Who Regulates Hospital Charity Care Programs? Understanding Oversight and Compliance

Medical debt is a significant burden for many Americans. Approximately four in ten adults in the United States carry some form of medical debt, totaling an estimated $195 billion or more. For those with lower incomes, the situation is even more critical, with nearly six in ten individuals in households earning below $40,000 facing medical debt. Emergency care and hospitalizations are frequently cited as major contributors to this debt. This financial strain is particularly challenging for the uninsured and underinsured, highlighting the urgent need for solutions that ensure affordable healthcare access. In response to these growing concerns, hospital charity care programs have come under increased scrutiny, prompting policymakers and patient advocates to examine and strengthen their regulatory frameworks.

This article delves into the critical question: who regulates hospital charity care programs? While these programs offer vital financial assistance to patients unable to afford medical bills, the oversight and regulation are complex, involving federal, state, and local entities. Understanding this regulatory landscape is crucial to ensuring that charity care programs effectively serve their intended purpose and provide meaningful relief to those in need.

The Landscape of Hospital Charity Care Regulation

Hospital charity care, often referred to as financial assistance, is defined by the Internal Revenue Service (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.” These programs are essential for individuals who cannot afford healthcare, and their existence is partly supported by government policies, including tax exemptions for nonprofit hospitals. However, the level of charity care provided varies significantly across hospitals, influenced by factors such as hospital mission, patient needs, and, crucially, the regulatory environment.

Figure 1: Distribution of hospital charity care costs as a percentage of operating expenses in 2020, illustrating the variation across different facilities.

Federal, state, and local governments play distinct but interconnected roles in regulating these programs. This multi-layered regulatory framework aims to ensure that hospitals, particularly nonprofit institutions benefiting from tax exemptions, fulfill their obligation to provide community benefits, including charity care. However, the effectiveness and enforcement of these regulations are ongoing areas of discussion and reform efforts.

Federal Oversight: IRS and Tax-Exempt Status

At the federal level, the primary regulator of charity care for nonprofit hospitals is the Internal Revenue Service (IRS). The IRS sets the standards that nonprofit hospitals must meet to maintain their tax-exempt status under section 501(c)(3) of the Internal Revenue Code. This tax exemption is a significant benefit, essentially a government subsidy intended to support hospitals’ charitable activities, including providing care to those who cannot afford to pay.

To maintain this tax-exempt status, nonprofit hospitals must comply with Section 501(r) of the Affordable Care Act (ACA), which outlines specific requirements related to charity care and community benefits:

Financial Assistance Policy (FAP): Hospitals must establish and widely publicize a FAP. This policy must clearly define eligibility criteria for charity care, the level of assistance offered (which can range from free to discounted care), and the application process. The FAP must be easily accessible to patients and translated into languages commonly spoken in the hospital’s service area.
Limitations on Charges: Hospitals are required to limit the amount charged to patients eligible for charity care to no more than the amounts generally billed to insured patients. This prevents charging charity care recipients exorbitant rates.
Community Health Needs Assessment (CHNA): Every three years, nonprofit hospitals must conduct a CHNA. This assessment identifies the health needs of the community they serve and guides the hospital in developing an implementation strategy to address these needs. Charity care and financial barriers to healthcare are often identified as key community health needs.
Reasonable Collection Efforts: Before engaging in aggressive debt collection practices, such as selling debt to third parties or initiating legal action, hospitals must make reasonable efforts to determine if a patient is eligible for charity care. This includes notifying patients about the FAP and providing sufficient time to apply.

While these federal requirements provide a baseline for charity care regulation, critics argue that they are not stringent enough and are weakly enforced. A 2020 Government Accountability Office (GAO) report highlighted concerns about the IRS’s enforcement of community benefit standards, noting that the IRS had not revoked a hospital’s nonprofit status for inadequate community benefits in the preceding decade. This raises questions about the effectiveness of federal oversight in ensuring that nonprofit hospitals are truly fulfilling their charitable obligations in exchange for substantial tax exemptions.

State-Level Regulations: Expanding and Enforcing Charity Care

Recognizing the limitations of federal oversight, many state governments have taken a more active role in regulating hospital charity care programs. Currently, over half of all states, along with the District of Columbia, have implemented additional requirements for hospitals to provide charity care. These state regulations often go beyond the federal minimum standards and can apply to various types of hospitals, including for-profit, nonprofit, and government-run facilities.

State regulations vary considerably, but common themes include:

Mandatory Charity Care Eligibility: Many states mandate that hospitals extend charity care eligibility to specific patient populations, often based on income levels. For example, some states require hospitals to provide free or discounted care to uninsured patients with incomes below a certain percentage of the Federal Poverty Level (FPL). Some states, like Maryland, extend these mandates to both insured and uninsured patients.
Standardized Eligibility Criteria: To ensure consistency and patient access, some states establish more specific and standardized eligibility criteria for charity care, reducing the discretion hospitals have in setting their own policies.
Enhanced Patient Protections: State regulations often include provisions to increase patient awareness of charity care programs and protect eligible patients from aggressive debt collection. This can include requirements for hospitals to proactively screen patients for charity care eligibility, provide clear notifications about the availability of financial assistance, and establish appeal processes for denied applications.
Enforcement Mechanisms: States are increasingly taking enforcement actions against hospitals that fail to comply with charity care regulations. Examples include investigations by state Attorneys General, lawsuits against hospitals for violating charity care laws, and the implementation of penalties for non-compliance. California and Washington state have been at the forefront of state-level enforcement, signaling a growing trend of states actively policing hospital charity care practices.

