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. 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. 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.) 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. 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. 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. 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.