25

20

15

10

5

0

25

20

15

10

5

0

25

20

15

10

5

0

For-Profit

Nonprofit

Government

(Nonfederal)

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30+

Percentage of Hospitals

Uncompensated-Care Costs as a Share of Operating Expenses (Percent)

Mean

(4.2)

Mean

(4.7)

Mean

(13.0)

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30+

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30+

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

P A P E R

DECEMBER 2006

Nonprofit

Hospitals and the 

Provision of

Community Benefits

CBO
Pub. No. 2707
The Congress of the United States O Congressional Budget Office

CBO

Nonprofit Hospitals and the

Provision of Community Benefits

December 2006

A

PAPER
Note

The histogram on the cover was developed by the Congressional Budget Office based on 

the Medicare Hospital Cost Report, 2003, and on data from the Government Accountability 

Office on uncompensated care. The bar height indicates the share of hospitals, in percent. 

The distributions are weighted by operating expenses and truncated at 30 percent. The 

solid vertical lines represent the weighted average uncompensated-care share for each 

ownership type.
Preface

Nonprofit hospitals receive various tax exemptions from federal, state, and local governments with the expectation that, in return, they will provide benefits to the community. 

In this paper, requested by the Chairman of the House Committee on Ways and Means, 

the Congressional Budget Office (CBO) examines several measures of community benefits 

provided by hospitals of different ownership types. Nonprofit hospitals are compared with 

for-profit hospitals, which do not receive tax exemptions. The analysis focuses primarily 

on differences in the provision of uncompensated care but also examines the provision of 

Medicaid-covered services and the provision of certain specialized services, such as emergency 

room care. In keeping with CBO’s mandate to provide objective, nonpartisan analysis, the 

paper makes no policy recommendations.

Chapin White, Robert Nguyen, and Alshadye Yemane of CBO’s Health and Human 

Resources division prepared the report under the supervision of James Baumgardner and 

Bruce Vavrichek. The report benefited from comments by Thomas Bradley, Douglas 

Hamilton, and Dennis Zimmerman, all of CBO. Several outside reviewers also provided 

comments, including Richard Frank of Harvard University and William Gentry of Williams 

College. (The assistance of external reviewers implies no responsibility for the final product, 

which rests solely with CBO.)

Loretta Lettner edited the report, and John Skeen proofread it. Maureen Costantino designed 

the cover and prepared the report for publication. Lenny Skutnik produced the printed 

copies, and Simone Thomas prepared the electronic version for CBO’s Web site 

(www.cbo.gov).

Donald B. Marron

Acting Director

December 2006

Contents

Introduction and Summary 1

Provision of Uncompensated Care 1

Provision of Medicaid-Covered Services 2

Provision of Specialized Services 3

The Value of Tax Exemptions for Nonprofit Hospitals 3

Background 3

Differences in Ownership Structure 4

Differences in Tax Treatment 4

The Value of Tax Exemptions for Nonprofit Hospitals 5

Approaches to Providing Collective Goods 6

Defining Community Benefits 7

Previous Research on Differences Between For-Profit and

Nonprofit Hospitals 8

Study Data and Methods 9

Measures of Community Benefits 9

Data Sources 10

Methods of Analysis 11

Characteristics of Hospitals 12

Differences in the Provision of Uncompensated Care 14

Effect of Location on Adjusted Differences 15

Differences by State 17

Distribution of Hospitals’ Uncompensated-Care Shares 17

Differences in the Provision of Medicaid-Covered Services 17

Differences in the Provision of Specialized Services 20

Limitations of the Analysis 21

Appendix: Detailed Results from Regression Models of

Uncompensated-Care Shares 23
VI NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

Tables

1. Estimated Value of Tax Exemptions Provided to

Nonprofit Hospitals, 2002 5

2. Hospital Ownership Types, by Region 12

3. Characteristics of Hospitals, by Ownership Type 13

4. Uncompensated-Care Shares, by Hospital Ownership

Type and State 15

5. Economic Characteristics of Hospitals’ Communities, by

Hospital Ownership Type and State 16

6. Medicaid Shares, by Hospital Ownership Type 19

7. Share of Hospitals That Provide Specialized Patient

Services, by Hospital Ownership Type 20

A-1. Uncompensated-Care Shares (Ordinary least squares

regression models) 24

Figure

1. Distribution of Hospitals, by Uncompensated-Care

Share and by Ownership Type 18
Nonprofit Hospitals and the

Provision of Community Benefits

Introduction and Summary

The various tax exemptions provided to nonprofit hospitals have come under scrutiny by policymakers, with the 

central concern being whether those hospitals provide 

community benefits that justify forgone government tax 

revenues. In this paper, the Congressional Budget Office 

(CBO) measures the provision of certain community 

benefits and compares nonprofit hospitals with for-profit 

hospitals. For-profit hospitals do not receive tax exemptions and are not required to meet community-benefit 

standards; the level of community benefits provided 

by for-profit hospitals serves, therefore, as a useful benchmark against which to compare nonprofit hospitals. 

The analysis also examines the provision of community 

benefits by nonfederal government hospitals.1

Although nonprofit hospitals must provide community 

benefits in order to receive tax exemptions, there is little 

consensus on what constitutes a community benefit or 

how to measure such benefits. For the purposes of this 

analysis, community benefits include the provision of 

uncompensated care, the provision of services to Medicaid patients, and the provision of certain specialized services that have been identified as generally unprofitable. 

Those services were selected because they benefit the 

community but are not typically considered financially 

rewarding.

In general, the comparisons of nonprofit and for-profit 

hospitals yielded mixed results. CBO found that, on 

average, nonprofit hospitals provided higher levels of 

uncompensated care than did otherwise similar for-profit 

hospitals. Among individual hospitals, however, the 

provision of uncompensated care varied widely, and the 

distributions for nonprofit and for-profit hospitals largely 

overlapped. Nonprofit hospitals were more likely than 

otherwise similar for-profit hospitals to provide certain 

specialized services but were found to provide care to 

fewer Medicaid-covered patients as a share of their total 

patient population. On average, nonprofit hospitals were 

found to operate in areas with higher average incomes, 

lower poverty rates, and lower rates of uninsurance than 

for-profit hospitals.

Provision of Uncompensated Care

The level of uncompensated care provided by community 

hospitals is examined here for hospitals located in five 

states—California, Florida, Georgia, Indiana, and 

Texas—using data from 2003 (the latest year for which

1. Hospitals are identified as nonprofit, for-profit, or governmental 

on the basis of classifications reported by hospitals in the “control 

type” variable in the Medicare Hospital Cost Report. According to 

the control type variable, “nonprofit” refers to voluntary nonprofit 

(with or without church affiliation); “for-profit” refers to proprietary hospitals owned by individuals, corporations, partnerships, 

or other entities; and “government” refers to state, county, citycounty, city, hospital-district, or other governmental entities (federal hospitals were excluded from the analysis).
2 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

such data are available).2 “Uncompensated care” refers to 

the sum of charity care (services for which a hospital does 

not expect payment) and bad debt (services for which a 

hospital expects but does not collect payment). Although 

charity care is a better measure of the community benefits 

provided by a hospital, data limitations precluded CBO’s 

analyzing charity care and bad debt separately. 

The five selected states were chosen in part because

sufficiently reliable data on uncompensated care were 

available in those areas. The data were provided to CBO 

by the Government Accountability Office (GAO) and 

were developed by GAO for use in its analyses of issues 

relating to the level of uncompensated care provided 

by different types of hospitals.3

 CBO’s analysis expands 

on GAO’s findings in several ways: first, regression techniques are used to calculate adjusted differences between 

nonprofit and for-profit hospitals in the provision of 

uncompensated care, taking into account hospital characteristics and the characteristics of local populations; and, 

second, the provision of Medicaid services and specialized 

services, such as emergency room care, are analyzed 

quantitatively.

CBO’s five-state analysis of uncompensated care yielded 

the following key findings:

B In the five states analyzed, nonprofit hospitals provided a total of about $3 billion in uncompensated 

care, government hospitals provided more than $3 billion, and for-profit hospitals provided about $1 billion 

in uncompensated care. The difference in the total 

amount of uncompensated care provided by nonprofit 

and for-profit hospitals is largely attributable to the 

fact that nonprofit hospitals accounted for a much 

larger share of the hospital market than did for-profits.

B The average “uncompensated-care share”—the cost of 

uncompensated care as a share of hospitals’ operating 

expenses—was much higher at government hospitals 

(13.0 percent) than at either nonprofit hospitals 

(4.7 percent) or for-profit hospitals (4.2 percent).

B Individual hospitals varied widely in their uncompensated-care shares. Although nonprofit hospitals, on 

average, have slightly higher uncompensated-care 

shares than for-profits (by 0.5 percentage points), the 

distributions of uncompensated-care shares among 

those two types of hospitals overlap to a large extent.

B When regression techniques were used to adjust 

for the hospitals’ size and location and for the characteristics of the local populations, nonprofit hospitals 

were estimated to have an average uncompensatedcare share that was 0.6 percentage points higher than 

that for otherwise similar for-profit hospitals. That 

estimated difference corresponds to nonprofit hospitals in the five selected states providing between $100 

million and $700 million more in uncompensated 

care than would have been provided if they had been 

for-profits.4

Provision of Medicaid-Covered Services

Medicaid’s payment rates have, in general, been found 

to be somewhat below the costs that hospitals incur in 

providing Medicaid-covered services. Because providing 

hospital services to Medicaid patients is often unprofitable and serves a needy population, it can be thought of 

as a type of community benefit. Among all community 

hospitals nationwide, CBO found that the Medicaid 

share—Medicaid-covered days as a share of all patient 

2. “Community hospitals” include nonfederal short-term general 

hospitals. This definition includes most hospital facilities but 

excludes, for example, federal hospitals run by the Veterans 

Administration, psychiatric hospitals, and long-term-care hospitals. Several of the key data sources used are Medicare administrative files. Therefore, only Medicare-certified community hospitals 

were included in the analyses in this paper. Throughout the text 

“all community hospitals” refers to all Medicare-certified community hospitals. The findings are referred to as representing the year 

2003, but the data are actually taken from either 2003 or 2002. 

For the analysis of uncompensated care, which includes hospitals 

in only five states, the data for 57 percent of hospitals are from 

federal fiscal year (FFY) 2003, and those for 43 percent of hospitals are from FFY 2002. For convenience, 2003 is used to describe 

the findings because the majority of hospitals report data for FFY 

2003. For consistency, the analysis for all community hospitals 

used the same data years that were used to analyze uncompensated 

care costs in the five states. The FFY 2003 data were used for all 

hospitals not in the five states. For the other analyses, which 

include hospitals in all of the states, 90 percent of hospitals had 

FFY 2003 data and 10 percent of hospitals had FFY 2002 data.

3. See Statement of David M. Walker, Comptroller General of the 

United States, before the House Committee on Ways and Means, 

published as Government Accountability Office, Nonprofit, ForProfit, and Government Hospitals: Uncompensated Care and Other 

Community Benefits, GAO-05-743T (May 26, 2005), available at 

www.gao.gov/new.items/d05743t.pdf. 

4. The range of $100 million to $700 million represents the 90 percent confidence interval from the underlying statistical analysis.
NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 3

days—was, on average, 1.5 percentage points lower 

among nonprofit hospitals than it was among for-profit 

hospitals (15.6 percent versus 17.2 percent). The Medicaid share was substantially higher among government 

hospitals (27.0 percent). When regression techniques 

were used to control for hospital characteristics, nonprofit hospitals were found to have adjusted Medicaid 

shares that were 1.3 percentage points lower than those 

of otherwise similar for-profit hospitals.

