Nonprofit, For-Profit, and Government Hospitals: Uncompensated Care and Other Community Benefits
Published: 2005-05-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Before 1969, IRS required hospitals to provide charity care to qualify for tax-exempt status. Since then, however, IRS has not specifically required such care, as long as the hospital provides benefits to the community in other ways. Seeking a better understanding of the benefits provided by nonprofit hospitals, Congress requested that GAO examine whether nonprofit hospitals provide levels of uncompensated care and other community benefits that are different from other hospitals. This statement focuses on, by ownership group, hospitals' (1) provision of uncompensated care, which consists of charity care and bad debt, and (2) reporting of other community benefits. The hospital ownership groups were (nonfederal) government, nonprofit, and for-profit. To compare the three hospital ownership groups, GAO obtained 2003 data from five geographically diverse states with substantial representation of the three ownership groups in each state. GAO analyzed cost data from two perspectives--each hospital group's percentage of (1) total uncompensated care costs in a state and (2) patient operating expenses devoted to uncompensated care.
section_title: What GAO Found
paragraphs: Government hospitals generally devoted substantially larger shares of their patient operating expenses to uncompensated care than did nonprofit and for-profit hospitals. The nonprofit groups' share was higher than that of the for-profit groups in four of the five states, but the difference was small relative to the difference found when making comparisons with the government hospital group. Further, within each group, the burden of uncompensated care costs was not evenly distributed among hospitals but instead was concentrated in a small number of hospitals. This meant that a small number of nonprofit hospitals accounted for substantially more of the uncompensated care burden than did others receiving the same tax preference. Hospitals in the five states--nonprofit, for-profit, and government hospitals--reported providing a variety of services and activities, which the hospitals themselves defined as community benefits. Community benefits include such services as the provision of health education and screening services to specific vulnerable populations within a community, as well as activities that benefit the greater public good, such as education for medical professionals and medical research. GAO was unable to assess the value of these benefits or make systematic comparisons between hospitals or across states. These observations illustrate a larger point--namely, that current tax policy lacks specific criteria with respect to tax exemptions for charitable entities and detail on how that tax exemption is conferred. If these criteria are articulated in accordance with desired goals, standards could be established that would allow nonprofit hospitals to be held accountable for providing services and benefits to the public commensurate with their favored tax status.

section_title: Letter
paragraphs: I am pleased to be here today as you discuss issues regarding tax  exemptions for nonprofit hospitals.  At this Committee’s recent hearing on  the tax-exempt sector as a whole,  I emphasized the importance of  reviewing this sector, drawing parallels to our agency’s call to reexamine  all major federal policies and programs in light of 21st century challenges.   Provisions granting federally recognized tax-exempt status and associated  policies have been layered on one another to respond to challenges at the  time, but they need to be reviewed and revised to reflect 21st century  changes and challenges.  On a broad scale, a comprehensive  reexamination could help address whether exempt entities are providing  services and benefits to the public commensurate with their favored tax  status, whether the current number and nature of exemptions continue to  make sense, whether the conditions and restrictions on the activities of  tax-exempt entities remain relevant, and whether the framework for  ensuring that exempt entities adhere to the requirements attendant to their  status is satisfactory.
There are a number of issues that merit reexamination, including whether  nonprofit hospitals perform sufficiently different services of benefit to the  public to justify their tax exemption.  To examine these hospitals’ tax- exempt status, we must look back several decades.  Before 1969, the  Internal Revenue Service (IRS) required hospitals to provide charity care  to qualify for tax-exempt status.  Since then, however, IRS has not  specifically required such care for a hospital to be exempt from federal  taxation and have access to tax-exempt bond financing and charitable  donations, as long as the hospital provides benefits to the community in  other ways.  Community benefits include such services as the provision of  health education and screening services to specific vulnerable populations  within a community, as well as activities that benefit the greater public  good, such as education for medical professionals and medical research.   Nonprofit hospitals may also be exempt under state law from state and  local taxes.
