Nonprofit Hospitals and Medical Debt in Indiana

Introduction

About 41% of Americans have some form of medical debt. This debt disproportionately affects low-income individuals and those in poor health. When individuals are unable to pay their medical bills, hospitals often pursue collections. Medical debt is a particularly serious problem in Indiana, where approximately 16% of families have medical debt in collections. In some rural counties, the rate is as high as 28%. Communities of color are disproportionately affected, with one in four families reporting medical debts in collection. When hospitals pursue collections and deem the debt unlikely to be paid, it is reported as “bad debt.”

As Americans continue to struggle with medical debt, health care is becoming increasingly unaffordable. Hospital prices have been rising faster than in any other sector, outpacing education, housing, food, and general inflation. From 2013–22, total annual premiums for families with employer-based health insurance in Indiana rose from $15,724 to $21,502, with the employee contribution making up an average of $4,300 to $6,105. However, many people with medical debt lack insurance. In fact, 8% of families in Indiana are uninsured.

Nonprofit hospitals were created to provide low-income and disadvantaged communities with greater health care access. Today, about half of all hospitals in the United States operate as nonprofit organizations. These hospitals are given substantial tax advantages in return for generating significant community benefit. Federal regulation allows for these benefits to be generated in a variety of ways, including financial assistance, community health improvement services, education of health professionals, subsidized health services, research, and community-building activities. Although there is little federal oversight, the Affordable Care Act (ACA) specifically requires nonprofit hospitals to perform some sort of charity care or risk losing their tax-exempt status.

Charity care is defined by the Internal Revenue Service (IRS) as “free or discounted health services provided to persons who meet the organization’s eligibility criteria for financial assistance and are unable to pay for all or a portion of the services.” While the eligibility requirements are set by hospitals, the IRS also requires that these eligibility requirements are readily available to patients. These requirements are usually posted on the hospital’s website. In most cases, hospitals require eligible patients to apply for financial assistance.

When charity care fails to reach the patients that it is designed to help, the consequences for low-income families can be severe. Hospitals have sued patients, garnished tax returns, and offered patients high-interest credit cards to collect medical debts. Attorneys general in Washington and Minnesota have sued hospitals for failing to deliver charity care, earning millions of dollars in payments or debt relief.

The tax exemption nonprofit hospitals received in 2019 was valued at $24 billion nationwide. Research suggests that many hospitals fail to generate a level of community benefit that exceeds the value of this tax break, and that the estimated value of the tax exemption at each hospital is approximately 4.3% of total expenses. When these tax savings are not passed onto the community, it reduces the funds available in the federal budget for other priorities, such as infrastructure, public safety, and education.

Indiana Hospitals Federal Tax Filings and Medicare Cost Reports

The National Academy of State Health Policy (NASHP) Hospital Cost Tool (HCT) contains financial data on 119 hospitals in Indiana for 2019. The HCT data, derived from Medicare cost reports, includes information on charity care spending, operating profits, expenses, and many other variables. To investigate the shortcomings of hospitals in providing adequate charity care, these data were linked with IRS Form 990 federal tax filings. Each nonprofit hospital is required to report levels of bad debt in these tax filings and estimate the amount of bad debt attributable to patients eligible for charity care under the hospital’s financial assistance policy.

Table 1 presents the hospitals in Indiana with the largest share of bad debt attributable to patients eligible for charity care. A descriptive table of all Indiana hospitals in the analysis is available in the appendix. IRS 990 federal tax filings are completed at the Employer Identification Number (E-IN) level. Some hospitals may file as part of a system, as a group within a system, or independently. As a result, occasionally bad debt data is not available for individual hospitals, although charity care and profit margins are always presented at the hospital level.

