Evaluation of Unreimbursed Medicaid Costs Among Nonprofit and For-Profit US Hospitals

Nonprofit US hospitals receive sizeable subsidies, including exemption from federal and state taxes and the ability to issue tax-free bonds. An estimate from 2015 placed the value of these subsidies at almost $25 billion.¹ Nonprofit hospitals are required to provide various forms of community benefit to justify their tax-related subsidies, although federal law does not impose a minimum requirement.² Among the 8 components of community benefit reported by nonprofit hospitals on Internal Revenue Service Form 990, the largest is unreimbursed Medicaid costs (44%).^3,4 We used 2019 Medicare cost report data to examine unreimbursed Medicaid costs among nonprofit and for-profit US hospitals.

This economic evaluation was deemed exempt from review by the Johns Hopkins University Institutional Review Board, because no identifiable private data or identifiable biospecimens were accessed. The study followed the Consolidated Health Economic Evaluation Reporting Standards (CHEERS) reporting guideline.

We used the 2019 Medicare cost reports to obtain information on self-reported unreimbursed Medicaid costs. Our sample included 3446 private hospitals (2617 nonprofit and 829 for-profit hospitals). Unreimbursed Medicaid costs were obtained from Worksheet S-10, calculated as the estimated cost for treating Medicaid patients (ie, the charges for the services multiplied by the hospital’s cost to charge ratio) minus all reimbursements and supplemental payments.⁵

For each state, we calculated (1) the weighted mean unreimbursed Medicaid cost to expense ratio (the total unreimbursed Medicaid cost across hospitals divided by their total expenses) for all private hospitals, nonprofit hospitals, and for-profit hospitals and (2) the ratio of the weighted mean unreimbursed Medicaid cost to expense ratio of for-profit hospitals relative to nonprofit hospitals (ie, the for-profit to nonprofit relative ratio). This weighted mean approach is consistent with the prior literature on hospital charity care.⁶ We also examined the median for-profit to nonprofit relative ratios for states that did (and did not) expand Medicaid by January 1, 2019.

The median test was used to compare medians in unreimbursed Medicaid costs of nonprofit and for-profit hospitals. Statistical significance was set at P < .01 (2-sided). Statistical analysis was conducted using Stata, version 15 (StataCorp).

In 2019, the 3446 US private hospitals in our data set incurred $20.59 billion in unreimbursed Medicaid costs, representing 2.52% of their total expenses. Nevada hospitals had the highest weighted mean unreimbursed Medicaid cost to expense ratio (7.74%), whereas hospitals in Maryland (0.02%), Utah (0.07%), and Alabama (0.14%) had the lowest ratios (Table). In 23 of the 45 states (51.1%) in which both nonprofit and for-profit hospitals operated, for-profit hospitals had higher unreimbursed Medicaid cost to expense ratios than nonprofit hospitals (Figure).

Texas had the highest ratio of for-profit to nonprofit unreimbursed Medicaid costs to expenses (10.51:1), whereas New York and the District of Columbia had the lowest ratio (0.00:1). Of the 45 states in which both nonprofit and for-profit hospitals operated, the 28 states that implemented the Medicaid expansion had a median (IQR) for-profit to nonprofit relative ratio that was similar to the 17 states that did not expand Medicaid (0.99 [0.56-1.21] vs 1.00 [0.48-1.77]; P = .85).

In this economic evaluation, nonprofit and for-profit hospitals had similar unreimbursed Medicaid costs as a share of expenses. In half of the 45 states in which both nonprofit and for-profit hospitals operate, nonprofit hospitals had a lower weighted mean unreimbursed Medicaid cost to expense ratio than for-profit hospitals—but only nonprofit hospitals receive a sizeable tax subsidy. Thus, our results suggest that the largest component of community benefit supposedly provided by nonprofit hospitals (ie, unreimbursed Medicaid costs, net of supplemental payments) is poorly aligned with the (effectively automatic) tax subsidy that these institutions receive. Prior research suggested similar results for the provision of charity care by nonprofit vs for-profit hospitals.⁶

In part, supplemental payments are designed to help offset unreimbursed Medicaid costs. A sizeable majority of hospitals in our data set (2375 [69%]) reported receiving supplemental payments, including 1840 nonprofit hospitals and 535 for-profit hospitals. The Medicare cost reports do not contain sufficient information for us to analyze the distribution of unreimbursed Medicaid costs if there were no supplemental payments, which is a limitation of this study. Our analysis also assumes that the figures reported by hospitals on their Medicare cost reports (under penalty of law) are accurate. If hospitals erroneously underreport supplemental payments, then their unreimbursed Medicaid costs will be inflated.

Policy makers should do more to address these issues, including providing greater transparency about the magnitude of the subsidies received by nonprofit hospitals and establishing a more direct nexus between these subsidies and the performance of those facilities in providing community benefit, whether in the form of unreimbursed Medicaid costs, charity care, or some other measure.

Accepted for Publication: December 21, 2021.

Published: February 14, 2022. doi:10.1001/jamanetworkopen.2021.48232

Open Access: This is an open access article distributed under the terms of the CC-BY License. © 2022 Bai G et al. JAMA Network Open.

Corresponding Author: Ge Bai, PhD, CPA, Johns Hopkins Carey Business School, Johns Hopkins University, 100 International Dr, Baltimore, MD 21202 (gbai@jhu.edu).

Author Contributions: Drs Bai and Zare had full access to all the data in the study and take responsibility for the integrity of the data and the accuracy of the data analysis.

Concept and design: Bai, Zare.

Acquisition, analysis, or interpretation of data: All authors.

Drafting of the manuscript: Bai.

Critical revision of the manuscript for important intellectual content: All authors.

Statistical analysis: Zare.

Obtained funding: Bai.

Administrative, technical, or material support: All authors.

Supervision: Bai, Hyman.

Conflict of Interest Disclosures: Drs Bai and Zare reported receiving grants from the Episcopal Health Foundation and the Commonwealth Fund during the conduct of this study and grants from Arnold Ventures outside the submitted work. No other disclosures were reported.

Funding/Support: This work was supported by the Episcopal Health Foundation, the Commonwealth Fund, and Arnold Ventures (Drs Bai and Zare).

Role of the Funder/Sponsor: The Episcopal Health Foundation, the Commonwealth Fund, and Arnold Ventures had no role in the design and conduct of the study; collection, management, analysis, and interpretation of the data; preparation, review, or approval of the manuscript; and decision to submit the manuscript for publication.