Seeking a better understanding of the benefits provided by nonprofit  hospitals, this Committee requested that we examine whether nonprofit  hospitals provide levels of uncompensated care—care provided to a  patient that a hospital is not reimbursed for—and other community  benefits that are different from other hospitals.  My remarks today will  focus on our examination, for selected states, of (1) the provision of  uncompensated care by state and local government-owned, nonprofit, and  for-profit hospitals and (2) hospitals’ reporting of other community  benefits.
To examine the provision of uncompensated care by the three hospital  ownership groups, we analyzed cost data from two perspectives, namely  each hospital group’s percentage of (1) total uncompensated care costs in  a state and (2) patient operating expenses devoted to uncompensated  care. We obtained 2003 data from five states—California, Florida, Georgia,  Indiana, and Texas. Hospitals in these states include 46 percent of the  nation’s for-profit hospitals and more than a quarter of all hospitals in the  three ownership groups. We selected these states because they  represented geographically diverse areas; had a number of hospitals in  each ownership group sufficient to make comparisons; and collected  hospital-specific uncompensated care data, which not all states maintain.  We compared each hospital ownership group’s provision of  uncompensated care by examining each group’s uncompensated care  costs as a percentage of its total patient operating expenses. Our measure  of uncompensated care includes the cost of charity care as well as bad  debt and deducts any payments made by or on behalf of individual  patients. We limited our analysis of uncompensated care to nonfederal,  short-term, acute care general hospitals. In doing our work, we tested the  reliability of the state data and determined they were adequate for our  purposes. To examine hospitals’ provision of community benefits other  than uncompensated care, we reviewed 21 hospital or hospital systems’  reports and Web sites for information about such benefits. These reports  and Web sites covered nonprofit, for-profit, and government hospitals in  the five states. We also examined laws in the five states regarding  community benefit requirements for nonprofit hospitals, reviewed the  literature, and interviewed state officials and state hospital association  representatives. In addition, we interviewed officials from the Centers for  Medicare & Medicaid Services (CMS), the American Hospital Association,  and the Federation of American Hospitals. We conducted our work from  February 2005 through May 2005 in accordance with generally accepted  government auditing standards. (See app. I for more detail on our scope  and methodology.)
In summary, the cost burden of providing uncompensated care varied  among the three hospital groups, but the burden was generally  concentrated in a small number of hospitals. In four of the five states,  government hospitals, as a group, devoted substantially larger shares of  their patient operating expenses to uncompensated care than did  nonprofit and for-profit hospitals. The nonprofit hospitals’ uncompensated  care costs, as a percentage of patient operating expenses, were higher on  average than those of the for-profit hospitals in four of the five states, but  the differences were generally not as great as the differences between the  government hospitals and both these groups. Further, the burden of  uncompensated care costs was not evenly distributed within each hospital  group but instead was concentrated in a small number of hospitals. For  example, in California’s nonprofit hospital group, the top quarter of  hospitals, ranked by uncompensated care as a percentage of patient  operating expenses, averaged 7.2 percent devoted to uncompensated care  compared with an average of 1.4 percent for hospitals in the bottom  quarter.
Regardless of ownership status, the hospitals we reviewed reported  providing a wide range of other community benefits, from health  education to clinic services specifically for the community’s indigent  population. Variations in the types of community benefits hospitals in the  five states reported providing could be explained by differences in the  services hospitals chose to provide as well as by variation in the  applicability, specificity, and breadth of state requirements.
subsections: section_title: Background
paragraphs: In 2003, of the roughly 3,900 nonfederal, short-term, acute care general  hospitals in the United States, the majority—about 62 percent—were  nonprofit. The rest included government hospitals (20 percent) and for- profit hospitals (18 percent). States varied—generally by region of the  country—in their percentages of nonprofit hospitals (see fig. 1). For  example, states in the Northeast and Midwest had relatively high  concentrations of nonprofit hospitals, whereas in the South the  concentration was relatively low.
