Nonprofit Hospitals and Medical Debt in Texas

Introduction

Hospital price increases are larger than in any other sector in the United States, including education, housing, food, and general inflation. From 2013–22, total annual premiums for families with employer-based health insurance in Texas rose from $16,049 to $22,304, with the employee contributing $4,892 to $7,759. However, in Texas 18% of families are uninsured — while approximately 41% of Americans have debt caused by medical or dental bills. Such debt can push disadvantaged families further into financial hardship.

A 2019 National Institutes of Health (NIH) study found that medical debt contributed to 58.5% of bankruptcies. When individuals are unable to pay their medical bills, hospitals often pursue collections. In Texas, approximately 19% of families have medical debt in collections, with rates exceeding 40% in Pecos and Haskell counties. More than one in four families report that they or a family member have had trouble paying for care. When hospitals pursue collections and deem the debt unlikely to be paid, it is reported as “bad debt.”

Nonprofit Hospitals’ Charitable Obligations

About half of all hospitals in the United States are nonprofit organizations, designed to help disadvantaged patients. Nonprofit hospitals are exempt from paying most state and federal taxes. In return, the hospitals are expected to use these tax savings to generate significant community benefits. The IRS guidelines allow this community benefit 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. While there are many options for generating community benefit, 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 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.” Hospitals set their own eligibility criteria for financial assistance polices, often using the federal poverty level (FPL) to determine the thresholds. In Texas, hospitals typically offer free care to families earning 200–300% of the FPL and discounted care to those earning between 400–500% of the FPL. 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.

Medical debts in collections can be a serious burden for low-income families. Nonprofit hospitals are intended to alleviate this burden, but when charity care does not reach the patients it is designed to help, vulnerable families face significant challenges. Reports from around the country highlight the extreme measures hospitals take to collect medical debts. In some instances, hospitals have sued patients, garnished tax returns, and offered patients high interest credit cards to collect medical debts.

Many states are pushing back against hospitals that bill low-income patients. Attorneys general in Washington and Minnesota won millions of dollars in debt relief after suing hospitals for failing to provide charity care to patients who were entitled to it.

Nonprofit hospitals nationwide receive a tax exemption valued at approximately $24 billion. Research shows this tax break corresponds to approximately 4.3% of total expenses for nonprofit hospitals. 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.

Texas Hospitals’ Federal Tax Filings and Medicare Cost Reports

The National Academy of State Health Policy (NASHP) Hospital Cost Tool (HCT) contains financial data on 111 nonprofit hospitals in Texas 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, we linked these data with IRS Form 990 federal tax filings. Nonprofit hospitals are required to report levels of bad debts in these tax filings and estimate how much of that bad debt is attributable to patients eligible for charity care under the hospital’s financial assistance policy.

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

Table 1 presents the hospitals in Texas with the largest share of bad debt attributable to patients eligible for charity care. A descriptive table of all Texas hospitals in our analysis is available in the appendix. 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. 

The share of total bad debt expense that Texas hospitals estimated was attributable to patients qualifying for charity care ranged from 0% to as much as 84.9% in 2019. This represents $127 million dollars in total bad debt for patients who should have received such assistance. This figure likely underestimates the situation. Of the 111 nonprofit hospitals in our sample, only 32 reported any amount (greater than $0) for bad debt tied to patients eligible for charity care on their filings. Thirty-five hospitals reported $0, and for 44, we were unable to identify any such data. For hospitals that reported more than $0, the bad debt for these patients represents 14.7% percent of all bad debt. If we include hospitals that estimated $0, this share falls to 5.4%.

Beyond the lack of reporting on bad debts, there is also uncertainty about how these estimates are calculated. Hospitals are required to report their estimation methods, but many simply estimate a percentage of bad debt attributable to patients eligible for charity care. Baptist Hospitals of Southeast Texas, which includes Baptist Beaumont (Table 1), estimates that 25% of bad debt is attributable to eligible patients, and explains the estimation process as follows: “The business office estimates the percentage of patients that would qualify for assistance based on conversations with those patients that do not complete the application.” 