Table 1 — Hospitals with the Highest Percentage of Bad Debt Eligible for Charity Care^[1]

In 2019, the estimated share of total bad debt expense attributable to patients eligible for charity care ranged from 0% to as much as 69.7%. Nonprofit hospitals in Indiana estimated that they had given up collecting $24.1 million in medical debt that was attributable to patients who were eligible for charity care under their policies. This figure likely underestimates the situation. Of the 77 nonprofit hospitals in the sample, only 18 reported any amount (greater than $0) for bad debts tied to patients eligible for charity care on their filings. The remaining hospitals either left this field blank or were not able to be identified. For hospitals that reported more than $0, the bad debt attributable for these patients represents 10.4% percent of all bad debt. If hospitals that estimated $0 dollars are included, this share falls to 4.4%.

Beyond the lack of reporting on bad debts, there is also uncertainty about how these estimates are made. Hospitals are required to report their estimation methods but often provide only a simple explanation, such as, “We estimate 1% of the bad debt expense to be attributable for patients eligible for financial assistance.”

Hospitals face unclear guidance on generating these figures, and anecdotal evidence suggests that many may not be good-faith estimates. However, some hospitals report more detailed estimating methods. Community Health Network Inc., the hospital in Indiana with the highest share of bad debt estimated to be attributed to patients eligible for financial assistance, describes its estimation process below.

“The estimated amount of the organization’s bad debt expense attributable to patients eligible under the organization’s financial assistance policy was calculated utilizing the historical level of patients that were determined as eligible for financial assistance based on a presumptive eligibility process and applying this ratio to the reported bad debt expense on the financial statements. The portion of the bad debt that is associated with patients who meet the charity care guidelines, but who did not apply for financial assistance, is considered community benefit services.”

These processes, and others described in IRS Form 990 tax filings, suggest that many hospitals lack well-defined methods for identifying patients who may be eligible for charity care. While some diligent hospitals use financial profiling technology to avoid billing patients who are eligible for financial assistance, this is not the norm. Most hospitals do not go beyond posting financial assistance policies online or distributing materials on these policies at registration.

Medical debt was expected to increase in the years following the COVID-19 pandemic. Table 2 presents the levels of bad debt, profit, and charity care in 2022 for the hospitals that had the highest share of bad debt attributable to patients eligible for charity care in 2019. All but one of these hospitals reported an equal or higher share of bad debt that was billed to disadvantaged patients.

Table 2 — Hospitals with the Highest Percentage of Bad Debt Eligible for Charity Care^[2]

Charitable Care

Nonprofit hospitals must report community benefit spending to the federal government. In Indiana, nonprofit hospitals must create a community benefit plan that sets goals and objectives for providing community benefits that include charity care. However, there is little oversight at federal or state levels regarding these plans and community benefit spending, and even less oversight of the hospitals’ bad debt practices.

The IRS allows hospitals to set their own eligibility requirements for charity care. Typically, patients with a family income less than 200% of the federal poverty level (FPL) are eligible for charity care. In 2019, this corresponded to $24,980 for an individual or $51,500 for a family of four. However, among nonprofit hospitals in Indiana this eligibility threshold ranges from 100% to 300% of the FPL, depending on the hospital.

As mentioned above, tax exemptions for nonprofit hospitals save an estimated 4.3% of total expenses, according to prior research. Only 26% of nonprofit hospitals in Indiana reported charity care exceeding this amount. Table 3 presents the five nonprofit hospitals with the lowest charity care levels, expressed as a percentage of total expenses in 2019. Notably, charity care accounted for less than 2% of total expenses for 33 of the 77 nonprofit hospitals in Indiana.

Table 3 — Hospitals with the Lowest Amount of Charity Care per Total Expenses^[3]

Profits

Interestingly, the four hospitals with the highest share of bad debt eligible for charity care in Table 1 earned net profit margins above the national average. Nonprofit hospitals rely on profits to build up their cash reserves, which are used to cover capital costs such as building new facilities or maintaining existing ones. Positive profit margins are an important component of financial health for nonprofit hospitals.

However, research finds hospital operating profits contribute substantially to cash reserves, and not to charity care. When nonprofit hospitals bill low-income patients who likely qualify for financial assistance, it suggests a misalignment between the hospitals’ priorities and their obligations for favorable tax treatment.