The five states we reviewed varied in number and ownership composition  of hospitals (see table 1). For example, in California and Indiana, nonprofit  hospitals accounted for over half of each state’s hospitals. In Texas,  government hospitals made up the state’s largest percentage, although the  distribution between nonprofit, for-profit, and government hospitals was  similar; in Florida, most hospitals were either nonprofit or for-profit, while  11 percent were government.
The average size of hospitals in our study, as measured by patient  operating expenses, varied across the three ownership groups. (See table  2.) On average, nonprofit hospitals were larger than for-profit hospitals.  The pattern held in all five states but the magnitude of the difference  varied. For example, in California, nonprofit hospitals were twice as large  as for-profit hospitals, whereas in Texas, this difference was smaller.
subsections: section_title: Hospitals’ Qualifications for Federal and State Tax- exempt Status
paragraphs: Hospitals may be extended a federal tax exemption by IRS if they meet the  Internal Revenue Code’s qualifications for charitable organizations under  section 501(c)(3). Hospitals that qualify for nonprofit status are exempt  from federal income taxes and typically receive other advantages,  including access to charitable donations—which are tax deductible for the  individual or corporate donor—and tax-exempt bond financing. To qualify  for federal tax-exempt status, a hospital must demonstrate that it is  organized and operated for a “charitable purpose,” that no part of its net  earnings inure to the benefit of any private shareholder or individual, and  that it does not participate in political campaigns on behalf of any  candidate or conduct substantial lobbying activities.
Before 1969, IRS required hospitals to provide charity care to qualify for  tax-exempt status. Since then, however, IRS has not specifically required  such care, as long as the hospital provides benefits to the community in  other ways. This “community benefit” standard came into existence with  an IRS ruling, which concluded that a hospital’s operation of an  emergency room open to all members of the community without regard to  ability to pay promoted health in a way consistent with other activities— such as advancement of education and religion—that qualify other  organizations as charitable. In addition, the 1969 ruling identified other  factors that might support a hospital’s tax-exempt status, such as having a  governance board composed of community members and using surplus  revenue to improve facilities, patient care, medical training, education, and  research.
Nonprofit hospitals may also receive exemptions from state and local  income, property, and sales taxes, which, in some cases, are of greater  value than the federal income tax exemption. Some states have defined  community benefits for nonprofit hospitals, but their statutes vary  considerably in their specificity and scope. Appendix II provides more  information on statutory definitions of community benefits in the states  we reviewed.
section_title: Government Payments for Uncompensated Care and Other Costs
paragraphs: Hospitals may receive direct payments from different government sources  to help cover their unreimbursed costs, including those for charity care,  bad debt, and low-income patients. For example, Medicare and Medicaid  make payments to hospitals that serve a disproportionate share of low- income patients under their respective disproportionate share hospital  (DSH) programs. Medicare bad debt reimbursement partially reimburses  hospitals for bad debt incurred for Medicare patients. Other state  payments may also be available to hospitals, although their specific types  vary widely. For example, hospitals may receive payments from special  revenues such as tobacco settlement funds, uncompensated care pools  that are funded by provider contributions, and payment programs targeted  at certain services such as emergency services. (See app. III for more  information on payments for uncompensated care and other costs.)
section_title: Burden of Providing Uncompensated Care Varied among Hospital Groups, but Burden Was Generally Concentrated in a Small Number of Hospitals
paragraphs: In our review of hospitals’ provision of uncompensated care in five states,  we analyzed cost data from two perspectives—namely, each hospital  group’s percentage of (1) total uncompensated care costs in a state and (2)  patient operating expenses devoted to uncompensated care. The former  relationship showed hospitals’ uncompensated care costs in dollars,  aggregated by groups; whereas the latter relationship showed hospitals’  uncompensated care costs as a proportion of their operating expenses,  thereby accounting for differences in hospital number and size among the  hospital groups. In general, government hospitals, as a group, accounted  for the largest percentage of total uncompensated care costs and devoted  the largest share of patient operating expenses to uncompensated care  costs. The uncompensated care cost burden was not evenly distributed  within each hospital group but instead was concentrated in a small  number of hospitals.