Example of Estimation Methods

Some hospitals provide more detailed estimation methods. Ascension Seton, which estimates 84.7% of its bad debt is attributable to patients eligible for charity care, describes its estimation strategy in this way: “The provision for doubtful accounts is based upon management's assessment of expected net collections considering historical experience, economic conditions, trends in healthcare coverage, and other collection indicators. Periodically throughout the year, management assesses the adequacy of the allowance for doubtful accounts based upon historical write-off experience by payor category, including those amounts not covered by insurance. The results of this review are then used to make any modifications to the provision for doubtful accounts to establish an appropriate allowance for doubtful accounts.”

In 2019, Ascension Seton was among the hospitals with the highest share of bad debt attributed to patients eligible for charity care, estimating that $41.3 of the $45.7 million in total bad debt for these patients. However, in 2022 they reported none of their $50 million in bad debt was attributable to patients eligible for charity care. Their 2022 explanation of this estimate was this: “Based on the organization's administration of its financial assistance program, no estimate for bad debt attributable to financial assistance eligible patients is deemed applicable to hospital operations.”

Limited Efforts to Identify Eligibility

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 hospitals report more diligent efforts to identify patients eligible for financial assistance before unpaid bills go into collections, this is not the norm. Most hospitals do not go beyond posting financial assistance policies online or distributing materials on these policies at registration.

Table 2 — Hospitals with the Highest Percentage of Bad Debt Eligible for Charity Care in 2019^[2]

The COVID-19 pandemic led to millions of hospitalizations in a time when many Americans were losing their jobs. The corresponding loss in employer sponsored health insurance led to concerns about an increase in medical debt. Table 2 presents the levels of bad debt, profit, and charity care in 2022 for the hospitals with the highest share of bad debt attributable to patients eligible for charity care in 2019. For systems with estimated bad debts over $10M, the total rose in 2022.

Charitable Care

Nonprofit hospitals must report community benefit spending to the federal government. Texas is one of five states that sets a minimum community benefit requirement, which means that in Texas, nonprofit hospitals must provide community benefit in an amount that satisfies one of the following standards.

1. Charity care and government-sponsored indigent health care at a level that is reasonable in relation to the community needs, as determined through a community needs assessment, available resources for the hospital, and the tax-exempt benefits received by the hospitals.
2. Charity care and government-sponsored indigent health care provided in an amount equal to at least 100% of the hospital’s tax exempt benefits, excluding federal income tax.
3. Charity care and community benefits provided in a combined amount equal to at least 5% of the hospital’s net patient revenue, provided that charity care and government-sponsored indigent health care are provided in an amount equal to at least 4% of net patient revenue.

As mentioned above, tax exemptions for nonprofit hospitals save an estimated 4.3% of total expenses, according to prior research. On average nonprofit hospitals in Texas provided net charity care amounting to 8.1% of expenses. This is significantly higher than the national average of 2.4%. In Texas, 92 of the 111 nonprofit hospitals’ net charity care costs exceeded the value of their tax exemption. While on average Texas provides more charity care than the rest of the country, Table 3 shows the five nonprofit hospitals in Texas that are below the national average for net charity care as a percentage of hospital expenses.

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

Profits

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 that 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]

Texas nonprofit hospitals earn an average operating profit margin of 11.3% compared to the national average of 13.5%. Operating profit margin is defined as operating profit divided by net patient revenue, while net profit margin is defined as net income divided by net patent revenue and net income includes non-patient related gains and losses. Texas hospitals earn profits similar to the national average but perform substantially more charity care, when expressed as the percentage of total expenses.

Discussion

Data availability was a significant limitation of this study. Reporting of bad 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.

• Although Texas hospitals provide relatively high levels of charity care compared to the rest of the country, patients who should have been eligible for charity care accounted for 5.4% to 14.7% of total bad debt.
• Many Texas hospitals left the charity care field blank on their IRS Form 990 federal tax filings. Even when hospitals did report estimates, most claimed that no patients eligible under their policies received a bill.
• Hospitals report their methods for estimating bad debt attributable to patients eligible for charity care on their Form 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.

Recommendation

Texas is one of five states with minimum requirements for community benefit spending and Texas hospitals perform more charity care than most the country. To increase hospital accountability, Texas policymakers should continue taking steps in the right direction and improve reporting standards for bad debt attributed to patients eligible for charity care.

Appendix

The appendix table presents descriptive statistics for all Texas hospitals in our 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.

^[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. Charity care percentage of expenses is defined as net charity costs, divided by total hospital expenses.

^[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.