitals. Additionally, the government reimbursed providers, including hospitals, for treating uninsured COVID-19 patients, totaling $5.8 billion until the program ended in March 2022 due to funding shortages.
Studies indicate that while average hospital operating margins decreased significantly in 2020 when excluding COVID-19 relief funds, total margins, including relief funds, remained relatively stable. Similarly, average charity care costs as a percentage of operating expenses remained consistent at 2.7% in 2019 and 2.6% in 2020. An analysis of large nonprofit and government hospitals showed that approximately 31% expanded their charity care policies between 2019 and 2021, while less than 10% became more restrictive, with the majority making minimal or no changes.
However, recent reports suggest a worsening financial outlook for hospitals due to factors like labor shortages, reduced government relief, rising drug costs, and broader economic pressures. This may create challenges for hospitals to maintain current levels of charity care. Continued monitoring is necessary to assess the financial strain on hospitals and its impact on charity care provision.
The Future of Charity Care Policy
In light of ongoing concerns about healthcare affordability and medical debt, various policy proposals are being considered at the federal and state levels to strengthen hospital charity care programs. These proposals range from reinforcing requirements for nonprofit hospitals to maintain tax-exempt status to broader reforms applicable to all hospitals. Specific ideas include:
- Establishing or expanding requirements for hospitals to provide charity care to patients below specified income thresholds.
- Mandating minimum levels of community benefits, including charity care, for nonprofit hospitals.
- Creating “floor-and-trade” systems where hospitals could either provide a minimum amount of charity care or subsidize other hospitals that do.
- Implementing policies to increase patient uptake of charity care programs.
- Enhancing oversight and enforcement of community benefit requirements.
- Restructuring tax exemptions 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 and regional health needs, which could also influence charity care provision.
Recent policy activity has been primarily at the state level. For example, California and Washington have expanded charity care mandates to cover more patients through higher income eligibility thresholds. Colorado has introduced a private right of action to enforce hospital compliance with charity care requirements, and Illinois has implemented new reporting requirements for charity care programs. State and federal policymakers are also exploring other 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, including potential financial implications for hospitals as they provide more free or discounted care to patients unable to pay.
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| Our analysis of reported charity care costs as a percent of operating expenses is based on 2019-2020 RAND Hospital Data, which is a cleaned and processed version of annual cost report data submitted by hospitals to the Healthcare Cost Report Information System (HCRIS). Every Medicare-certified hospital must submit a cost report, meaning that HCRIS data encompass all US hospitals except federal hospitals and some children’s hospitals. HCRIS instructions indicate that hospitals should report amounts related to both their charity care and uninsured discounts as part of their charity care costs. The Medicare Payment Advisory Commission (MedPAC) has noted that current HCRIS calculations favor hospitals with higher markups, and it has recommended revisions that would put hospitals on more equal footing and reduce reported charity care costs on average. Our analysis relied on a calendar year version of the RAND Hospital Data, which apportions data from different cost reports for hospitals that do not use a calendar year reporting period. We focused on short-term general hospitals in all 50 states plus DC. We recoded missing charity care costs as $0 if the hospital reported total unreimbursed and uncompensated care costs (affecting about 3% of hospitals) but left as missing otherwise. There were no other instances of $0 charity care costs in our sample. We excluded hospitals with incomplete data for the calendar year, missing or negative operating expenses or charity care costs, or outlier amounts of charity care as a percent of operating expenses (greater than or equal to 38.0%, i.e., the top 0.1% of hospitals). Our final sample for 2020 included 4,279 of the 4,546 short-term general hospitals in the 2020 RAND Hospital Data. When comparing charity care costs in 2019 and 2020, we restricted the sample to the 4,236 hospitals that were in sample in both years. We evaluated two adjustments to our analysis and found that neither substantially affected our primary findings. First, we found that dropping all hospitals with missing charity care costs, rather than recoding a subset as $0, would result in a similar median value for charity care costs as a percent of operating expenses (1.5% versus 1.4%) and the same mean value (2.6%), with somewhat less variation across hospitals than in our analysis. For example, under this alternative approach, charity care costs would represent 0.2 percent of operating expenses or less among eleven percent of hospitals and 7.0 percent of operating costs or more among nine percent of hospitals. Second, as with our analysis comparing 2019 and 2020, when further restricting the sample to the 1,628 hospitals that used a calendar year reporting period in both years, average charity care costs as a percent of operating expenses remained relatively constant over time (at 2.3% in 2019 and 2.2% in 2020). |
This work was supported in part by Arnold Ventures. KFF maintains full editorial control over all of its policy analysis, polling, and journalism activities.