subsections: section_title: Government Hospitals Generally Accounted for the Largest Percentage of the Uncompensated Care Costs in States Reviewed
paragraphs: Government hospitals, as a group, accounted for the largest percentage of  the total uncompensated care costs in three of the five states—California,  Georgia, and Texas. Nonprofit hospitals, as a group, accounted for the  largest percentage of the uncompensated care costs in Florida and  Indiana. For-profit hospitals, as a group, provided 20 percent or less of  total uncompensated care costs in each state we reviewed. (See table 3).
In each of the five states, the nonprofit hospital groups accounted for a  larger percentage of total uncompensated costs compared with the for- profit hospital groups. This difference was due, in part, to the larger  number of nonprofit hospitals and their larger size relative to the for-profit  hospitals. For example, in California, the nonprofit group’s percentage of  total uncompensated care costs was almost four times higher than that of  the for-profit group, but this is not surprising, as nonprofit hospitals  outnumbered for-profit hospitals almost 2 to 1 and were twice the size in  patient operating expenses.
section_title: Government Hospital Groups Generally Devoted Largest Share of Patient Operating Expenses to Uncompensated Care, but Shares Varied across States
paragraphs: In four of the five states reviewed, government hospitals devoted  substantially larger shares, on average, of their patient operating expenses  to uncompensated care than did nonprofit and for-profit hospitals. (See  fig. 2.) In those four states, the differences in average percentages between  the government hospital groups and the nonprofit hospital groups ranged  from about 4.3 percentage points in Georgia to 11.3 percentage points in  Texas. In contrast, in the fifth state, Indiana, the nonprofit hospital group  devoted the largest share, on average, of patient operating expenses to  uncompensated care. Between the nonprofit and for-profit hospital  groups, the nonprofit hospitals’ average percentages were greater in four  of the five states—ranging from 1.2 percentage points greater in Florida to  2.3 percentage points greater in Indiana. In contrast, in the fifth state,  California, the nonprofit group’s average percentage was similar to that of  the for-profit group.
The five states varied in their hospitals’ shares of patient operating  expenses devoted to uncompensated care, ranging from an average 4.1  percent for all Indiana hospitals to an average 8.3 percent for Texas  hospitals. (See table 4.) Similar state-to-state variation found in other  studies was due, in part, to differences in states’ proportions of uninsured  populations, variation in Medicaid eligibility or payment levels, and the  presence of state programs that provide health insurance to low-income  uninsured individuals. Specifically, prior research showed that hospitals  located in states with more uninsured individuals and hospitals in states  with relatively more eligibility-restricted Medicaid programs may have  higher levels of uncompensated care. Our data are consistent with these  studies’ findings on the uninsured. For example, in our five-state review,  Texas had the highest percentage of uninsured—25 percent—and the  highest share, on average, of patient operating expenses devoted to  uncompensated care, whereas Indiana had the lowest percentage of  uninsured—13 percent—and the lowest average share.
section_title: For Each Hospital Group, Uncompensated Care Costs Were Concentrated in a Small Number of Hospitals
paragraphs: For each group, uncompensated care costs were concentrated in a small  number of hospitals. We observed this pattern when examining the  percentages of patient operating expenses devoted to uncompensated care  costs as well as hospitals’ shares of total uncompensated care costs in a  state. For the three hospital ownership groups, we ranked hospitals  according to their share of patient operating expenses devoted to  uncompensated care.
