The Value of Nonprofit Hospitals

By | May 9, 2022

There has been a great deal of focus on whether nonprofit hospitals bring value to the communities they serve in proportion to their tax-exempt status. The argument is that the tax dollars are necessary and properly utilized for community benefit; therefore, a tax-exempt status requires community benefit in replacement of payments.

The measure used as a metric for the “success” of tax-exempt status is the amount of free care provided to justify the tax avoidance. However, numerous other metrics also require our attention. One such measure is the services provided in a market. In a model where competition has the effect of “cherry-picking” profitable, lower acuity procedures and care, hospitals in general, are left taking care of those that do not meet the “criteria” for services by many of these providers. Therefore, it’s crucial to examine whether there is a difference in services provided by for-profit versus nonprofit and government hospitals.

Horwitz et al. did this examination and reported their findings in a recent Health Affairs article, Hospital Service Offerings Still Differ Substantially By Owner Type. Though all three categories tend to be more likely to offer services when they are relatively profitable, for-profit hospitals are considerably more likely than the others to provide services based on profitability. After adjusting for the hospital and market characteristics, they found nonprofit hospitals offer relatively unprofitable services more than for-profit hospitals and fewer than government hospitals. Profitable services exhibited the opposite effect. They also found that for-profit hospitals are more likely to discontinue services based on profitability than the other two categories.

This scenario is not unexpected since for-profit hospitals have investors to answer to, and they pay taxes. However, it’s pertinent to realize that the tax component is vital to the equation. If we remove that “advantage,” we risk decreasing needed services for significant portions of our communities. And this will increase the burden on governmental support for a community both owning and operating its own hospitals, as well as paying for services from a for-profit entity in a manner that has a higher price point because of the need to show a return on capital and making tax payments.

As we manage the polarity of the hospital taxation question, it’s crucial to recognize that there are complexities and metrics beyond merely providing free care. Being a backstop for needed services is an important variable that is paramount to the delivery of needed care to all. Since there is a public need for healthcare, it’s crucial to consider all components. A free-market mode leading to tax payments have limitations when we consider the public needs supported by the community and cultural values. Undoubtedly, there is potential for countless improvements in multitudes of dimensions; however, we must examine the unintended consequences as we consider remedies for our healthcare woes.