Pushing Nonprofit Hospitals to Live Up to the Name

Nonprofit hospitals have come under fire again. It’s no secret they rake in hefty tax benefits with little charitable giving to show for it. Due to their 501(c)(3) tax-exempt status, they save an average of $11 million annually in exchange for their “community benefit”—an umbrella term for uncompensated care and other charitable expenditures as defined by the IRS Form 990.

It’s also no secret that most nonprofit hospitals fall short on their community benefit spending. Studies show that nonprofit hospitals spend no more on charity care than their for-profit counterparts. Under lax IRS regulations, they can write off questionable charges as community benefit—like a lobby fountain as “community health improvement” or an advertising billboard as “community building.” 

These practices are well-documented, but the solution is less clear. Some propose trying to entirely remove or reduce the tax exemption. But these solutions face formidable legal and lobbying battles at the state and federal levels. Instead of harsh punitive measures, states should pursue the opposite approach: incentivizing nonprofit hospitals to increase their community benefit spending to match the value of their exemption. They can do this by creating new primary care residencies.

In today’s physician shortage, America is in dire need of more primary care doctors. And students are entering medical school at increasingly high rates, growing the demand for residency positions. However, residency funding is doled out in lump sums through Medicare, not regularly in proportion to need. Congress occasionally passes bills to increase the number of residencies funded, but this process is arduous and slow.

We need an innovative state-led way to fund residencies absent of waiting on Congress to act. Nonprofit hospitals, with their millions in unused tax benefits, are the perfect candidates. When they fall short on community benefit spending, states can push them to make up the difference by funding a proportionate number of primary care residency slots.

Such a policy would be simple. The new residency requirement would take into account the size of a given hospital, based on their number of active beds, as well as the hospital’s existing community benefit spending. The less revenue they spend on meaningful community benefit, the more residencies they would be required to fund. If instating a residency program isn’t possible given the hospital’s location or resources, they have the option to increase their community benefit spending to make up the difference or even to fund residencies at nearby facilities.

This would require defining which categories of community benefit spending are legitimate—otherwise, we risk incentivizing nonprofit hospitals to simply inflate their numbers further. The Lown Institute Hospital Index methodology is a decent example, severing from community benefit efforts that don’t improve community health. For example, if every Texas nonprofit hospital larger than 100 beds funded two residencies apiece—a small portion of their tax benefit—Texas would gain 60 new primary care doctors a year. 

Legislators can start encouraging residency slots right now. It can be developed and passed at the state level. While nonprofit hospitals may oppose the costs it brings them, the policy will attract the support of medical schools, who want more residency options for their growing student bodies, and for-profit hospitals, who suffer from a lack of physicians. Most importantly, it also benefits patients, who face a growing shortage and long wait times for care.

This policy also has great potential to improve the bruised reputations of nonprofit hospitals, who are facing increased public scrutiny for their lack of community benefit. Although some may initially oppose the costs, this is an opportunity to boost PR and appease donors while the spotlight is on them.

By making nonprofit hospitals fund residencies, we chip away at the large and growing physician shortage and hold nonprofit hospitals accountable. A nonprofit hospital cannot simply work to benefit itself. With great benefits should come great responsibilities.