AHP Connect Articles

Much has been written lately questioning the nonprofit status of hospitals. Opponents argue that nonprofit hospitals enjoy significant tax benefits without always providing commensurate levels of community benefit. They point to examples of nonprofit hospitals that operate more like profit-driven businesses, with high executive salaries, aggressive billing practices, and extensive investments in lucrative services and dispute that these hospitals truly serve vulnerable populations.  

While it is right to shine a light on specific examples of wrongdoing, it is both unfair and dangerous to point to them as the industry norm. At best, these arguments ignore the financial and operational complexities of the US healthcare system. At worst, they wrongly condemn well-intentioned organizations doing the best they can with the resources they have to fulfill their missions to their communities. 

Nonprofit hospitals are a vital part of the healthcare landscape, providing a wide range of services to meet the needs of their communities, which often include uninsured or underinsured individuals and families. In addition, nonprofit hospitals provide training and development support for nurses and staff, invest in clinics in underserved communities, partner with community-based organizations to address social determinants of health like affordable housing and education, and launch efforts to promote healthier behaviors, especially focusing on disease categories like heart disease and diabetes that disproportionately impact the disadvantaged. Nonprofit hospitals and healthcare philanthropy also drive innovation—new cures, new service delivery models, new preventive health initiatives—that make life-changing healthcare possible.  

However, as nonprofit hospitals work to balance their mission with their financial viability, they continue to struggle with inadequate reimbursement rates from Medicare and Medicaid. According to the American Hospital Association, Medicare and Medicaid pay less than the cost of caring for program beneficiaries—an annual shortfall of $57.8 billion borne by hospitals. Hospital uncompensated care makes up about 6 percent of the average hospital’s costs. Even public hospitals that receive tax subsidies to offset some of the costs of care for poor populations—and not all public hospitals do—only get 10 cents per dollar of cost. Private insured patients and others often make up the difference.  

Differences in Medicaid, Medicare, and commercial health reimbursement rates also continue to impact nonprofit healthcare systems’ ability to address access, health equity, and cost. According to the Medicaid and CHIP Payment and Access Commission (MACPAC), Medicaid fee-for service (FFS) inpatient hospital base payments were 22 percent below comparable Medicare rates. And when we compare how Medicare and Medicaid stack up against commercial coverage the gap is even wider. The Congressional Budget Office found commercial physician rates were 30 percent higher than Medicare rates for inpatient care and the Kaiser Family Foundation reported commercial rates are nearly 90 percent higher than Medicare. Simply put, both government and commercial payers’ reimbursement rates are too low. Low base payment levels by government and commercial payers impact the ability of hospitals to attract and retain a robust and qualified workforce, invest in innovative care models, and make critical and ongoing capital investments that can strengthen quality.  

As a result of low reimbursement rates for the under- or uninsured, US hospitals continue to struggle with profitability. Though operating margins have improved since the height of the pandemic, average operating margins are still hovering around zero. 

As nonprofit hospitals explore a broad range of programs and initiatives to become financially viable, they have come under attack for not living up to their mission. But what these critics fail to realize is that nonprofit hospitals are operating in a perfect storm fueled by low reimbursement rates for under- or uninsured patients coupled with a steep rise in operational costs which continue to put tremendous pressure on hospital systems as they try to fill both healthcare access and equity gaps. In addition, neither government nor payers can finance upstream preventive services like education programs, behavioral health, employment, and food and housing insecurity that most experts agree can have a significant impact on community health.  

Given the critical role played by nonprofit hospitals in the US and their philanthropic programs to fill the gaps that neither government nor payers can fill, and the costs of uncompensated care, we need to consider the complex operating environments surrounding nonprofit hospitals and systems before rushing to any conclusions about their charitable contributions to communities and their overall impact on community health.   

Healthcare leaders and stakeholders must work together to harness the power of nonprofit hospitals and healthcare systems and healthcare philanthropy. The ever-increasing complex needs of our patients will not be solved by any single provider, payer, or philanthropic partner. We will succeed in narrowing healthcare equity gaps by recognizing that nonprofit hospitals and healthcare philanthropy play a unique and complementary role to government and payers in making life-changing healthcare possible.  

AHP members can download our Messaging and Proof Points Toolkit for more information about spreading the word about the benefits that hospitals provide in our communities.