Do non-profit hospitals provide more charity care when faced with a mandatory minimum standard? Evidence from Texas

Abstract

Policymakers often question whether not-for-profit (NFP) hospitals provide enough charity care to justify tax advantages. In 1993, Texas enacted legislation requiring NFP hospitals to provide certain community benefits at levels set forth in specific criteria to retain tax-exempt status; this paper focuses on the effect of the legislation’s requirement that NFP hospitals spend a minimum of 4% of net patient revenue on charity care. We also study a modification of the law passed in 1995, which allows the deduction of bad debts expense when calculating net patient revenue. This change effectively lowers required charity care spending, and our study considers whether Texas hospitals responded by reducing charity care spending. We test the Texas laws’ effect on hospital charity care spending using financial data for 1992 through 1997. As anticipated, results show that, on average, NFP hospitals spending below the 4% threshold increased their charity care spending to meet this threshold. Surprisingly, NFP hospitals spending above the threshold experienced a marginally significant decrease in spending. After the 1995 law change, hospitals with higher total margins decreased charity care spending, an unintended consequence of the legislation. Overall, the Texas law changes did not, on average, lead to increased charity care spending by NFP hospitals. While spending increased by NFPs providing too little charity care prior to the law, this group represents less than 20% of our sample. These findings are particularly important given the increase in Texas uninsurance rates during the sample period. Seventeen states have followed Texas’ lead by enacting legislation regarding the charity care spending by NFPs, thus an empirical investigation into the impact of this precedent-setting legislation is critical for evaluating the effectiveness of specific charity care requirements.