We found that, for all three hospital groups, the top quarter of hospitals  devoted substantially greater percentages of their patient operating  expenses to uncompensated care, on average, compared with the bottom  quarter of hospitals. (See fig. 3.) For example, in California’s nonprofit  hospital group, the top quarter of hospitals devoted an average of 7.2  percent compared with 1.4 percent for the bottom quarter of hospitals.  Similarly, in Florida’s government hospital group, the top quarter of  hospitals devoted an average 19.6 percent compared with an average 5.2  percent for the bottom quarter of hospitals. From state to state, the  difference in ranges between top and bottom quarters was also  substantial. For example, in Indiana’s government group, the average  share of operating expenses devoted to uncompensated care for hospitals  in the top quarter was about 3 times larger than for those in the bottom  quarter; whereas in California, the average share for the top quarter of  hospitals was almost 13 times higher than that of the bottom quarter.
When examining hospitals’ shares of total uncompensated care costs in a  state, we found that uncompensated care costs remained concentrated in  a disproportionately small number of hospitals. Specifically, each state’s  top quarter of hospitals accounted for a disproportionately large share of  the state’s uncompensated care costs. For example, in Texas, the top  quarter of hospitals accounted for about 50 percent of total  uncompensated care costs, yet accounted for only 18 percent of the total  beds. (See table 5). Moreover, in Texas, six major government teaching  institutions accounted for 34 percent of total uncompensated care costs,  which amounted to over half of the contribution of the hospitals in the top  quarter. This pattern was also true for California, Florida, and Georgia. For  example, in California, 13 major teaching hospitals accounted for 42  percent of total uncompensated care costs. In contrast, in Indiana, total  uncompensated care costs were distributed more evenly across a greater  number of hospitals.
Several factors explain which hospitals were likely to be in their group’s  top and bottom quarters. For example, in our five-state analysis, we found  that whether a hospital was a teaching institution was an important  predictor of whether it would be in the top quarter of a state’s government  hospital group. Hospitals that had teaching programs were more likely to  be in the top quarter of a government hospital group. In contrast, teaching  status was not an important predictor for either the nonprofit or for-profit  hospital groups’ top quarter. For nonprofits, hospitals in rural areas were  more likely to be in the top quarter than hospitals located in urban areas.  Other factors that were outside the scope of this study, such as differences  in the proportion of uninsured populations in the hospital market, may  have also influenced the likelihood of a hospital’s inclusion in the top or  bottom quarter.
section_title: Hospitals Reported Providing a Wide Range of Other Community Benefits
paragraphs: In addition to providing uncompensated care, hospitals may provide other  services to their communities for which they are not reimbursed. In our  review of hospitals’ Web sites and reports about community benefits— published documents specifying the types and value of services hospitals  provide to communities—we found that, regardless of ownership status,  hospitals reported providing a wide range of community benefits.  Variations in the types of community benefits hospitals reported providing  could be explained by differences in the community benefits hospitals  chose to provide as well as by variations in the applicability, specificity,  and breadth of state requirements.
Certain hospital industry guidance defines community benefits as the  unreimbursed goods and services hospitals provide that address their  communities’ health needs, including health education, screening, and  clinic services, among others. Consistent with this industry definition, we  found through our review of reports and Web sites that hospitals reported  providing similar types of services, including:    community health education such as parenting education, smoking  cessation, fitness and nutrition, health fairs, and diabetes management;    health screening services such as screening for high cholesterol, cancer,    clinic services, including clinics targeted to specific groups in the  community, such as indigent patients;    medical education for physicians, nurses, and other health professionals;   financial contributions, including cash donations and grants, to  community organizations;    coordination of community events and in-kind donations—such as food,  clothing, and meeting room space—to community organizations; and    hospital facility and other infrastructure improvements.
Community health education and health screenings were listed by most of  the reports and Web sites we reviewed. Clinic services, support groups,  community event coordination, cash contributions to charities, and  medical education for health professionals were listed by over half of the  reports we reviewed.