Provision of Specialized Services

CBO also examined the share of hospitals of different 

ownership types that provide four specific types of specialized patient services: intensive care for burn victims, 

emergency room care, high-level trauma care, and labor 

and delivery services.5

 Each of those services addresses a 

community need and has been identified as being generally unprofitable. Among all community hospitals nationwide, emergency room care and labor and delivery 

services were both quite common, whereas few hospitals 

provided burn intensive care or high-level trauma care.

CBO found that nonprofit hospitals were more likely 

than for-profit hospitals to provide each of the four specialized services examined. After adjustment for hospital 

characteristics, nonprofit hospitals were found to be significantly more likely than for-profit hospitals to provide 

two of the four specialized patient services (emergency 

room care and labor and delivery services). Compared 

with otherwise similar for-profit hospitals, the share of 

nonprofit hospitals providing emergency room care was 

3.8 percentage points higher, and the share providing 

labor and delivery services was 10.5 percentage points 

higher. CBO did not attempt to quantify the value to

the community of the availability of those specialized

services.

The Value of Tax Exemptions for Nonprofit 

Hospitals

The Joint Committee on Taxation (JCT) recently examined the value to nonprofit hospitals and their supporting 

organizations of the major tax exemptions they receive 

from federal, state, and local governments. Together, 

the value of the various tax exemptions in 2002 was 

estimated to be $12.6 billion, with exemptions from 

federal taxes accounting for about half of the total and 

exemptions from state and local taxes accounting for the 

remaining half.

JCT also estimated the value of some of the tax exemptions for nonprofit hospitals located in the five states 

for which uncompensated-care data were available. In 

those five states, the exemptions from federal and state 

corporate income taxes, state and local sales taxes, and 

local property taxes were valued at $2.5 billion. (Two 

important categories of tax exemptions—tax-exemptbond financing and the deductibility of charitable contributions—were included in the national totals but were 

not available for the five states and are not included in the 

five-state total.)

Background

The hospital industry in the United States includes a mix 

of ownership forms. Nonprofit hospitals are the most 

common type, but for-profit and government hospitals 

also play substantial roles.6 Of the 630,000 beds in 

Medicare-certified community hospitals in the United 

States in 2003, 68 percent were located in nonprofit 

hospitals, 16 percent were located in for-profit hospitals, 

and 15 percent were located in government (nonfederal) 

facilities.

This section of the analysis examines the differences between nonprofit hospitals and for-profit hospitals in their 

ownership structure, tax treatment, and the provision of 

collective goods. (Collective goods are defined as goods or 

services that, when used or consumed, generate well5. In CBO’s analysis, a hospital provides “high-level trauma care” if it 

is a level 1 or level 2 adult trauma center (stand-alone pediatric 

trauma centers are not included). A hospital may be designated 

as a trauma center if it meets certain criteria developed by the 

American College of Surgeons. Trauma centers are assigned a level 

ranging from 1 through 5, with level 1 being the highest. To be 

designated a level 1 or level 2 trauma center, a hospital must 

“[provide] comprehensive trauma care” and must “have immediate availability of trauma surgeons, anesthesiologists, physician 

specialists, nurses, and resuscitation equipment.” See Ellen J. 

MacKenzie and others, “National Inventory of Hospital Trauma 

Centers,” Journal of the American Medical Association, vol. 289, 

no. 12 (March 26, 2003), pp. 1515-1522.

6. The terms “nonprofit” and “tax-exempt” (or “untaxed”) are sometimes used interchangeably, but they are technically distinct. For 

the purposes of federal taxation, an organization may be deemed 

tax-exempt by meeting the requirements of section 501 of the 

Internal Revenue Code. Nonprofit status, on the other hand, is 

granted by state governments on the basis of criteria that vary 

from state to state. In CBO’s analysis, hospitals that identify 

themselves as nonprofit in Medicare Hospital Cost Reports are 

assumed to be exempt from federal, state, and local taxes.
4 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

being or utility for more than one individual at the same 

time.7

) The tax exemptions for nonprofit hospitals are 

discussed as one approach to promoting the provision of 

collective goods, and other approaches are identified as 

well.

Differences in Ownership Structure

Ownership of a business entity entails the right to direct 

the operations of that business and the right to receive its 

profits. Like for-profits, nonprofit hospitals have governing boards that guide their operations. And, like for-profits, nonprofit hospitals may earn surpluses or accounting 

profits, meaning an excess of revenues over expenses. But 

nonprofits face a “nondistribution constraint,” which 

means that they do not have shareholders and may not 

distribute surpluses to managers, individual owners, or 

members of the governing board. Surpluses generated by 

nonprofit hospitals’ activities are expected to be reinvested in the hospitals’ operations rather than distributed 

to individual owners.

Differences in Tax Treatment

Nonprofit hospitals receive tax exemptions that allow 

them to use funds that would have been paid in taxes for 

patient care or other purposes. Tax exemptions provided 

to nonprofit hospitals, therefore, can be viewed as a form 

of government subsidy for the activities of a certain type 

of hospital. Whether that subsidy is justified from a public policy perspective depends on whether policymakers 

believe that the activities of hospitals in general should be 

subsidized, and, if so, whether those subsidies should 

be targeted at hospitals that organize themselves as

nonprofits.

One possible rationale for providing tax exemptions to 

nonprofit hospitals would be if nonprofit hospitals 

tended to provide more collective goods than did forprofit hospitals. The provision of uncompensated medical care to an indigent individual might be thought of as a 

type of collective good: the medical care directly benefits 

the indigent individual who receives it and might also 

benefit members of the community (by fulfilling compassionate impulses, for example, or by preventing the 

spread of a communicable disease). The managers of 

nonprofit organizations, because they do not directly receive the profits from the activities they oversee, might, in 

principle, be more willing than the managers of for-profit 

firms to provide collective goods when doing so is unprofitable.8

Unlike for-profit hospitals, nonprofit hospitals are generally exempt from federal and state corporate income 

taxes, and local sales and property taxes. Nonprofit hospitals can also obtain tax-exempt-bond financing and receive charitable contributions that are tax-deductible to 

the donor. For a hospital to qualify for exemption from 

federal income taxes, it must be organized and operated 

exclusively for a charitable, educational, or scientific purpose and meet Internal Revenue Service (IRS) requirements under section 501(c)(3) of the tax code.

The IRS does not specifically require that a hospital 

provide a certain level of charity care to qualify for taxexempt status, as long as the hospital provides some 

benefits to the community. The criteria the IRS uses to 

determine whether a hospital qualifies as tax-exempt have 

changed over time and have been the subject of some debate. Activities that could support a hospital’s application 

for federal tax-exempt status include operating an emergency room that is open to all members of the community regardless of their ability to pay; having a governing 

board composed of community members; and using 

earnings to improve facilities, patient care, medical education, training, and research. 

7. Burton A. Weisbrod, The Nonprofit Economy (Cambridge, Mass.: 

Harvard University Press, 1988).

8. A concept in the discipline of economics that is similar to a collective good is that of a “public good.” Public goods are defined as 

having two properties: (1) nonrivalry in consumption (meaning 

that one person’s consumption does not diminish another person’s 

ability to consume the same good) and (2) nonexcludability 

(meaning that, because of the nature of the good, it is not feasible, 

once the good has been produced, to stop someone from consuming it; therefore, it is not possible for a seller of the good to recoup 

adequate payment for it). If nonindigent members of the community are made better off when indigent individuals are given health 

care, and if it is not possible for the hospital that provides such 

care to prevent nonindigent community members who have not 

contributed to the hospital from being made better off, then the 

provision of uncompensated care to poor people fits the definition 

of a public good. Because people can benefit from a public good 

without paying anything toward its production, a private marketplace may not produce an appropriate amount of such goods. 

Governments may intervene to bring about adequate production 

of public goods by either having the government produce those 

goods or by providing subsidies to private producers of such 

goods. Prevention of the spread of communicable disease also fits 

the definition of a public good and provides an additional rationale for subsidization of certain hospital activities, including care 

for the indigent.
NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 5

Table 1.

Estimated Value of Tax Exemptions 

Provided to Nonprofit Hospitals, 2002

Source: Joint Committee on Taxation.

To qualify for exemption from state corporate income 

taxes and for exemption from state and local property and 

sales taxes, hospitals are subject to local requirements that 

may differ from federal requirements. State and local governments have, in many cases, required that, in order to 

receive tax exemptions, hospitals meet standards that are 

stricter than those imposed by the IRS. For example, in 

1985 the Utah Supreme Court ruled that, to qualify for 

the property-tax exemption, hospitals must engage in 

some “act of giving,” such as providing charity care. In 

Illinois, property-tax exemptions are limited to nonprofit 

hospitals that dispense charity care to all who need it. 

Some states have already taken or have proposed taking 

the additional step of imposing specific reporting and 

performance requirements on nonprofit hospitals. For 

example, in Texas, to receive a property-tax exemption, 

nonprofit hospitals must regularly report on the charity 

care and other community benefits that they provide and 

must meet specified quantitative standards.9 Those state 

and local requirements can represent significant constraints on nonprofit hospitals, given the financial value 

to nonprofit hospitals of the exemptions from state and 

local taxes.

To evaluate how nonprofit hospitals currently meet the 

community benefits standard, the IRS recently distributed a questionnaire to a selected group of nonprofit hospitals. Those hospitals were asked to provide a detailed 

report on their community-benefit policies, admissions 

policies, billing policies, and the amount of uncompensated care they provide. The IRS may use the responses to 

the questionnaire to issue further guidance or standards 

relating to tax exemptions for nonprofit hospitals.

The Value of Tax Exemptions for Nonprofit 

Hospitals

JCT recently examined the value to nonprofit hospitals 

of the major tax exemptions they receive from federal, 

state, and local governments.10 Together, the value of 

the various tax exemptions for nonprofit hospitals nationwide was estimated to be $12.6 billion in 2002 (see 

Table 1). Exemptions from federal taxes accounted for 

about half of the total, and state and local taxes accounted 

for the other half. The largest categories were the exemption from local property taxes ($3.1 billion) and the 

exemption from state and local sales taxes ($2.8 billion). 

(The exemption from sales taxes applies to supplies that 

nonprofit hospitals purchase, such as medical and office 

equipment.)

JCT also estimated the value of certain tax exemptions 

provided to nonprofit hospitals located in the five states 

for which GAO data on uncompensated care were 

available. In those five states, the exemptions from the 

federal and state corporate income taxes, state and local 

sales taxes, and local property taxes in 2002 were valued 

at $2.5 billion. (Two important categories of tax exemptions—tax-exempt-bond financing and the deductibility 

of charitable contributions—were included in the 

national totals but were not calculated for the five states 

and are not included in the five-state total.)

In terms of reduced tax revenues, the costs to the various 

levels of government of the tax exemptions for nonprofit 

hospitals are difficult to quantify. Part of the difficulty in 

measuring the value of the tax exemptions arises from the 

fact that nonprofits, because of their tax-exempt status, 

do not file the same types of tax returns as for-profits and, 

thus, do not provide some information needed to calculate their potential tax liability. A more fundamental issue 

in valuing the tax exemptions provided to nonprofits is 

the fact that nonprofit hospitals, if they were to lose their 

tax-exempt status, would likely change their behavior.

