Medicaid underpayments increasingly drive community benefits for nonprofit hospitals

Medicaid underpayments consumed a large and growing share of community benefits reported by hospitals on their tax forms, according to a new analysis.

The share of community benefit nonprofit hospitals attributed to covering Medicaid underpayments for care increased from 32% in 2011 to nearly 45% in 2021, according to an analysis by the American Hospital Association (AHA) and the Catholic Health Association. Meanwhile, the share attributed to financial assistance, or charity care, decreased from 23% in 2011 to 14% in 2021.

“Shifts in federal and state policy can significantly impact the distribution of community benefits from year to year,” said AHA in a release on the report.

The report examined eight categories of benefits reported to the IRS through Form 990 Schedule H.

Medicaid shift

The report noted that states that expanded Medicaid eligibility — as allowed by the Affordable Care Act (ACA) — in 2013 to 2020 saw a 34% increase in Medicaid enrollment, or 13 million new Medicaid beneficiaries.

“As a result, hospitals in Medicaid expansion states experienced an increase in their Medicaid shortfall, with an associated decrease in financial assistance, as individuals who were previously uninsured and would have otherwise sought financial assistance were now enrolled in Medicaid,” the report said. “This rise in Medicaid coverage and reduction in financial assistance following Medicaid expansion was a widely expected trend among policymakers and researchers.”

The report found that Medicaid shortfall expenses at expansion-state hospitals increased from 2.4% of total expenses in the year before expansion to 3.2% three years after expansion. In contrast, the Medicaid shortfall and financial assistance levels at hospitals in non-expansion states “remained approximately the same” before and after 2014. 

However, the report’s finding that Medicaid shortfalls comprise a growing share of non-profit hospitals’ reported community benefit may elicit increased criticism. That’s because outside entities that examine whether hospitals’ community benefit adequately offsets tax benefits hospitals receive through their nonprofit status often do not count Medicaid underpayments.

Various criticisms of hospitals’ community benefit and nonprofit tax status has drawn support from some politicians and resulted in state legislation. That includes an Indiana bill to require nonprofit hospitals to pay state taxes if their rates are more than 200% of Medicare rates.

Thomas Campanella, a healthcare consultant and professor emeritus of Health Economics at Baldwin Wallace University, said the ACA’s Medicaid expansion worked as intended and left hospitals in “a better position than they were prior to the passage of the ACA.”

However, he was critical of hospitals counting Medicaid underpayments toward their community benefit. Instead, he said, “Hospitals need to change their business model to increasingly focus on keeping people healthy rather than focusing on the after-event.”

AHA has pushed back on criticism of including Medicaid underpayment in community benefit calculations based on the fact hospitals accepting payment for less than the cost of care effectively helps “lessen government burden,” which is a cornerstone of the IRS tax exemption. Additionally, hospitals—uniquely in healthcare—cannot deny emergent care to patients based on their insurance status, which means that hospitals must absorb Medicaid underpayments.

AHA noted that in 2022, combined Medicaid and Medicare underpayments totaled $130 billion.

“Recent discussions of non-profit hospitals and their tax-exempt status have focused on concerns regarding specific measures of benefits while ignoring others in a way that misrepresents the extent of the community benefits provided,” said the report.

Wide variation

The report also found big differences between hospital types in the share each category of cost contributed to their community benefit.

Medicaid underpayments’ share of hospitals’ community benefit included:

• 42% for community hospitals
• 52% for children’s hospitals
• 44% for teaching hospitals
• 40% for critical access hospitals (CAHs)

Meanwhile, charity care’s share of community benefit included:

• 16% for community hospitals
• 3% for children’s hospitals
• 13% for teaching hospitals
• 14% for CAHs

The report noted that CAHs have lower shares of both financial assistance and Medicaid shortfall and attributed it to them using their limited resources to subsidize a greater number of core services.

Teaching hospitals are located in large urban areas with disproportionately more Medicaid patients, which drives up the share of their community benefit in Medicaid payment shortfall while lowering the share from charity care, said the report.

Children’s hospitals provide the lowest amount of financial assistance across hospital types, the report noted. However, they incur the highest amount of Medicaid shortfall as a percentage of community benefit because Medicaid and CHIP cover many children and few are uninsured.