Because of the wide variation in hospitals’ reporting of community  benefits, we were not able to discern clear patterns in the provision of  these benefits across hospital ownership groups. The variation could be  explained by differences in the community benefits hospitals chose to  provide as well as by variations in the applicability, specificity, and  breadth of state requirements. Specifically, the five states reviewed require  all hospitals to report financial data, including data on the cost of charity  care they provide. However, as shown in table 6, California, Indiana, and  Texas also have statutory requirements for nonprofit hospitals to develop  plans for meeting their communities’ health needs and to report annually  on the types and value of the community benefits they provide. Of these  three states, only Texas and Indiana require nonprofit hospitals to report  using standardized forms and have the explicit statutory authority to  impose fines for noncompliance as part of the requirements. The Texas  form is more specific, as it includes line-items that capture the hospitals’  unreimbursed costs associated with providing traditionally “unprofitable”  health services such as trauma care and community clinics, education of  medical professionals, medical research, and cash and in-kind donations  made by the hospital to local charities. Indiana’s form provides nonprofit  hospitals more flexibility in delineating the types and value of their  community benefits but includes supplementary guidance to nonprofit  hospitals about what should be considered community benefits, including  financial or in-kind support of public health programs, community- orientated wellness and health promotion programs, and outreach clinics  in economically depressed communities. California has no form for annual  community benefit reports but requires that hospitals classify the services  provided into broad, statutorily defined categories, including cash and in- kind donations to public health programs, efforts to contain health care  costs and enhance access, and services that help maintain a person’s  health.
According to state officials or state hospital association representatives in  the five states we reviewed, for-profit and government hospitals are not  required to report on the community benefits they provide outside of the  requirements to report financial data, including data on the cost of charity  care they provide. However, as we found through our review, some of  these hospitals report publicly—for promotional purposes—on the  community benefits they provide, either through published reports or by  posting general information on their Web sites.
Moreover, the three states with community benefit reporting  requirements—California, Indiana, and Texas—conduct limited  monitoring of nonprofit hospitals’ community benefit reports. For  example, according to officials from state agencies, none of the three  states conducts audits of nonprofit hospitals’ self-reported community  benefits information, although Texas reviews the reports to ensure that  “reasonable” types of services are listed as community benefits. In  addition, these states do not routinely use the data collected through  community benefit reports to review hospitals’ tax-exempt status.
section_title: Concluding Observations
paragraphs: Our comparison of the hospital ownership groups’ uncompensated care  costs, as a percentage of patient operating expenses, was instructive.  Differences between the nonprofit and for-profit groups were often small  when compared with the substantial differences between the government  group and the other two groups.  Moreover, the burden of uncompensated  care costs was not evenly distributed among hospitals, which meant that a  small number of nonprofit hospitals accounted for substantially more of  the uncompensated care burden than did others receiving the same tax  preference.
As for the other community benefits hospitals reported providing, we were  not able to discern a clear distinction among the government, nonprofit,  and for-profit hospital groups.  Hospitals in the five states reported  conducting a variety of activities, which the hospitals themselves  considered community benefits.  We were unable to assess the value of  these benefits or make systematic comparisons between hospitals or  across states.
These observations illustrate a larger point that I and others raised at the  hearing last month—namely, that current tax policy lacks specific criteria  with respect to tax exemptions for charitable entities and detail on how  that tax exemption is conferred.  If these criteria are articulated in  accordance with desired goals, standards could be established that would  allow nonprofit hospitals to be held accountable for providing services of  benefit to the public commensurate with their favored tax status.