9. For details on Texas’s charity-care standards for the nonprofit 

hospital tax exemption, see Statement of David M. Walker, May 

26, 2005; and Kathryn J. Jervis, “A Review of State Legislation 

and a State Legislator Survey Related to Not-for-Profit Hospital 

Tax Exemption and Health Care for the Indigent,” Journal of 

Health Care Finance, vol. 32, no. 2 (Winter 2005), pp. 36-71.

2.5

1.8

1.8

0.5

2.8

3.1

Total 12.6

(Billions of dollars)

Value

Sales Tax (State and local)

Property Tax (Local)

Corporate Income Tax (Federal)

Tax-Exempt-Bond Financing (Federal)

Charitable Contributions (Federal)

Corporate Income Tax (State)

10. See Congressional Budget Office, Nonprofit Hospitals and Tax 

Arbitrage (December 2006).
6 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

To calculate the value of the tax exemptions listed in 

Table 1, hospitals’ observed tax bases were multiplied by 

the applicable tax rates. That method follows JCT’s 

standard approach to calculating “tax expenditures,” 

which are defined as revenue losses resulting from special 

provisions or preferences in tax law.11 The calculation 

of tax expenditures implicitly assumes no behavioral 

responses—in other words, it assumes that if special tax 

preferences were removed there would be no change 

in firms’ income, capital structure, or physical assets. 

A revenue estimate, which is the estimated change in tax 

revenues arising from a change in tax policy, differs from 

a tax expenditure in that the revenue estimate incorporates behavioral responses. The value of the tax exemptions detailed in Table 1 does not incorporate behavioral 

responses and should not be interpreted as revenue 

estimates.

Identifying the potential behavioral responses of nonprofit hospitals to removal of or restrictions on tax 

exemptions is complex. If nonprofit hospitals lost their 

tax-exempt status but maintained their nonprofit ownership status, they would face financial pressure to reduce 

their accounting profits and thereby reduce their tax burden.12 That pressure could lead nonprofit hospitals to 

change their accounting practices as well as lower the 

prices they charge patients and insurers, and increase 

their costs of production.13 At the same time, adding new 

restrictions on tax-exempt status for nonprofit hospitals 

might prompt some of those facilities to convert to forprofit ownership, which might also result in changes in 

their tax bases (taxable income for converting hospitals, 

for example, might increase).

Approaches to Providing Collective Goods

Besides offering tax exemptions to nonprofit hospitals, 

governments have several options if they wish to promote 

the provision of collective goods such as health care for 

low-income individuals. The first approach is to produce 

those goods directly. Government hospitals that provide 

charity care are an example of direct production. The second approach is to purchase collective goods from private 

organizations. An example of that approach is the Medicaid program, through which the federal government and 

state governments purchase health care from private organizations on behalf of low-income individuals. The third 

approach is to subsidize the activities of producers of collective goods. Subsidies have the advantage of flexibility—local organizations can direct the use of the subsidies 

to meet locally identified needs—but potentially have the 

disadvantage of being poorly targeted.

Unlike the tax exemptions provided to nonprofit hospitals, other subsidy mechanisms exist that are available to 

hospitals of all ownership types. Such subsidies include 

Medicare and Medicaid disproportionate share hospital 

(DSH) payments and Medicare’s supplemental payments 

to teaching hospitals through the indirect medical education (IME) program.14 Hospitals may also receive partial 

reimbursement from Medicare for bad debt incurred for 

Medicare patients.15 In addition, some states fund hospitals through various revenue sources such as tobaccosettlement funds and uncompensated-care pools.

The existing subsidies for hospital care, other than the tax 

exemptions provided to nonprofits, are substantial. CBO 

estimates that in 2005 hospitals received $15 billion in 

Medicare DSH and IME payments, and $9 billion in

11. See Joint Committee on Taxation, Estimates of Federal Tax 

Expenditures for Fiscal Years 2006-2010, JCS-2-06 (2006).

12. For-profit hospitals also face an incentive to minimize their tax 

burden, but they are constrained from doing so by their owners’ 

interests in generating and distributing income.

13. See Congressional Budget Office, Taxing the Untaxed Business 

Sector (July 2005).

14. Medicare DSH payments are based on each hospital’s share of 

low-income patients. For the purposes of determining Medicare 

DSH payments, each hospital’s disproportionate patient percentage is calculated, which equals the share of Medicare patient days 

accounted for by Medicare beneficiaries who receive Supplemental 

Security Income plus Medicaid patient days as a share of total 

patient days. The mechanism for allocating Medicaid DSH funds 

varies from state to state.

15. If a Medicare beneficiary does not pay the required deductible or 

coinsurance for a hospital stay, the hospital may, under certain 

conditions, report the unpaid amounts as bad debt and receive 

reimbursement from Medicare for 70 percent of that bad debt. 

See Statement of Mark McClellan, Administrator of the Centers 

for Medicare & Medicaid Services, Tax Exemption for Hospitals 

and Federal Payment for Uncompensated Care, before the House 

Committee on Ways and Means (May 26, 2005), available at 

www.cms.hhs.gov/media/press/release.asp?Counter=1476.
NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 7

Medicaid DSH payments.16 Other analysts have estimated that Medicare bad-debt payments to hospitals 

totaled $1.6 billion in 2005, and that in 2001 state and 

local governments provided about $7 billion to hospitals 

through various tax appropriations and indigent-care 

programs.17

Defining Community Benefits

Although nonprofit hospitals receive tax exemptions 

in return for providing community benefits, there is little 

consensus on what constitutes a community benefit or 

how to measure community benefits. In the academic 

literature, community benefits have been defined as 

“those programs and services that are generally thought to 

be provided at low or negative margin and are intended 

to improve access by disadvantaged groups or to address 

important health care matters for a defined population.”18 Community benefits and collective goods are 

linked—if a hospital chooses to provide a particular 

medical service despite its being unprofitable, that may 

indicate that the hospital views that service as a collective 

good that is worth providing because it benefits the 

community. In identifying and measuring the community benefits that hospitals provide, it seems reasonable, 

therefore, to focus on services that are uncompensated or 

relatively unprofitable.

The IRS has developed a practical definition of community benefits for the purpose of granting tax exemptions. 

The federal criteria for providing tax exemptions to nonprofit hospitals have changed over time and have been 

gradually loosened. In a 1956 revenue ruling, the IRS criteria included a charity-care requirement, meaning specifically that a hospital “must be operated to the extent of its 

financial ability for those not able to pay for the services 

rendered.”19 That 1956 revenue ruling specified clearly 

that bad debt did not constitute charity and that incurring bad debt did not satisfy the criteria for the tax exemption. In a 1969 revenue ruling, the IRS significantly 

loosened the criteria for nonprofit hospitals to receive the 

federal income tax exemption and defined promoting the 

health of any broad class of persons as a community benefit, including, perhaps, such activities as charity care, 

health screening, community education about health 

risks, emergency room services, and basic research.20

A hospital could satisfy the 1969 community-benefit 

requirement by offering emergency room services to all 

people regardless of their ability to pay, even if the hospital did not otherwise admit individuals who were unable 

to pay. In 1983, the IRS loosened the guidelines further 

when it specified that a nonprofit hospital could receive 

the federal income tax exemption even if it did not operate an emergency room.21

As a basis for comparison, the Catholic Health Association (CHA) recently released a set of guidelines for hospitals to use in identifying community benefits. CHA’s 

guidelines, which are in some ways stricter than the IRS’s 

standards, specify that community benefits should include services that are “offered to the broad community 

[and] designed to improve community health,” and for 

which the hospital either is not compensated at all or is 

undercompensated relative to the costs of providing the 

service.22 The CHA guidelines include charity care as a 

community benefit but specifically exclude bad debt.

16. Many states use Medicaid supplemental payment programs, 

including DSH and upper payment limit (UPL) arrangements, to 

“recycle” Medicaid funds in order to increase the federal matching 

contribution. Those recycling strategies result in much of Medicaid’s DSH funding not being retained by hospitals and, instead, 

being returned to states through provider taxes or intergovernmental transfers. One recent study estimated that only roughly 

half of the total spending on Medicaid DSH was retained by hospitals, with the rest paid back to states or retained by states. See 

Teresa A. Coughlin, Brian K. Bruen, and Jennifer King, “States’ 

Use of Medicaid UPL and DSH Financing Mechanisms,” Health 

Affairs, vol. 23, no. 2 (March/April 2004), pp. 245-257. The 

effective subsidy to hospitals from Medicaid DSH spending, 

therefore, is substantially less than the $9 billion in total spending 

on Medicaid DSH. UPL arrangements result in payments that, on 

the basis of Coughlin’s study, appear in large part to be returned 

to the states rather than retained by hospitals. UPL payments 

are, therefore, not listed in this section as a type of subsidy for 

hospitals.

17. See Jack Hadley and John Holahan, “How Much Medical Care 

Do the Uninsured Use, and Who Pays for It?,” Health Affairs, 

Web Exclusive (February 12, 2003), Exhibit 4, p. 76.

18. Joel Weissman, “Uncompensated Hospital Care: Will It Be There 

if We Need It?,” Journal of the American Medical Association, 

vol. 276, no. 10 (September 11, 1996), pp. 823-828.

19. Internal Revenue Service, Revenue Ruling 56-185, 1956-1 

C.B. 202, available at www.irs.gov/pub/irs-tege/rr56-185.pdf.

20. Internal Revenue Service, Revenue Ruling 69-545, 1969-2 

C.B. 117, available at www.irs.gov/pub/irs-tege/rr69-545.pdf.

21. Internal Revenue Service, Revenue Ruling 83-157, 1983-2 

C.B. 94, available at www.irs.gov/pub/irs-tege/rr83-157.pdf.

22. Catholic Health Association, A Guide for Planning and Reporting 

Community Benefit, available at www.chausa.org/NR/rdonlyres/

7E5CFBD9-F741-4BA6-A74C-E8F14EC9DF82/0/

ReferenceI.pdf.
8 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

Previous Research on Differences 

Between For-Profit and Nonprofit

Hospitals

The Government Accountability Office recently released 

a report based on an analysis of hospitals in five selected 

states that compares the levels of uncompensated care 

provided by hospitals of different ownership types.23

(The data on uncompensated care used for GAO’s study 

are also used in this analysis.) GAO found that, in four of 

the five states analyzed, uncompensated care as a share of 

operating expenses was higher at nonprofit hospitals than 

at for-profit hospitals, although the differences were relatively small. A striking finding from that study was that 

(nonfederal) government hospitals devote a substantially 

greater share of their activities to uncompensated care 

than do either nonprofit or for-profit hospitals.24

Although other research findings besides the GAO report 

suggest that nonprofit hospitals provide higher levels of 

uncompensated care than do for-profits,25 some researchers have concluded that the differences in the level of uncompensated care provided by nonprofit and for-profit 

hospitals are small.26 Two studies have also reported that 

when nonprofit hospitals were acquired by for-profit corporations, they did not reduce their provision of uncompensated care or other community benefits.27

Although studies on uncompensated care often focus on 

the contrasts between for-profit and nonprofit hospitals, 

several factors may lead those different types of hospitals 

to provide similar levels of uncompensated care. First, 

both types of hospitals may choose to provide uncompensated care to maintain a good relationship with the local 

community. Second, some states, such as New Jersey, distribute funds to hospitals on the basis of the level of uncompensated care they provide, which can substantially 

reduce the financial disincentives to provide uncompensated care. And, third, regardless of nonprofit and forprofit hospitals’ willingness to provide charity care, both 

types of hospitals may incur bad debt in the normal 

course of operations.