These state-level actions demonstrate a growing recognition of the importance of charity care and a willingness to implement stricter regulations to ensure that hospitals are accountable for providing this essential service to their communities. The patchwork of state laws, however, also creates complexity and variation in charity care access across the country.

Local Government Influence and Community Advocacy

While federal and state governments are the primary regulators, local governments and community advocacy groups also play a role in shaping hospital charity care practices. Local health departments, city councils, and community organizations can exert influence through:

Community Health Needs Assessments: Local health departments and community groups often collaborate with hospitals in conducting CHNAs, ensuring that local needs, including access to affordable care, are accurately identified and addressed.
Public Pressure and Advocacy: Community advocacy groups can raise public awareness about hospital charity care policies, monitor hospital practices, and advocate for stronger regulations and enforcement at both the state and local levels. Media attention and public pressure can be effective tools for holding hospitals accountable.
Local Ordinances and Agreements: In some cases, local governments may enact ordinances or negotiate agreements with hospitals that include specific charity care provisions or community benefit requirements.

The combined efforts of federal, state, and local regulators, along with community advocacy, create a system of checks and balances aimed at ensuring that hospitals, particularly nonprofit entities, are providing adequate charity care to their communities.

The Role of Other Government Programs

Beyond direct regulation, government programs like Medicaid and Medicare significantly impact hospital charity care.

Medicaid Expansion: The Affordable Care Act’s Medicaid expansion has played a crucial role in reducing uncompensated care costs for hospitals. By expanding health coverage to more low-income individuals, Medicaid reduces the number of uninsured patients who might otherwise rely on charity care. Studies have shown that states that expanded Medicaid saw a significant decrease in uncompensated care costs compared to non-expansion states.
Supplemental Payments: Both Medicaid and Medicare provide supplemental payments to hospitals that serve a disproportionate share of low-income patients (Disproportionate Share Hospital or DSH payments). These payments are intended, in part, to help hospitals offset the costs of charity care and other uncompensated services.
340B Drug Pricing Program: This federal program requires drug manufacturers to offer discounted outpatient drugs to certain hospitals serving large low-income populations. The savings from this program can free up hospital resources that can indirectly support charity care.

Uncompensated care costs for hospitals in states that expanded Medicaid and states that did not, showing a greater decrease in expansion states.

These government programs, while not directly regulating charity care policies, provide substantial financial support that influences hospitals’ ability to provide and fund charity care programs.

Challenges and Future Directions in Charity Care Regulation

Despite the existing regulatory framework and government support, challenges remain in ensuring effective hospital charity care programs. These include:

Variability in Hospital Policies: Significant variation persists in hospital charity care policies, eligibility criteria, and the level of assistance provided. This inconsistency can lead to unequal access to care for patients in different locations or at different hospitals.
Lack of Awareness and Access: Many eligible patients remain unaware of charity care programs or face difficulties in accessing them due to complex application processes, language barriers, or lack of outreach by hospitals.
Enforcement Gaps: Enforcement of existing regulations, particularly at the federal level, has been criticized as weak. Stronger oversight and more consistent enforcement are needed to ensure hospital compliance.
Defining “Adequate” Charity Care: There is ongoing debate about what constitutes an “adequate” level of charity care for nonprofit hospitals to justify their tax exemptions. Policymakers are exploring options like minimum spending requirements or more direct links between tax benefits and charity care provision.

Looking ahead, policy discussions are focusing on strengthening charity care regulation through measures such as:

Standardizing Eligibility and Benefits: Efforts to create more uniform and transparent eligibility criteria and benefit levels across hospitals, potentially through state or federal mandates.
Increased Oversight and Enforcement: Strengthening the capacity of regulatory agencies, particularly the IRS and state Attorneys General, to monitor and enforce charity care requirements.
Linking Tax Exemption to Charity Care: Exploring mechanisms to more directly tie the tax exemption of nonprofit hospitals to the value of charity care and other community benefits they provide.
Improving Patient Access and Awareness: Implementing policies to enhance patient awareness of charity care programs, simplify application processes, and require hospitals to proactively identify and assist eligible patients.

Conclusion: Ensuring Accountability and Access

The regulation of hospital charity care programs is a shared responsibility involving federal, state, and local governments, as well as community advocates. While federal regulations set a basic framework, states are increasingly taking the lead in expanding and enforcing charity care requirements. The ultimate goal of this regulatory web is to ensure that hospitals, particularly nonprofit institutions benefiting from public subsidies, are accountable for providing essential financial assistance to patients in need.

As policymakers continue to grapple with issues of healthcare affordability and medical debt, strengthening the regulation and oversight of hospital charity care programs will remain a critical component of ensuring equitable access to healthcare for all Americans, regardless of their ability to pay. Further reforms and ongoing vigilance are necessary to ensure these programs truly serve as a safety net for vulnerable populations and contribute to a more just and accessible healthcare system.

References:

Levinson, Z., Hulver, S., & Neuman, T. (2023). Hospital Charity Care: How It Works and Why It Matters. KFF.
Internal Revenue Service (IRS) guidelines on charity care and community benefits for nonprofit hospitals.
Government Accountability Office (GAO) reports on nonprofit hospital community benefits.
Reports from the National Consumer Law Center (NCLC) on state charity care laws.
Medicaid and CHIP Payment and Access Commission (MACPAC) reports on charity care costs.
Medicare Payment Advisory Commission (MedPAC) reports on charity care calculations.

Disclaimer: This article provides general information about the regulation of hospital charity care programs and should not be considered legal or financial advice. For specific guidance, consult with qualified professionals.