Mr. Chairman, this concludes my prepared statement. I will be happy to  answer questions you or the other Committee Members may have.
section_title: Contact and Acknowledgments
paragraphs: For further information regarding this testimony, please contact A. Bruce  Steinwald at (202) 512-7101. Kristi Peterson, Thomas Walke, Joanna Hiatt,  Kelly DeMots, Mary Giffin, Emily Rowe, Craig Winslow, and Hannah Fein  contributed to this statement.
section_title: Appendix I: Scope and Methodology
paragraphs: To examine the provision of uncompensated care by the three hospital  ownership groups, we obtained 2003 uncompensated care data from five  states—California, Florida, Georgia, Indiana, and Texas. We obtained all  other data, such as cost-to-charge ratios, patient operating expenses, and  all descriptive statistics, from 2002 and 2003 Medicare hospital cost  reports. We selected the five states because they represented  geographically diverse areas; had a number of hospitals in each ownership  group sufficient to make comparisons; and collected hospital-specific  uncompensated care data, which not all states maintain. The 2003 state  uncompensated care data and 2002 and 2003 Medicare hospital cost  reports were the most recent available at the time of our analysis. We also  interviewed health officials from all five states as well as officials from the  Centers for Medicare & Medicaid Services (CMS), the American Hospital  Association, and the Federation of American Hospitals. We limited our  analysis to nonfederal, short-term, acute care general hospitals for which a  cost report was available. This analysis included critical access hospitals  that provide general acute care.  Our study included about 92 percent of  nonfederal, short-term, acute care hospitals in the five states.
We defined uncompensated care as the sum of charity care and bad debt  costs as reported in the state data. To determine uncompensated care  costs, we multiplied uncompensated care charges by a hospital-specific  cost-to-charge ratio. Although specific definitions of charity care varied,  states generally defined it as charges for patients deemed unable to pay all  or part of their bill, less any payments made by, or on behalf of, that  specific patient. States generally defined bad debt as the uncollectible  payment that a patient is expected to, but does not pay. Our definition of  uncompensated care does not include any contractual allowances or cost  shortfalls. In addition, we did not subtract any charity care-specific block  grants or donations a hospital may receive, as this information was not  available for all states.
We analyzed uncompensated care cost data from two perspectives—— namely, each hospital ownership group’s percentage of (1) total  uncompensated care costs in a state, and (2) average patient operating  expenses devoted to uncompensated care. To examine factors that could  explain differences in the provision of uncompensated care by hospital  ownership groups, we examined certain hospital characteristics including  a hospital’s size, teaching status, and location. We used patient operating  expenses to measure hospital size. For teaching status, we defined major  teaching hospitals as those hospitals having an intern/resident-to-bed ratio  of 0.25 or more and minor teaching hospitals as those having an  intern/resident-to-bed ratio greater than 0 and less than 0.25. We defined a  hospital as urban if it was located in a metropolitan statistical area and as  rural if it was not located in a metropolitan statistical area. We  supplemented our analysis with a review of the literature to determine  other factors that could explain differences in the provision of  uncompensated care by hospital ownership groups.
We assessed the reliability of the hospital Medicare cost reports and the  reliability of state uncompensated care cost data from California, Florida,  Georgia, Indiana, and Texas in several ways. First, we performed tests of  data elements. For example, we examined the values for uncompensated  care costs and patient operating expenses to determine whether these data  were complete and reasonable. We also verified that the dollar amount of  uncompensated care in the 2003 data was consistent with the amount in  2002. Second, we reviewed existing information about the data elements.  For example, we compared descriptive statistics we calculated from the  Medicare hospitals cost reports with statistics published by CMS. Third,  we interviewed state and agency officials knowledgeable about the data in  our analyses and knowledgeable about hospital uncompensated care  costs. We determined that CMS and all five states performed quality  assurance tests on the data before releasing them. Overall, we determined  that the data we used in our analyses were sufficiently reliable for our  purposes.
To examine hospitals’ provision of community benefits other than  uncompensated care, we reviewed 21 hospital reports and Web sites for  information about such benefits in five states. Specifically, we reviewed 12  publicly available reports about the community benefits provided by  nonprofit and for-profit hospitals and 3 reports for for-profit hospital  systems representing multiple hospitals. We also reviewed 6 government  hospitals’ Web sites to determine the extent to which they publicized the  provision of services that are generally considered community benefits.  We also examined laws in five states regarding community benefit  requirements for nonprofit hospitals, reviewed the literature, and  interviewed state officials and hospital association representatives.