The difference in the level of uncompensated care provided by nonprofit and for-profit hospitals has generally 

been found to be small, but other disparities in hospitals’ 

behavior have been documented. Nonprofit hospitals 

have been found by some researchers to be less efficient 

than for-profit hospitals, meaning that costs per unit of 

output are higher.28 Many other studies report that

23. Statement of David M. Walker, May 26, 2005. 

24. A 1990 GAO study also found that government hospitals devoted 

a larger share of their activities to uncompensated care than either 

nonprofit or for-profit hospitals. See General Accounting Office, 

Nonprofit Hospitals: Better Standards Needed for Tax Exemption, 

GAO/HRD-90-84 (May 30, 1990), available at http://archive.

gao.gov/d24t8/141681.pdf. The difference in uncompensatedcare shares between government hospitals and other hospitals 

appears to have grown substantially since the late 1980s.

25. Mark Schlesinger and others, “Competition, Ownership and 

Access to Hospital Services,” Medical Care, vol. 35, no. 9 (1997), 

pp. 974-992.

26. Frank A. Sloan, “Not-for-Profit Ownership and Hospital Behavior,” in A.J. Culyer and J.P. Newhouse, eds., Handbook of Health 

Economics (Amsterdam: Elsevier Science B.V., 2000); and Statement of Mark B. McClellan, May 26, 2005.

27. Gary J. Young, Kamal R. Desai, and Carol Van Deusen Lukas, 

“Does the Sale of Nonprofit Hospitals Threaten Health Care for 

the Poor?,” Health Affairs, vol. 16, no. 1 (January/February 1997), 

pp. 137-141; and Gary J. Young and Kamal R. Desai, “Nonprofit 

Hospital Conversions and Community Benefits: New Evidence 

from Three States,” Health Affairs, vol. 18, no. 5 (September/

October 1999), pp. 146-155.

28. George W. Wilson and Joseph M. Jadlow, “Competition, Profit 

Incentives, and Technical Efficiency in the Provision of Nuclear 

Medicine Services,” Bell Journal of Economics, vol. 13, no. 2 

(Autumn 1982), pp. 472-482; Regina E. Herzlinger and William 

S. Krasker, “Who Profits from Nonprofits?,” Harvard Business 

Review, vol. 93 (1987), pp. 93-106; and David M. Cutler and Jill 

R. Horwitz, “Converting Hospitals from Not-for-Profit to 

For-Profit Status: Why and What Effects?,” in D.M. Cutler, ed., 

The Changing Hospital Industry: Comparing Not-for-Profit and 

For-Profit Institutions (Chicago: University of Chicago Press, 

2000). Note, however, that at least one study has found that nonprofit hospitals are more efficient than for-profit hospitals. See 

Stephen Zuckerman, Jack Hadley, and Lisa Iezzoni, “Measuring 

Hospital Efficiency with Frontier Cost Functions,” Journal of 

Health Economics, vol. 13 (1994), pp. 255-280.
NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 9

nonprofits charge lower prices or markups than do forprofits.29 Several studies have also concluded that forprofit hospitals appear to react more strongly than nonprofits do to the reimbursement environment by altering 

the mix of services they provide,30 by limiting increases in 

the wages of hospital employees,31 and by more aggressively coding services provided so as to increase reimbursement rates.32 A large number of studies have examined differences in the quality of care and health 

outcomes between for-profit and nonprofit hospitals but 

have not generally identified any consistent patterns.33

Study Data and Methods

The remainder of this paper assesses whether the three 

types of hospitals—nonprofit, for-profit, and government—provide different levels of community benefits. 

First, the types of services used in the analysis as measures 

of community benefits are explained. Next, the paper describes the data used to measure hospital characteristics 

and the provision of community benefits, and the analytical strategy used to compare hospitals of different ownership types. Then the results of the analysis are presented, 

which examine the differences between hospitals of different ownership types, both in their basic characteristics 

(size, location, and so on), and in their provision of community benefits.

Measures of Community Benefits

Because of the lack of general consensus on the definition 

of community benefits, many different types of services 

and activities could be regarded as community benefits. 

This analysis focuses on the provision of uncompensated 

care, the provision of Medicaid-covered services, and the 

provision of certain specialized facilities or services (burn 

intensive care, emergency room care, high-level trauma 

care, and labor and delivery services).

Although uncompensated care is the focus of this CBO 

paper and has frequently been analyzed by other researchers, it has substantial limitations as a measure of community benefits. The most significant limitation is that it 

does not distinguish between the provision of charity care 

for the indigent, which is more clearly a type of community benefit, and bad debt, which is not necessarily a 

community benefit. A hospital may incur bad debt when 

providing services to a high-income individual with

29. Craig G. Coelen, “Hospital Ownership and Comparative 

Hospital Costs,” in Bradford H. Gray, ed., For-Profit Enterprise in 

Health Care (Washington, D.C.: National Academy Press, 1986); 

Robert V. Pattison and Hallie M. Katz, “Investor-Owned and 

Not-for-Profit Hospitals: A Comparison Based on California 

Data,” New England Journal of Medicine, vol. 309 (1983), pp. 

347-353; Robert V. Pattison, “Response to Financial Incentives 

Among Investor-Owned and Not-for-Profit Hospitals: An Analysis Based on California Data 1978-82, in Gray, ed., For-Profit 

Enterprise in Health Care; and Richard G. Frank and David S. 

Salkever, “Nonprofit Organization in the Health Sector,” Journal 

of Economic Perspectives, vol. 8, no. 4 (Autumn 1994), pp. 129-

144.

30. Jill R. Horwitz, “Making Profits and Providing Care: Comparing 

Nonprofit, For-Profit, and Government Hospitals,” Health 

Affairs, vol. 24, no. 3 (May/June 2005), pp. 790-801.

31. Daniel P. Kessler and Mark B. McClellan, “The Effects of 

Hospital Ownership on Medical Productivity,” Rand Journal of 

Economics, vol. 33, no. 3 (Autumn 2002), pp. 488-506.

32. Elaine Silverman and Jonathan Skinner, “Medicare Upcoding and 

Hospital Ownership,” Journal of Health Economics, vol. 23, no. 2 

(March 2004), pp. 369-389; and Leemore S. Dafny, “How Do 

Hospitals Respond to Price Changes?,” American Economic 

Review, vol. 95, no. 5 (December 2005), pp. 1525-1547.

33. Frank A. Sloan and others, “Hospital Ownership and Cost and 

Quality of Care: Is There a Dime’s Worth of Difference?,” Journal 

of Health Economics, vol. 21, no. 1 (January 2001), pp. 1-21; 

Edmund R. Becker and Frank A. Sloan, “Hospital Ownership and 

Performance,” Economic Inquiry, vol. 23, no. 1 (January 1985), 

pp. 21-36; Gary Gaumer, “Medicare Patient Outcomes and Hospital Organizational Mission,” in Gray, ed., For-Profit Enterprise in 

Health Care; Stephen M. Shortell and Edward F. X. Hughes, “The 

Effects of Regulation, Competition, and Ownership on Mortality 

Rates Among Hospital Inpatients,” New England Journal of Medicine, vol. 318, no. 17 (1988), pp. 1100-1107; Emmett B. Keeler 

and others, “Hospital Characteristics and Quality of Care,” Journal of the American Medical Association, vol. 268, no. 13 (1992), 

pp. 1709-1714; Sloan, “Not-for-Profit Ownership and Hospital 

Behavior”; and Kessler and McClellan, “The Effects of Hospital 

Ownership on Medical Productivity.” 
10 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

insurance, for example, if the individual fails to pay the 

deductible for a hospital stay.34

Medicaid’s payment rates have, in general, been found to 

be lower than the costs that hospitals incur for providing 

Medicaid-covered services. Providing hospital services to 

Medicaid patients is generally unprofitable and serves a 

needy population and can, therefore, be thought of as a 

type of community benefit. Like uncompensated care, 

however, the provision of Medicaid-covered services has 

significant limitations as a measure of community benefits. The profitability of providing care to Medicaid patients appears to vary widely from state to state and also 

probably varies from hospital to hospital, and from case 

to case. Because providing Medicaid-covered services is 

not always unprofitable, it is not always appropriate to 

treat it as a community benefit.

The four specialized services analyzed by CBO (burn intensive care, emergency room care, high-level trauma 

care, and labor and delivery services) were selected because they serve community needs and have been identified by other researchers as being generally unprofitable, 

and because data are readily available on which hospitals 

provide them.35 CBO did not attempt directly to measure the profitability of each of the four specialized 

services.

Data Sources

Two data sets were constructed, the first including all 

Medicare-certified community hospitals in the United 

States and the second including only the subset of community hospitals for which data on uncompensated care 

were available. Both data sets include the following hospital characteristics: ownership status, specialized services 

provided, community characteristics, and financial 

characteristics. Sufficiently reliable data on uncompensated care were available only for hospitals in five states: 

California, Florida, Georgia, Indiana, and Texas. GAO, 

which gathered the data on uncompensated care, selected 

those states because they are geographically diverse, they 

have a large number of hospitals in each ownership 

group, and authorities in those states collected hospitalspecific information on uncompensated care.36

GAO’s measure of uncompensated-care costs is based on 

charges (or “list prices”) deflated by a hospital-specific 

cost-to-charge ratio. The cost-to-charge ratio equals the 

total costs of providing care to all patients in a given hospital divided by the total charges for all patients in that 

hospital.37

The main source of data on hospital characteristics is the 

Medicare Hospital Cost Report database. All Medicarecertified hospitals in the United States must file an annual 

cost report with the Centers for Medicare & Medicaid 

34. There is very little direct evidence on the income and insurance 

status of the patients who account for hospitals’ uncompensated 

care. Two surveys of uncompensated-care patients, both limited to 

hospitals in Massachusetts, showed that most uncompensated care 

was attributable to uninsured patients (see Joel S. Weissman, 

Carol Van Deusen Lukas, and Arnold M. Epstein, “Bad Debt and 

Free Care in Massachusetts Hospitals,” Health Affairs, vol. 11, no. 

2, Summer 1992, pp. 148-161), and that the great majority of

bad debt was attributable to patients with incomes below 200%

of the federal poverty line (see Joel S. Weissman, Paul Dryfoos, 

and Katharine London, “Income Levels of Bad-Debt and FreeCare Patients in Massachusetts Hospitals,” Health Affairs, vol. 18, 

no. 4, July/August 1999, pp. 156-166). Those findings support 

the validity of the use of uncompensated care as a measure of 

community benefits, but they are not necessarily generalizable 

nationwide.

35. William M. Gentry, and John R. Penrod, “The Tax Benefits of 

Not-for-Profit Hospitals,” in D.M. Cutler, ed., The Changing 

Hospital Industry: Comparing Not-for-Profit and For-Profit Institutions (Chicago: University of Chicago Press, 2000); and Horwitz, 

“Making Profits and Providing Care: Comparing Nonprofit, 

For-Profit, and Government Hospitals.” Gentry and Penrod point 

out that emergency room care and labor and delivery services are 

financially unrewarding to hospitals because they are provided to 

disproportionately large numbers of Medicaid enrollees and the 

uninsured. Also, the Emergency Medical Treatment & Active 

Labor Act (EMTALA) makes the provision of emergency room 

care less financially attractive to hospitals. Complying with 

EMTALA, which is a precondition for participation in the Medicare program, requires that hospitals—if they choose to offer 

emergency room care—provide screening and stabilization services to all patients entering the emergency room regardless of 

their ability to pay. Some specialized services, besides the four 

CBO examined, have also been identified as generally unprofitable, but data on which hospitals provided those other services 

were not readily available.

