Association for Public Policy Analysis & Management

In the U.S., hospital services are provided by three sectors: public, for-profit and nonprofit organizations. While for-profit and public hospitals are large players in the healthcare market, about the two-thirds of all U.S. hospitals are tax-exempt charitable organizations and the size of the tax exemption is over $24 billion annually (American Hospital Association, 2015; Rosenbaum et al. 2015). One justification for nonprofit hospital tax exemptions is an expectation that the hospitals provide medical benefits to their communities, particularly through charity care. The extent to which nonprofit hospitals fulfill this mission to a greater degree as compared to hospitals in other sectors (for-profit and public) is an empirical question. In this paper, we provide evidence on these concerns, estimating the impact of Illinois’ minimum community benefit law on charity care spending and shedding light on the consequences of increasing incentives for nonprofit hospitals to provide charity care.

In 2012, as part of their response to the Affordable Care Act (ACA), Illinois instituted a law that requires all nonprofit hospitals to provide a specified minimum amount of community benefits in order to maintain their favorable tax status. In particular, the law mandates nonprofit hospitals to spend at least as much on charitable care as they would otherwise pay in property taxes. While some research shows differences in charity care provision across ownership sector (e.g., Arrington and Haddock 1990; Dranove 1988; Nicholson et al. 2000), there are no studies to our knowledge that address the malleability of these spending decisions. To fill this gap, we evaluate how the Illinois’ 2012 minimum community benefit standards have affected hospitals’ charity care spending. We answer two key questions: (1) to what extent are there differences in terms of charity care expenditure depending on hospital type and (2) to what extent does Illinois’ minimum benefits law increase nonprofit hospital spending on charity care?

In our study, we estimate the impact of Illinois’ minimum benefits law using a differences-in-differences framework and exploiting detailed panel data from Illinois’ Annual Hospital Questionnaire (AHQ). Our panel includes 10 years (2006-2015) and, crucially, includes hospital characteristics, financial information and ownership type for the census of over 200 licensed hospitals in Illinois (over 2,100 hospital-year observations in all). We first compare levels of charitable care by ownership type prior to 2012. We exploit the discrete change in charitable care requirements to identify the effect of the minimum benefits law on nonprofit hospital charitable care, controlling for hospital fixed (or random) effects and hospital location, size, services provided and total budgets. Our parameters of interest differentiate between post-policy responses by hospitals required to maintain minimal charitable spending (nonprofits) and those that are not (for-profit and public).

Increasingly, states have shown greater focus on incentivizing nonprofit hospitals to fulfill their mission to provide charity care and address their broader community needs. Our results will inform this policy discussion by offering insight on the effectiveness of state charity care standards.