We conducted our work from February 2005 through May 2005 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Statutory Definitions of Community Benefits in the Five States Reviewed
paragraphs: Table 7 summarizes the statutory definitions of community benefits for  nonprofit hospitals in the states we reviewed. We found that the statutes  vary considerably in their specificity and scope. In addition, of the five  states we reviewed, only the Texas statute contains an explicit link  between the statutory definition of community benefits and hospitals’  qualifications for state tax exemptions.
section_title: Appendix III: Government Payments for Uncompensated Care and Other Unreimbursed Costs
paragraphs: Hospitals may receive direct payments from different government sources  to help cover their unreimbursed costs. Such payments may include  special Medicare and Medicaid payments, known as disproportionate  share hospital (DSH) payments, Medicare bad debt reimbursement, and  other state payments.
Medicare DSH: The Medicare DSH adjustment provides payments to  hospitals that serve a disproportionate share of low-income patients. The  Congress mandated this adjustment in 1986 to address the concern that  hospitals that serve such patients have higher Medicare costs per case  because they have higher overhead and labor costs and their patients are  in poorer health with more complications and secondary diagnoses.  Hospitals qualify for the Medicare DSH adjustment based on their low- income patient share. The low-income patient share is computed as the  percentage of a hospital’s Medicare inpatient days attributable to patients  that are eligible for both Medicare part A and Supplemental Security  Income plus the percentage of total inpatient days attributable to patients  eligible for Medicaid, but not Medicare part A. For hospitals that qualify  for a DSH adjustment, their actual adjustment is based on several factors,  including the number of acute care beds, number of patient days for low-  income patients, and location (rural or urban). See table 8 for Medicare  DSH payments in 2003 to the hospitals in the selected states we analyzed.
Medicaid DSH: The Medicaid statute requires that states make DSH  adjustments to the payment rates of certain hospitals treating large  numbers of low-income and Medicaid patients. The Medicaid DSH  adjustment was established by the Congress in 1981 and establishes broad  guidelines for hospital eligibility to receive Medicaid DSH and for the  methods used to compute the amount of payment. States have discretion  in designating DSH hospitals and calculating adjustments for them. States  also vary in terms of program rules and resource levels as well as the  degree to which they target payments to different types of hospitals.
Medicaid DSH is the largest source of financial support for hospital  uncompensated care and is funded jointly by the states and the federal  government. State approaches to financing the state portion of Medicaid  DSH include obtaining funds from hospitals through provider taxes or  intergovernmental transfers in order to establish the state’s contribution  required to obtain the federal match for Medicaid DSH funding. Therefore,  it is not always possible to determine what portion of Medicaid DSH  payments to individual hospitals is the net additional payment to the  hospital.
Medicare bad debt reimbursement: Medicare partially reimburses acute  care hospitals for bad debts resulting from Medicare beneficiaries’  nonpayment of deductibles and copayments after providers have made  reasonable efforts to collect unpaid amounts. If a hospital can document  that a Medicare patient is indigent, the hospital can then forgo collection  efforts from the patient. Medicare pays hospitals 70 percent of their  reimbursable bad debts, except critical access hospitals, for which it pays  100 percent of their reimbursable bad debts. See table 9 for total Medicare  bad debt reimbursements in 2003 to the hospitals in the selected states we  analyzed.
Other state sources: Other state sources of payment to hospitals for  uncompensated or unreimbursed care vary widely, and may include  special revenues such as tobacco settlement funds, uncompensated care  pools that are funded by provider contributions, and payment programs  targeted at certain services such as emergency services. For example,  Massachusetts has used a portion of the state’s tobacco settlement fund to  help cover uncompensated care costs.
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