36. For-profits hospitals had a larger market share in the five GAO 

states than in states not included in the GAO data. Among the 

hospitals included in the GAO data, 29 percent were for-profit, 

while among the hospitals that were included in the national analysis but not in the five GAO states only 14 percent were for-profit. 

That difference in for-profit market share implies that it may be 

difficult to generalize findings from the five GAO states to the 

national level.

37. Cost-to-charge ratios vary widely across hospitals, with

ratios ranging from 0.17 (the 5th percentile) to 0.70 (the 

95th percentile).
NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 11

Services (CMS). Medicare Hospital Cost Reports contain 

a wealth of information on providers, such as ownership 

type and facility characteristics, utilization data (discharges and days of patient care), costs and charges by 

cost center (in total, and for Medicare), and financialstatement data (including assets, revenues, and expenses).38 The cost reports also provide information on 

the location of the hospitals, the number of beds in each 

facility, and the availability of three types of specialized 

patient services: emergency room care, burn intensive 

care, and labor and delivery services. To identify hospitals 

that provide high-level trauma care, CBO used an inventory of trauma centers provided by the Trauma Information Exchange Program (TIEP).39

The Medicare Hospital Cost Report data used in this 

analysis are from the March 2005 update, which includes 

all Medicare Hospital Cost Reports submitted up to that 

point. The analysis focuses on services provided in 2003, 

however, because the uncompensated-care data cover that 

period and because cost-report data are available for 2003 

for over 4,500 community hospitals, representing nearly 

all such hospitals. Other hospital data are obtained from 

the “Provider Specific” file and the “Provider of Services” 

file, both maintained by CMS.

The characteristics of the county in which each hospital is 

located are taken from the 2004 Area Resource File, 

which is maintained by the Bureau of Health Professions 

of the Department of Health and Human Services. Those 

data include average per capita income in the county, the 

percentage of the population in poverty, the unemployment rate, and other population characteristics. Each 

hospital is associated with a set of population characteristics (income, and so on) based on the county in which 

that hospital is located. For each population characteristic, the most recent data available were used.

The level of uncompensated care provided by a hospital 

will depend, in part, on the size of the hospital, the characteristics of the community in which it is located, as well 

as the hospital’s mission and form of organization. One of 

the reasons that nonprofit hospitals may provide a higher 

level of uncompensated care than for-profit hospitals do 

is simply that nonprofits tend to be larger than for-profits. To account for differences in hospitals’ size in the 

comparison of levels of uncompensated care, CBO used 

uncompensated care as a share of operating expenses 

(the uncompensated-care share) as the main measure of 

uncompensated care.

Methods of Analysis

CBO used two approaches to compare the level of community benefits provided by the three different types of 

hospitals. The first approach is an “unadjusted” analysis 

that compares simple weighted averages among hospitals 

of different ownership types. The second approach is an 

“adjusted” analysis that measures the differences between 

hospitals of different ownership types, holding constant 

certain hospital characteristics, such as the size of the facility, the state in which it is located, and the income level 

of the community in which it is located. Those unadjusted and adjusted analyses were first applied to uncompensated-care shares, and then the same approach is used 

to analyze the provision of Medicaid-covered services, 

and the provision of certain specialized services.

The use of both unadjusted and adjusted analyses can 

help determine whether any observed differences among 

hospitals of different ownership types are attributable to 

the hospitals’ location and size or to some other factor 

correlated with ownership status. As other researchers 

have pointed out, hospitals of different ownership types 

tend to be located in disparate geographic areas with divergent patient populations. One can think of different 

geographic areas as having varying levels of demand for 

uncompensated care, with low-income areas and areas 

with high numbers of uninsured people having higher 

levels of demand. The unadjusted uncompensated-care 

shares reflect both hospitals’ willingness and ability to 

provide such care and their decision to locate in areas 

with high or low levels of demand for uncompensated 

care. The differences in adjusted uncompensated-care 

38. Although the Medicare Hospital Cost Report includes some information on uncompensated care, CBO did not analyze those Cost 

Report-based data because of concerns over the quality and consistency of the data. Nancy M. Kane and Stephen A. Magnus 

present a detailed description of the limitations of the Medicare 

Cost Report, especially financial measures contained in the cost 

report’s worksheet G and uncompensated care in worksheet S-10. 

See Nancy M. Kane and Stephen A. Magnus, “The Medicare Cost 

Report and the Limits of Hospital Accountability: Improving 

Financial Accounting Data,” Journal of Health Politics, Policy and 

Law, vol. 26, no. 1 (February 2001), pp. 81-105. 

39. National Inventory of Trauma Centers Database (Upper 

Marlboro, Md.: American Trauma Society-Trauma Information 

Exchange Program, 2006), accessed October 4, 2006. The analysis and interpretation of the data on high-level trauma care presented in this paper are solely the responsibility of CBO and do 

not represent the views or conclusions of TIEP, its funders, or 

those who carried out the original collection of the data.
12 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

Table 2.

Hospital Ownership Types, by Region

Source: Congressional Budget Office based on the Medicare Hospital Cost Report, 2003.

shares, by contrast, reflect differences in hospitals’ willingness and ability to supply uncompensated care, after 

controlling for differences in the communities in which 

the hospitals are located and other hospital characteristics. Conceptually, the adjusted differences represent the 

differences that would occur if hospitals of all ownership 

types were located in the same areas and were the same in 

all respects other than ownership status.40

To calculate the adjusted differences in uncompensatedcare shares, CBO regressed uncompensated-care shares 

on state indicator variables, local population characteristics, a measure of hospital size, case mix (in other words, 

the average intensity of illness and resource needs among 

a hospital’s patients), and indicator variables for nonprofit 

and government ownership status.41 (“For-profit” ownership is the omitted reference group.)42 That regression 

yields adjusted differences in uncompensated-care shares 

for each state and the average for the entire five-state sample. That technical adjustment has the effect of correcting 

for differences in hospital size and local community characteristics that may affect the uncompensated-care share 

of a hospital, leaving a clearer picture of the differences in 

community benefits that are attributable solely to differences in ownership type.

Characteristics of Hospitals

Of the 4,518 community hospitals included in the national analysis, 58 percent (2,641) are categorized as nonprofit, 18 percent (794) as for-profit, and the remaining 

24 percent (1,083) as government hospitals. Those different types of hospitals vary in their location, size, and financial performance, and in their provision of community benefits.

The distribution of hospital ownership varies markedly 

by region (see Table 2). In the Northeast, 89 percent of 

the hospitals are nonprofits, whereas in the South only 

43 percent of the hospitals are nonprofits. For-profit hospitals are common in the South and West, but not in the 

Northeast and Midwest.

Nonprofit hospitals tend to be larger than for-profit

hospitals and are more likely to be teaching hospitals 

(see Table 3). The mean number of beds at nonprofit 

Number of Hospitals

Nonprofit For-Profit Government of All Types

Northeast 89 6 5 618

Midwest 69 6 25 1,339

South 43 29 28 1,728

West 52 21 27 833

All Regions 58 18 24 4,518

Share of Hospitals (Percent)

40. Nonprofit hospitals operating in the same market as for-profits 

appear to imitate their behavior to some extent. See Cutler and 

Horwitz, “Converting Hospitals from Not-for-Profit to For-Profit 

Status: Why and What Effects?”; Silverman and Skinner, “Medicare Upcoding and Hospital Ownership”; and Jonathan Gruber, 

“The Effects of Competitive Pressure on Charity-Hospital 

Response to Price Shopping in California,” Journal of Health Economics, vol. 13, no. 2 (1994), pp. 183-212. That phenomenon has 

led some researchers to focus not on the effect of the ownership 

status of individual hospitals, but, instead, on the effect of the 

share of hospitals that are for-profit in defined geographic areas. 

See, for example, Mark Duggan, “Hospital Market Structure and 

the Behavior of Not-for-Profit Hospitals,” Rand Journal of Economics, vol. 33, no. 3 (Autumn 2002), pp. 433-446. CBO did not 

analyze any market-level ownership effects or interaction effects 

among hospitals. Possible interaction effects might include crowding out (the existence of governmental hospitals could reduce the 

uncompensated care provided by nongovernmental hospitals in 

the same market) and imitation effects.

41. An indicator variable is one that only takes on values of either zero 

or one. For example, the state indicator variable for Alaska equals 

one for all hospitals located in Alaska and zero for all other hospitals.

42. In the uncompensated-care-share regressions, each independent 

variable is interacted with—in other words, multiplied by—a set 

of indicator variables representing the state in which the hospital 

is located. That allows the estimated effect of each independent 

variable to vary from state to state. The uncompensated-care-share 

regressions are weighted by operating expenses.
NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 13

Table 3.

Characteristics of Hospitals, by Ownership Type

Source: Congressional Budget Office based on the Medicare Hospital Cost Report, 2003.

Notes: SSI = Supplemental Security Income.

All statistics represent means, unless otherwise noted.

The statistical significance was calculated for the differences between for-profit and nonprofit hospitals and between for-profit 

and government hospitals, using two-tailed Student's t-tests. * = p<0.10; ** = p<0.05; *** = p<0.01.

Approximately 700 hospitals were missing data on SSI days as a share of Medicare days and case-mix index. A small number of 

hospitals were missing data for some items. 

Weights were used to calculate the following statistics: percentage of discharges (weight = discharges); case-mix index (weight = 

inpatient days); SSI days as a percentage of Medicare days (weight = Medicare days); ratio of interns/residents to (100) beds (weight 

= beds); local population characteristics (weight = inpatient days).

a. The source for total margins is the Medicare Payment Advisory Commission (MedPAC). Total margins were calculated by MedPAC among 

community hospitals paid under Medicare's prospective payment system in 2003.

b. Statistical significance not calculated.

c. Each hospital is assigned local population characteristics on the basis of the population of the county in which it is located.