Table 4 — Hospital Profits and Charity Care Spending in 2019^[4]

Indiana hospitals earn an average operating profit margin of 21.1%, almost twice the national average of 13.5%. Despite being much more profitable than the national average, they only perform marginally more charity care.

Discussion

Two significant observations regarding Indiana hospitals:

• Millions of low-income patients who should have qualified for charity care were billed in 2019. The billing of economically disadvantaged patients continued in 2022 and, without proper oversight, is likely to continue.
• Nonprofit hospitals are often more profitable than their for-profit counterparts. Of the 10 most profitable hospitals in Indiana in 2019, seven were nonprofit. Yet, none of these hospitals spent more on charity care than the estimated value of their tax exemption.

Data availability was a significant limitation of this study. Reporting of bed debt attributable to patients eligible for charity care is sporadic and unreliable. The IRS allows hospitals to use multiple methods to estimate bad debt and charity spending, which makes comparisons difficult.

• Approximately half of nonprofit hospitals in Indiana left this field blank on their IRS 990 federal tax filings. Even when hospitals did report estimates, most claimed that no patients eligible for charity care under their policies received a bill.
• Hospitals report their methods for estimating bad debt attributable to patients eligible for charity care on their 990 tax filings.
• Many hospitals that report $0 in this field seem to assume that all patients eligible must have applied for financial assistance because financial assistance policies are posted near registration areas and available online.

Although federal guidelines do not specify clear quantitative requirements for community benefit spending, some states have implemented policies to ensure nonprofit hospitals meet their obligations in exchange for favorable tax treatment. In Utah and Illinois, hospitals are required to spend more on community benefits than they receive in property tax exemptions. Oregon and Nevada went a step further by setting a minimum benchmark for community benefit spending.

Recommendations

To increase hospital accountability, Indiana policy makers should:

1. Improve reporting standards for bad debt attributable to patients eligible for charity care.
2. Follow the example of other states by implementing measures to protect disadvantaged patients from the burden of expensive health services.

Appendix

The appendix table presents descriptive statistics for all Indiana hospitals in the sample.^[5] IRS form 990 federal tax filings are completed at the employer identification number (EIN) level. Some hospitals file as a system or a group, while others file independently. As a result, occasionally bad debt data is not available for individual hospitals, although charity care and profit margins are always presented at the hospital level. In the table below, hospitals filing as a group are marked with an asterisk, and their bad debts are presented at the group level.

To view the appendix, download the PDF.

Notes

^[1] Total bad debt represents all debt that the hospital estimates it is unlikely to collect. Profit margin is calculated as net income divided by net patient revenue, indicating the percentage of net patient revenue retained by the hospital. Charity care percentage of expenses is defined as net charity costs, divided by total hospital expenses.

^[2] Total bad debt represents all debt that the hospital estimates it is unlikely to collect. Profit margin is calculated as net income divided by net patient revenue, indicating the percentage of net patient revenue retained by the hospital. Charity care percentage of expenses is defined as net charity costs, divided by total hospital expenses.

^[3] Total bad debt represents all debt that the hospital estimates it is unlikely to collect. Profit margin is calculated as net income divided by net patient revenue, indicating the percentage of net patient revenue retained by the hospital.

^[4] Operating profit margin is defined as operating profit divided by net patient revenue. Net profit margin is defined as net income divided by net patient revenue. Charity care percentage of expenses is defined as net charity costs, divided by total hospital expenses.

^[5] Author analysis of IRS Form 990 tax forms; NASHP analysis of Medicare Cost Reports. Note that *indicates the hospital filed as a group. When hospitals file as a group, the total bad debt, and bad debt attributed to patients eligible for charity care columns are reported at the system level. Total bad debt represents all debt that the hospital estimates it is unlikely to collect. Profit margin is calculated as net income divided by net patient revenue, indicating the percentage of net patient revenue retained by the hospital. Charity care percentage of expenses is defined as net charity costs, divided by total hospital expenses. Free and discounted care thresholds are defined as the family or individual income levels that qualify for free or discounted care expressed as a percentage of the federal poverty limit.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.