Hospital Community Benefit Post-Affordable Care Act: An Assessment of the Effects of Medicaid Expansion and 501(r) on Non-profit Hospitals 2010–2018

Abstract

Background. Policymakers and the public have expressed growing concern about the balance between the federal tax exemption for non-profit hospitals and their charitable activities. Recent reports have estimated that around 40% of hospitals do not offer community benefit that matches or exceeds the value of their federal tax exemption (Herring et al., 2018; Zare et al., 2021). Many non-profit hospitals also engage in aggressive billing and collection actions, adding to the list of concerns about hospital charitable activities and whether the tax exemption is warranted (Bruhn et al., 2019).

Objective. The Affordable Care Act (ACA) was expected to prompt major changes both in non-profit hospital community benefit expenditures and their billing and collection actions. This dissertation examined two ACA policies to probe whether they had the expected effect on community benefit: Medicaid expansion and 501(r).

It was anticipated that gains in coverage through state Medicaid expansion and the health insurance marketplaces would improve hospital finances, reduce hospital expenditures on uncompensated care, and ostensibly facilitate more spending on other community benefit activities like community health improvement. While hospital finances have generally improved and uncompensated care expenditures have declined in Medicaid expansion states (Dranove et al., 2016), these gains have not translated to increased spending on community health improvement. Instead, they have been offset by increased spending on Medicaid shortfall (Kanter et al., 2020; Stoecker et al., 2020). It remains unclear what underlies this tradeoff.

The addition of Section 501(r) to the Internal Revenue Code (IRC) set new requirements for tax exemption, including that hospitals must assess patient eligibility for financial assistance before engaging in extraordinary collection actions (ECAs). No peer-reviewed literature to date has reported on the effect of this policy on hospital reporting over time.

Data Sources. The sample for all analyses was comprised of 3,287 non-profit hospitals that submitted IRS Form 990 Schedule H for at least one tax year during 2010–2018. IRS Form 990 Schedule H data were linked with other publicly available data sets to add hospital-, county-, and state-level variables including from Area Health Resource Files, Centers for Medicare and Medicaid Services (CMS) Providers of Services, Hilltop Institute, and Kaiser Family Foundation.

Study Design. A difference-in-difference approach was employed to assess the tradeoff associated with state Medicaid expansion between financial assistance and Medicaid shortfall expenditures by non-profit hospitals. Trends in reporting on extraordinary collection actions were analyzed using descriptive statistics and the probability of reporting ECAs using a binary logistic regression model.

Principal Findings. Medicaid expansion was associated with a reduction in spending on financial assistance as a proportion of total community benefit spending (–6.83 percentage point change, p < 0.001) and a similar increase in spending on Medicaid shortfall as a proportion of total community benefit spending (7.19 percentage point change, p < 0.001). This trend was consistent across all other stratified analyses by hospital and county characteristics except for hospitals with high revenue. Hospitals with revenue in the top quartile reported a higher increase in Medicaid shortfall compared to those with lower revenue (7.34 percentage point change vs. 6.69 percentage point change) but a lower reduction in financial assistance (–4.36 percentage point change vs. –6.85 percentage point change).

The proportion of hospitals reporting that they engaged in ECAs before determining patient eligibility for financial assistance decreased significantly over time, from 15% of hospitals in 2010 to 1% of hospitals in 2018. However, in the second year of reporting (2011), nearly one in five hospitals reported that they engaged in ECAs before determining patient eligibility for financial assistance.

Hospitals in counties with higher rates of unemployment were 16% more likely to report engaging in ECAs, and 19% more likely in counties with higher rates of poverty. Factors associated with decreased odds of engaging in ECAs were urban location (OR 0.68; p < 0.001), Medicaid expansion state (OR 0.57; p < 0.001), and children’s hospital status (OR 0.51; p < 0.01).

Conclusions and Policy Implications. There appeared to be a strong relationship between hospital spending on financial assistance and Medicaid shortfall such that decreases in financial assistance were observed alongside equivalent increases in Medicaid shortfall. The only case in which this trend was not observed was for high-revenue hospitals, implying they are able to allocate additional funds toward community benefits. Future research should assess the relationship between changes in payer mix and community benefit spending to further clarify the effect of Medicaid expansion on financial assistance and Medicaid shortfall.

These findings provide suggestive evidence that including Medicaid shortfall in community benefit reporting provided the opportunity for hospitals to inflate total community benefit spending. Revising the definition of community benefit in IRS reporting to remove Medicaid shortfall may help to better clarify the actual value of community benefit expenditures.

501(r) was effective in discouraging ECAs before due process to determine eligibility for financial assistance, though not entirely; 1% of hospitals were still reporting that they were not compliant with this regulation in 2018. Communities with high rates of unemployment and poverty were disproportionately likely to have their medical bills sent to credit agencies before reasonable efforts to assess eligibility for financial assistance. Future research should attempt to characterize the extent of reasonable efforts to determine eligibility for financial assistance and confirm the decline of these practices in hospital financial assistance policies and credit agency data.

Reporting requirements and the resulting transparency in hospital practices are insufficient policy tools for discouraging hospital predatory billing. Moreover, the questions included in Schedule H do not allow for an accurate assessment of ECAs or the consistency with which FAPs or billing and collection policies are applied. Although it appears that ECAs have decreased, this reported change does not necessarily mean that aggressive billing and collection practices have declined; hospitals may be pursuing patient debt at the same rate. Schedule H should collect more meaningful information about ECAs, including the number of patients assessed for financial assistance eligibility, the number deemed to be ineligible, the number likely eligible who did not apply, and the ECAs taken to obtain payment.

There may also be a need for stronger consumer protections at the federal and/or state levels to limit or ameliorate the disproportionate effect of extraordinary collection actions among high-unemployment and low-income communities. A presumptive eligibility requirement, e.g., for all patients in low-income zip codes, may help to protect patients eligible for financial assistance from ECAs and serve to limit the widening of disparities in medical debt and access to care.