794 2,641 1,083

130 164 *** 90 ***

5,666 8,337 *** 4,018 ***

Medicare discharges (Percent) 37.5 37.4 32.9 ***

Medicaid discharges (Percent) 16.9 13.5 *** 23.0 ***

465 955 *** 551 **

1.4 1.5 *** 1.4

13.2 8.1 *** 12.0 **

18.1 30.8 *** 12.8 ***

3.5 12.2 *** 19.0 ***

3.8 5.9 ** 4.0

2.4 5.6 *** 3.7 *

57.0 137.2 *** 70.0 **

30.4 56.5 *** 26.6 *

68.9 119.0 *** 58.6 **

64.5 120.6 *** 64.4

9.1 3.9 b 2.9 b

29,126 32,423 *** 29,273

13.4 11.4 *** 13.2

19.0 15.4 *** 17.7 ***

14.4 14.9 *** 14.4

6.1 5.8 *** 6.0

9.3 7.0 *** 8.4 ***

59.8 51.4 *** 24.1 ***

33.1 34.3 41.8 ***

7.1 14.3 *** 34.1 ***

Total discharges

Population uninsured among people under age 65 (Percent)

Hospital Characteristics

Teaching hospital (Percent)

Number of staff (Full-time equivalents)

Case-mix index (Transfer-adjusted)

Nonprofit Government 

Facility Size and Patient Population

Number of hospital beds

Hospital Characteristics For-Profit

Number of Hospitals in Data Set

Ownership Type

Operating expenses (Millions of dollars)

Ratio of interns/residents to (100) beds

Referral center (Percent)

Transplant center (Percent)

Financial Measures

Total assets (Millions of dollars)

Fixed assets (Millions of dollars) 

SSI days as a percentage of Medicare days

Net patient revenue (Millions of dollars)

Location

Large urban area (Percent)

Small urban or suburban area (Percent)

Rural area (Percent)

Total margin (Percent)a

Local Population Characteristicsc

Average per capita income (Dollars)

Population in poverty (Percent)

Population eligible for Medicare (Percent)

Unemployment rate

Population with fewer than nine years of schooling (Percent)
14 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

hospitals (164) is 26 percent larger than the mean number of beds at for-profits (130), and 82 percent larger 

than at government hospitals (90). The number of patient discharges and the number of employees (measured 

by full-time equivalents) follow similar patterns.

Teaching hospitals account for 31 percent of nonprofits 

versus 18 percent of for-profits and 13 percent of government hospitals.43 The ratio of interns and residents to 

beds, a measure of teaching intensity, shows that nonprofit hospitals are involved to a greater degree in graduate medical education than are for-profits.44 Nonprofits 

also have higher mean total assets, fixed assets, net patient 

revenues, and operating expenses than both for-profit 

and government hospitals. Nonprofit hospitals have a 

total margin (3.9 percent) that is somewhat higher than 

government hospitals’ (2.9 percent) but lower than forprofits’ (9.1 percent).45

Compared with for-profit hospitals and government hospitals, nonprofit hospitals tend to be located in counties 

with higher average incomes and lower poverty rates. 

Nonprofit hospitals also tend to be located in areas with 

relatively low rates of uninsurance and higher levels of education. Both nonprofit hospitals and government hospitals are more likely than for-profit hospitals to be located 

in rural areas.

Differences in the Provision of 

Uncompensated Care

CBO’s analysis of uncompensated care as a share of operating expenses was conducted using 1,057 community 

hospitals in the five selected states—California, Florida, 

Georgia, Indiana, and Texas—for which data on uncompensated care were available. Of those 1,057 community 

hospitals, 462 (44 percent) were nonprofit, 308 (29 percent) were for-profit, and 287 (27 percent) were government-owned. In the five states analyzed, nonprofit hospitals provided a total of about $3 billion in uncompensated care, government hospitals provided more than

$3 billion, and for-profit hospitals provided about 

$1 billion in uncompensated care.

Table 4 presents the unadjusted uncompensated-care 

shares for each ownership type, as well as unadjusted and 

adjusted differences between nonprofit and for-profit 

hospitals, and between government hospitals and forprofit hospitals.46 In the unadjusted results, nonprofit 

hospitals were found to devote a slightly larger share of 

their operating expenses to uncompensated care than did 

for-profits (a statistically significant difference of 4.7 percent versus 4.2 percent).

The adjusted differences in Table 4 reflect the estimated 

differences in uncompensated-care shares after controlling for the following variables: the hospital’s size; the 

state in which it is located; the degree of urbanization of 

the community in which it is located; its case mix; the 

percentage of the surrounding county’s population that 

lives in poverty; the percentage of the county’s population 

that is uninsured; and the percentage of the county’s population that is eligible for Medicare. (The full regression 

results used to generate the adjusted results in Table 4 are 

included in Table A-1.) After adjustment, the difference 

between nonprofit and for-profit hospitals in their average uncompensated-care share was a statistically significant 0.6 percentage points. As in the unadjusted results, 

43. In this analysis, a teaching hospital is defined as a hospital that 

reports being a teaching hospital in the Medicare Hospital Cost 

Report.

44. Some researchers treat the costs that hospitals incur in providing 

graduate medical education as a type of community benefit, similar to the provision of uncompensated care. Others have argued 

that medical residents bear the costs of their own training by earning salaries less than the revenue generated for the hospital by the 

services they provide, and that medical residents ultimately benefit 

from their training when they receive the higher salaries they can 

command because of that training. Teaching hospitals also receive 

payments from Medicare on the basis of the number of residents 

in training. Those facts imply that providing graduate medical 

education is not necessarily unprofitable for the teaching hospital 

and does not necessarily meet the criteria CBO used to identify 

services as community benefits.

45. The total margin is defined as the excess of total payments from 

all sources over all costs as a share of payments.

46. The unadjusted uncompensated-care shares reported by CBO 

inTable 4 differ slightly from the uncompensated-care shares 

reported by GAO (see Statement of David M. Walker, May 26, 

2005, “Highlights” and p. 11). The discrepancy is attributable to 

the use of different data sources for hospital operating expenses 

(hospital operating expenses are used as the denominator in the 

calculation of uncompensated-care shares). The differences in 

total operating expenses between the two data sources are relatively small and are not large enough to substantially affect the 

key results.
NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 15

Table 4.

Uncompensated-Care Shares, by Hospital Ownership Type and State 

Source: Congressional Budget Office based on the Medicare Hospital Cost Report, 2003, and data from the Government Accountability 

Office on uncompensated care.

Notes: The uncompensated-care share equals uncompensated-care costs as a share of total hospital operating expenses, expressed as a percentage. The adjusted differences reflect the differences between for-profit, nonprofit, and government hospitals after controlling for 

the following factors: number of hospital beds, hospital case mix, and population characteristics of the county in which the hospital 

was located (including percentage in poverty, percentage without insurance, percentage eligible for Medicare, and the degree of

urbanization—large urban, suburban/small urban, or rural—of the county). In the “All Five States” model, state indicator variables 

were included, and each control variable was interacted with an indicator for the state in which the hospital was located. All regression 

models were weighted by operating expenses. Appendix A presents the regression models used to calculate the adjusted differences.

In the unadjusted results, the statistical significance of the differences (between for-profit and nonprofit hospitals and between forprofit and government hospitals) was calculated using two-tailed Student's t-tests. In the adjusted results, the statistical significance 

of the differences was calculated on the basis of the estimated regression coefficients and standard errors. * = p<0.10; 

** = p<0.05; *** = p<0.01.

government hospitals were found in the adjusted results 

to have much higher uncompensated-care shares than either nonprofit or for-profit hospitals. If nonprofit hospitals in the five selected states had behaved like otherwise 

similar for-profit hospitals—in other words, if they had 

provided the level of uncompensated care that CBO predicts would have been provided by otherwise similar forprofit hospitals—there is a 90 percent chance that nonprofit hospitals would have provided between $100 million and $700 million less in uncompensated care than 

they actually did provide.47

To check the sensitivity of the results to the particular 

empirical specification used, CBO analyzed a number of 

alternative specifications. Alternative models were considered that included only subsets of the control variables in 

the basic model (the results of two of those models are 

shown in the appendix); added a teaching-hospital control variable; used different functional forms for some of 

the variables; and used different geographic groupings 

(such as zip code) for defining certain variables (such as 

the poverty rate). In general, the key results on nonprofit 

ownership status were quite similar in those alternative 

analyses to the main results presented in Table 4. The 

finding that nonprofit hospitals in the five selected states 

have, on average, slightly higher uncompensated-care 

shares than for-profit hospitals appears, therefore, to be 

statistically robust, meaning that very similar key results 

occur when different analytical specifications are used.

Effect of Location on Adjusted Differences

The relatively small estimated differences that exist between nonprofit and for-profit hospitals in adjusted uncompensated-care shares could tend to mask larger differences in actual shares if nonprofits tended to be located in 

areas with high demand for uncompensated care. That is, 

the adjustment process controls for locational characteristics and would not, in a sense, give credit to nonprofit 

hospitals for their decision to operate in areas with a high 

demand for uncompensated care. On the basis of the national data presented in Table 3, however, it appears that

328 3.4 3.2 12.8 -0.2 -0.4 9.4 *** 8.1 ***

168 4.3 5.5 12.8 1.2 *** 0.9 * 8.5 *** 8.1 ***

132 5.2 6.0 10.3 0.8 -0.4 5.1 *** 2.3

97 1.9 3.9 3.4 1.9 *** 1.8 *** 1.5 *** 0.7

332 4.6 6.4 19.7 1.8 *** 2.1 ** 15.2 *** 15.3 ***

1,057 4.2 4.7 13.0 0.5 *** 0.6 * 8.9 *** 8.6 ***

Nonprofit and Government and

Difference Between 

Texas

All Five States

For-Profit Hospitals

Number of (Percentage points)

For-Profit Nonprofit Government

Difference Between

(Percent) (Percentage points)

Mean Uncompensated-Care Share

Florida

Georgia

Indiana

Hospitals

California

For-Profit Hospitals

Unadjusted Adjusted Unadjusted Adjusted 

47. The range of $100 million to $700 million represents the 90 percent confidence interval from the underlying statistical analysis.
16 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

Table 5.

Economic Characteristics of Hospitals’ Communities, by Hospital Ownership

Type and State

Source: Congressional Budget Office.

Note: Each hospital was assigned local population characteristics on the basis of the population of the county in which it is located. The 

statistical significance was calculated for the differences between for-profit and nonprofit hospitals and between for-profit and government hospitals, using two-tailed Student's t-tests. * = p<0.10; ** = p<0.05; *** = p<0.01.

nonprofit hospitals tend to be located in areas with relatively high income, low poverty rates, and low rates of 

uninsurance.48

To examine locational differences in more detail, CBO 

focused on the five states included in the uncompensated-care analysis and measured average per capita income, poverty rates, and rates of uninsurance in the 

counties where the hospitals were located (see Table 5). In 

each of the five states except for Indiana, nonprofit hospitals, compared with for-profit hospitals, were found to be 

located in counties with either lower poverty rates, lower 

rates of uninsurance, or both. (In Indiana, in comparison 

with for-profit hospitals, nonprofit hospitals were located 

in counties with higher rates of poverty and higher rates 

of uninsurance.) On the whole, nonprofit hospitals do 

not appear disproportionately to have characteristics, 

other than ownership type, that are associated with 

greater provision of uncompensated care. That fact 

results, in the analysis of uncompensated-care shares, in 

Number of

Hospitals

California 328 Average per capita income (Dollars) 32,221 32,673 31,264

Population in poverty (Percent) 13.0 13.0 13.8

Population uninsured among people 

under age 65 (Percent) 22.2 21.2 * 22.3

Florida 168 Average per capita income (Dollars) 29,491 28,731 29,036

Population in poverty (Percent) 12.2 11.8 11.8

Population uninsured among people 

under age 65 (Percent) 19.7 18.7 ** 20.1

Georgia 132 Average per capita income (Dollars) 30,754 31,715 28,536

Population in poverty (Percent) 14.8 13.1 ** 15.0

Population uninsured among people 

under age 65 (Percent) 17.8 17.6 17.9

Indiana 97 Average per capita income (Dollars) 27,571 28,356 27,788

Population in poverty (Percent) 8.7 10.1 * 7.7

Population uninsured among people 

under age 65 (Percent) 12.8 14.3 ** 11.7 *

Texas 332 Average per capita income (Dollars) 28,347 29,580 27,483

Population in poverty (Percent) 16.3 14.5 ** 15.2

Population uninsured among people 

under age 65 (Percent) 22.7 20.4 *** 21.3 *

Characteristics (Means) For-Profit Nonprofit Government 

Local Population Ownership Type

48. At the national level, nonprofit hospitals, compared with forprofit hospitals, tend to be located in higher-income counties (see 

Table 3). That fact is partly attributable to regional differences 

and the uneven distribution of hospitals across regions (see 

Table 2). In the Northeast, a region with relatively high incomes, 

nonprofits account for 89 percent of all hospitals and for-profits 

account for only 6 percent. In the South, a region with relatively 

low incomes, nonprofits account for 43 percent of all hospitals, 

and for-profits account for 29 percent. Those regional differences 

in income can account for much of the observed differences 

between nonprofit and for-profit hospitals in the average income 

and poverty rates of the communities they serve.
NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 17

the unadjusted and adjusted differences between nonprofit and for-profit hospitals being quite similar.

Differences by State

States differ in whether they impose community-benefit 

requirements on nonprofit hospitals, in the strictness of 

those requirements, and in other factors that affect hospitals’ provision of uncompensated care. The differences 

between nonprofit and for-profit hospitals in their uncompensated-care shares should not, therefore, be expected to be the same among different states.

In terms of community-benefit requirements, among the 

five states included in the uncompensated-care analysis, 

only California, Indiana and Texas require that nonprofit 

hospitals maintain and report community-benefit plans; 

only Texas and Indiana impose fines on nonprofit hospitals for not reporting community benefits; and only Texas 

requires that nonprofit hospitals demonstrate that they 

have met certain quantitative requirements in their provision of charity care and community benefits.

CBO’s regression analysis of uncompensated-care shares 

allows for a separate comparison of nonprofit, for-profit, 

and government hospitals in each state. Those results, 

which appear in Table 4, show that in Florida nonprofit 

hospitals have somewhat higher uncompensated-care 

shares than otherwise similar for-profit hospitals (0.9 percentage points), while the differences between nonprofit 

and for-profit hospitals’ uncompensated-care shares are 

larger in Indiana (1.8 percentage points) and Texas (2.1 

percentage points). In California and Georgia, the differences in uncompensated-care shares between nonprofit 

and otherwise similar for-profit hospitals are not significantly different from zero. Given that the analysis of uncompensated-care shares includes only five states, it is not 

possible to draw any firm conclusions regarding possible 

links between state community-benefit requirements for 

nonprofit hospitals and the differences between nonprofit 

and for-profit hospitals in their uncompensated-care 

shares. It is worth noting, however, that among the five 

states examined, Texas and Indiana impose the strictest 

requirements on nonprofit hospitals, and the differences 

in uncompensated-care shares between nonprofit and forprofit hospitals appear to be largest in those two states.

Distribution of Hospitals’ Uncompensated-Care 

Shares

The comparison of the mean uncompensated-care shares 

among hospitals of different ownership types masks substantial variation among individual hospitals. To illustrate 

the high degree of variation in uncompensated-care 

shares, CBO generated the histograms in Figure 1, which 

show the fraction of hospitals with different uncompensated-care shares by ownership type.49 There is substantial variation within each ownership type in hospitals’ uncompensated-care shares. Although nonprofit hospitals, 

on average, have higher uncompensated-care shares than 

do for-profits, the distributions of hospital-level uncompensated-care shares among those two types of hospitals 

overlap to a large extent. Among both nonprofit and forprofit hospitals, a large majority have either low uncompensated-care shares (below 5 percent) or moderate uncompensated-care shares (5 to 10 percent). Government 

hospitals on average provide much more uncompensated 

care than either nonprofit or for-profit hospitals, but a 

substantial share of government hospitals provides only 

modest levels of uncompensated care. The difference in 

the mean uncompensated-care shares between government hospitals and other types of hospitals is driven 

largely by the existence of a relatively small number of 

government hospitals—35 out of the 287 government 

hospitals in the five selected states—that had very high 

uncompensated-care shares (over 15 percent).

Differences in the Provision of 

Medicaid-Covered Services

Some industry experts and researchers include the socalled Medicaid shortfall as an additional type of community benefit. The Medicaid shortfall is the difference between the costs that hospitals incur as a result of providing services to Medicaid enrollees and Medicaid’s payments to hospitals for those services. On the basis of data 

from the American Hospital Association, the Lewin 

Group estimates that Medicaid’s payments over the past 

several years have covered about 95 percent of the Medic49. To generate the histograms in Figure 1, unadjusted uncompensated-care shares are used and each hospital is weighted by its 

operating expenses.
18 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

Figure 1.

Distribution of Hospitals, by Uncompensated-Care Share and by Ownership Type

(Percentage of Hospitals)

Source: Congressional Budget Office based on the Medicare Hospital Cost Report, 2003, and data from the Government Accountability 

Office on uncompensated care.

Note: “Government” hospitals include only nonfederal government-owned community hospitals.

The uncompensated-care share equals uncompensated-care costs as a share of total hospital operating expenses. Uncompensatedcare shares are unadjusted. The bar height indicates the share of hospitals, in percent. The distributions are weighted by operating 

expenses and truncated at 30 percent. The solid vertical lines represent the weighted average uncompensated-care share for each

ownership type.

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 +

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 +

0

5

10

15

20

25

For-Profit

0

5

10

15

20

25

Government

(Nonfederal)

Uncompensated-Care Share (Percent)

0

5

10

15

20

25

Nonprofit

Mean

(4.7)

Mean

(4.2)

Mean

(13.0)

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 +
NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 19

Table 6.

Medicaid Shares, by Hospital Ownership Type

Source: Congressional Budget Office based on the Medicare Hospital Cost Report, 2003.

Notes: The Medicaid share equals Medicaid-covered hospital inpatient days as a share of total hospital inpatient days, expressed as a percentage. The adjusted values reflect the differences between for-profit and nonprofit hospitals, and between for-profit and government 

hospitals, after controlling for the state in which the hospital was located and the following factors: number of hospital beds, hospital 

case mix, and population characteristics of the county in which the hospital was located (including percentage in poverty, percentage 

without insurance, percentage eligible for Medicare, and the degree of urbanization—large urban, suburban/small urban, or rural—of 

the county). Each control variable was interacted with an indicator for the state in which the hospital was located. The regression 

model was weighted by operating expenses. Hospitals were excluded from the calculation of the adjusted differences if they were

located in a state that did not have at least one for-profit hospital.

In the unadjusted results, the statistical significance of the differences (between for-profit and nonprofit hospitals, and between forprofit and government hospitals) was calculated using two-tailed Student's t-tests. In the adjusted results, the statistical significance 

of the differences was calculated on the basis of the estimated regression coefficients and standard errors. * = p<0.10; 

** = p<0.05; *** = p<0.01.

aid-related costs that hospitals incur.50 Hospitals that 

treat a large number of Medicaid patients, therefore, are 

likely to face a larger Medicaid shortfall than hospitals 

that treat fewer Medicaid patients.

To examine differences among nonprofit, for-profit, and 

government hospitals in the provision of care to Medicaid 

patients, CBO analyzed the “Medicaid share,” which is 

calculated for each hospital and equals the percentage of 

inpatient days accounted for by Medicaid patients. The 

Medicaid analysis included all community hospitals nationwide for which data were available (N = 4,397).51 In 

2003, the average Medicaid share among for-profit hospitals was 17.2 percent, among nonprofit hospitals it was 

15.6 percent, and among government hospitals it was 

27.0 percent (see Table 6). CBO calculated adjusted differences in Medicaid shares using regression models similar to those used to analyze the uncompensated-care 

share. After accounting for hospitals’ characteristics and 

local population characteristics, CBO estimated that 

nonprofit hospitals had a Medicaid share that was 1.3 

percentage points lower than for-profit hospitals, a difference that was statistically significant.

The difference in Medicaid shares can be used to estimate 

the differences in the Medicaid shortfall as a share of operating expenses among different types of hospitals. On 

the basis of Lewin’s estimated national average, the shortfall from treating Medicaid patients would equal about 

5 percent of a hospital’s Medicaid-related operating expenses. As a share of operating expenses, the Medicaid 

shortfall is estimated to be less than one-tenth of one 

percentage point higher at for-profit hospitals than at 

nonprofit hospitals. The fact that nonprofit hospitals 

tend to treat fewer Medicaid patients than otherwise 

similar for-profit hospitals implies that they probably face 

less of a Medicaid shortfall; but, as a share of operating 

expenses, the difference appears to be quite small.

17.2 15.6 27.0 -1.5 *** -1.3 ** 9.8 *** 8.8 ***

For-Profit Nonprofit Government Unadjusted Adjusted Unadjusted Adjusted 

Mean Medicaid Share (Percent)

For-Profit Hospitals

(Percentage points)

Difference Between Nonprofit and Difference Between Government and

For-Profit Hospitals

(Percentage points)

50. Al Dobson and others, Executive Summary: Evaluation of the Adequacy of Medicaid Payments to Hospitals in Pennsylvania (prepared 

by the Lewin Group for the Hospital and Healthsystem Association of Pennsylvania, June 2005), available at www.haponline.org/

downloads/Evaluation_of_the_Adequacy_of_Medicaid_

Payments_to_Hospitals_in_Pennsylvania_LEWIN_Exec_Summ.

pdf. 

51. Hospitals were excluded from the calculation of the adjusted differences in Medicaid shares if they were located in a state that did 

not have at least one for-profit hospital. The four states that did 

not meet this criterion lacked adequate comparison groups and 

could not, therefore, be used to estimate differences between forprofit hospitals and other ownership types.
20 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

Table 7.

Share of Hospitals That Provide Specialized Patient Services, by Hospital

Ownership Type 

Source: Congressional Budget Office based on data from the Medicare Hospital Cost Report, 2003, and the Trauma Information Exchange 

Program.

Notes: Providing “high-level trauma care” indicates that the hospital is a level 1 or level 2 adult trauma center (stand-alone pediatric trauma 

centers are not included). The adjusted values reflect the differences between for-profit and nonprofit hospitals and between for-profit 

and government hospitals, after controlling for the state in which the hospital was located and the following factors: number of hospital beds, hospital case mix, and population characteristics of the county in which the hospital was located (including percentage in 

poverty, percentage without insurance, percentage eligible for Medicare, and the degree of urbanization—large urban, suburban/

small urban, or rural—of the county). Each control variable was interacted with an indicator for the state in which the hospital was 

located. All regression models were weighted by operating expenses. Hospitals were excluded from the calculation of the adjusted 

differences if they were located in a state that did not include at least one for-profit hospital.

In the unadjusted results, the statistical significance of the differences (between for-profit and nonprofit hospitals, and between forprofit and government hospitals) was calculated using two-tailed Student's t-tests. In the adjusted results, the statistical significance 

of the differences was calculated on the basis of the estimated regression coefficients and standard errors. * = p<0.10; 

** = p<0.05; *** = p<0.01.

Differences in the Provision of 

Specialized Services

CBO analyzed the fraction of hospitals of different ownership types that provided the following specialized patient services: burn intensive care, emergency room care, 

high-level trauma care, and labor and delivery services 

(see Table 7).52 Those services were selected because they 

have been identified by other researchers as being generally unprofitable. Like the analysis of Medicaid-covered 

services, the analysis of specialized services includes all 

community hospitals nationwide for which data were 

available (N = 4,397).53

In general, the analysis found that burn intensive care and 

high-level trauma care are provided by only a minority of 

hospitals, whereas a large majority of hospitals provide labor and delivery services, and nearly all hospitals provide 

emergency room care. On the basis of an analysis of the 

unadjusted fraction of hospitals providing each service, 

nonprofit hospitals were found to be significantly more 

likely than for-profit hospitals to provide each of the 

specialized services examined.

Specialized Service

Burn Intensive Care 1.0 6.8 22.0 5.8 *** 0.0 21.0 *** 19.9 ***

Emergency Room Care 96.6 98.5 97.1 1.9 *** 3.8 *** 0.6 4.9 ***

High-Level Trauma Care 9.3 33.0 48.0 23.8 *** 1.7 38.7 *** 25.9 ***

Labor and Delivery Services 72.2 83.5 86.5 11.3 *** 10.5 *** 14.3 *** 14.0 ***

Adjusted 

Nonprofit and

(Percentage points)

For-Profit Hospitals

(Percentage points)

Difference Between 

Government and

For-Profit Hospitals

Share of Hospitals That 

For-Profit Unadjusted Adjusted Unadjusted 

Difference Between 

Nonprofit Government

(Percent)

Provide a Specialized Service

52. Data on burn intensive care, emergency room care, and labor and 

delivery services were taken from the Medicare Hospital Cost 

Report and are from 2003. Data on high-level trauma care are 

from 2006.

53. Hospitals were excluded from the calculation of the adjusted differences in the provision of specialized services if they were located 

in a state that did not have at least one for-profit hospital. The 

four states that did not meet this criterion lacked adequate comparison groups and could not, therefore, be used to estimate differences between for-profit hospitals and other ownership types. 

As a specification check, CBO also estimated adjusted differences 

in the provision of specialized services excluding any state in 

which there was no variation among hospitals in the provision of 

the specialized service (in some states, for example, all hospitals 

provide emergency room care). The key results from that alternative analysis were very similar to the results presented in Table 7.
NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS 21

Adjusted differences in the provision of specialized services were also calculated using linear probability models 

that included the same set of control variables used in the 

regressions of uncompensated-care shares. After controlling for hospital characteristics and the characteristics of 

the local population, CBO found statistically significant 

differences between nonprofit hospitals and for-profit 

hospitals in the provision of two of the specialized services examined: nonprofit hospitals were 3.8 percentage 

points more likely to provide emergency room care, and 

they were 10.5 percentage points more likely to provide 

labor and delivery services. For each of the four specialized services, government hospitals were found in the adjusted results to be significantly more likely than otherwise similar for-profit hospitals to provide such services.

For two of the specialized services that CBO examined—

burn intensive care and high-level trauma care—the unadjusted results show that nonprofit hospitals were significantly more likely to provide those services than forprofit hospitals, but no statistically significant difference 

was found in the adjusted results. That fact implies that, 

compared with for-profit hospitals, nonprofit hospitals 

tend disproportionately to have characteristics other than 

ownership type that are associated with the provision of 

burn intensive care and high-level trauma care. Nonprofit 

hospitals, for example, tend to be larger than for-profit 

hospitals, and larger hospitals are more likely to provide 

burn intensive care and high-level trauma care.

Limitations of the Analysis

Several important limitations apply to this analysis. First, 

the data on uncompensated care do not distinguish between charity care and bad debt. Charity care for the indigent is more clearly a type of community benefit, 

whereas bad debt is not necessarily a community benefit. 

Second, data on the amount of uncompensated care provided are available only for hospitals in five selected 

states. That limitation is attributable to the lack of a valid 

nationwide source of data on uncompensated care provided by hospitals. Hospitals in the five selected states are 

not necessarily representative of all hospitals nationwide. 

Third, the analysis of the Medicaid shortfall uses a single 

national estimate of the ratio of Medicaid’s payments to 

hospitals’ costs; the Medicaid shortfall varies among states 

and years and may also vary among individual hospitals. 

Fourth, the identification of certain types of specialized 

services as community benefits is based on a review of 

the literature and on the services that other researchers 

have identified. The value to the community of those services was not quantified by CBO and neither was their 

profitability.

A final limitation of the analysis relates to the interpretation of the reported differences in the level of community 

benefits provided by nonprofit and for-profit hospitals. 

Although the observed differences reflect the current differences in tax treatment, they may also reflect variations 

along other dimensions as well, such as organizational

objectives.

Appendix: Detailed Results from Regression 

Models of Uncompensated-Care Shares

This appendix presents the results from three ordinary least squares (OLS) regression models.1 In each of 

the three OLS models, the “uncompensated-care 

share”—uncompensated-care costs as a share of operating 

expenses—is used as the dependent variable, and the coefficients of interest are the indicator variables for the 

hospital ownership types. One of the models (the “full 

model”) was used to estimate the adjusted differences in 

uncompensated-care shares, which are used as the main 

results of the uncompensated-care analysis (see Table 4 on 

page 15).2 The other two models presented in this appendix are used as alternative specifications to examine the 

robustness of the main results.

The coefficient estimates shown in Table A-1 may be interpreted as percentage-point effects. For example, a coefficient estimate of 1 implies a 1 percentage-point increase 

in the predicted uncompensated-care share. The models 

pool hospitals in the five states for which uncompensated-care cost data are available and include state indicator variables and interactions of state indicator variables 

with each of the control variables. The key coefficients 

are the interactions of the state indicator variables with 

the indicators for nonprofit ownership status and government ownership status. (For-profit hospitals are the omitted reference group, which means that the coefficients on 

nonprofit ownership status and government ownership 

reflect an implicit comparison between those ownership 

types and for-profit hospitals.) The other control variables are as follows: the natural logarithm of the number 

of hospital beds, a measure of the hospital’s case-mix index (missing values in the original data were set to zero); a 

variable indicating whether the case-mix index was missing (the case-mix index is missing for critical-access hospitals because they are not paid by Medicare under the 

case-mix-adjusted prospective payment system); the percentage of a county’s population living in poverty; the 

percentage of a county population’s that is uninsured; the 

percentage of a county’s population that is eligible for 

Medicare; a location indicator for small urban or suburban counties; a location indicator for rural counties (large 

urban counties are the omitted reference group); and an 

indicator for state. Each of the control variables (other 

than the state indicators) is interacted with each state indicator variable, which allows the estimated effect of each 

control variable to vary from state to state.

The overall estimated effect of nonprofit ownership status 

and government ownership status on the uncompensated-care share is calculated by taking a weighted average 

of the five state-specific coefficients on the nonprofit indicators, where the weight equals each state’s share of total hospital operating expenses among the five states. 

Those weighted averages are shown near the bottom of 

Table A-1.

1. OLS models provide estimates of the relationship between an outcome of interest, referred to generically as the “dependent” variable, and a set of variables—referred to as “control” (or, 

“independent”) variables—thought to influence the outcome of 

interest.

2. The adjusted differences reflect the association between uncompensated-care shares and nonprofit ownership status and between 

uncompensated-care shares and government ownership status, 

after controlling for characteristics of hospitals other than ownership status.
24 NONPROFIT HOSPITALS AND THE PROVISION OF COMMUNITY BENEFITS

Table A-1.

Uncompensated-Care Shares (Ordinary least squares regression models)

Continued

-0.953 *** -0.034 -0.369

1.379 *** 0.803 0.922 *

1.830 *** -0.927 -0.424

-0.282 1.924 *** 1.790 ***

2.227 *** 1.833 ** 2.060 **

8.609 *** 8.376 *** 8.117 ***

8.685 *** 7.834 *** 8.106 ***

6.145 * 2.192 * 2.335

-0.741 * 1.124 ** 0.736

15.571 *** 14.672 *** 15.313 ***

n.a. 2.537 *** 2.933 ***

n.a. 1.479 0.777

n.a. 5.030 * 4.798 *

n.a. 0.042 0.339

n.a. 2.133 *** 1.625 **

n.a. -9.616 *** -10.344 ***

n.a. -3.296 -2.252

n.a. -13.168 ** -13.672 **

n.a. -1.032 -1.267

n.a. -4.913 ** -4.245 **

n.a. -3.606 -5.004

n.a. 0.909 -0.558

n.a. -5.881 -7.586

n.a. 0.306 0.142

n.a. -7.179 ** -5.531 *

n.a. n.a. 0.162

n.a. n.a. 0.164

n.a. n.a. 0.362

n.a. n.a. 0.040

n.a. n.a. 0.254

n.a. n.a. -0.210

n.a. n.a. 0.037

n.a. n.a. -0.488

n.a. n.a. -0.195 **

n.a. n.a. -0.298

characteristics, and 

county characteristics)

California

Indiana

Texas

County Population Uninsured (Percent)

Florida

Georgia

Florida

Georgia

Indiana

Texas

Texas

Texas

County Population in Poverty (Percent)

California

California

Florida

Georgia

Indiana

Florida

Georgia

Indiana

Texas

Florida

Georgia

Indiana

California

Hospital Case-Mix Index

Indiana

Texas

California

Natural Logarithm of Hospital Beds

Indicator for Missing Case-Mix Index

California

Florida

Georgia

Indiana

Texas

California

Florida

Government Hospital Indicator

Georgia

Control Variable

Nonprofit Hospital Indicator

Ownership and 

(Ownership, hospital 

Ownership

Regression Model

Hospital Characteristics

Full Model
APPENDIX: DETAILED RESULTS FROM REGRESSION MODELS OF UNCOMPENSATED-CARE SHARES 25

Table A-1.

Continued

Source: Congressional Budget Office.

Notes: The dependent variable in each model is the uncompensated-care share, which equals uncompensated-care costs as a share 

of total hospital operating expenses expressed as a percentage. The omitted reference categories are as follows: for-profit ownership, 

California, and urban location. At hospitals with missing values for case-mix index, the case-mix index is set to zero.

* = p<0.10; ** = p<0.05; *** = p<0.01; n.a. = not applicable.

n.a. n.a. 0.005

n.a. n.a. -0.114 *

n.a. n.a. -0.078

n.a. n.a. 0.003

n.a. n.a. 0.037

n.a. n.a. 2.065

n.a. n.a. -0.400

n.a. n.a. -0.460

n.a. n.a. 0.393

n.a. n.a. -2.509 *

n.a. n.a. -0.709

n.a. n.a. 4.486 ***

n.a. n.a. 0.705

n.a. n.a. 2.568 *

n.a. n.a. -6.494 ***

n.a. -3.222 -2.682

n.a. -5.074 0.054

n.a. -0.839 -1.183

n.a. -3.914 -0.836

4.157 *** 4.137 5.452

0.625 *** 0.651 ** 0.646 *

9.200 *** 8.478 *** 8.571 ***

1,058 1,058 1,057

0.433 0.509 0.527

(Ownership, hospital 

Ownership and characteristics, and 

Control Variable Ownership Hospital Characteristics county characteristics)

Regression Model

Full Model

Number of Observations

R-Squared

Texas

Memorandum:

Weighted Average of Nonprofit Hospital Coefficient

Weighted Average of Government Hospital Coefficient

Constant

State Indicator

Florida

Georgia

Indiana

Florida

Georgia

Indiana

Texas

Indiana

Texas

Rural Location Indicator

California

Suburban/Small Urban Location Indicator

California

Florida

Georgia

Florida

Georgia

Indiana

Texas

County Population Eligible for Medicare (Percent)

California