Most American hospitals were established as either municipal or charitable organizations, with a commitment to providing free and discounted medical care to the poor. This responsibility is now recognized in federal law, aided by substantial public subsidies.
However, the magnitude of state and federal subsidies to support hospitals now substantially exceeds the value of “uncompensated care” that facilities provide to the uninsured.
As a new Manhattan Institute report demonstrates, federal aid for hospitals is also distributed senselessly. While lavish hospitals in affluent neighborhoods receive unnecessary windfalls, those serving the poorest communities often still find themselves financially strained in providing basic care to the uninsured.
In 2021, 8 percent of U.S. residents lacked health insurance coverage. The uninsured have less access to medical care and face higher out-of-pocket costs when they receive it. Whereas 6 percent of all U.S. residents were admitted to a hospital in 2021, only 1.6 percent of the uninsured received inpatient treatment. While those hospitalized received services worth an average of $21,710 (and paid $547 for them) if they were insured, the uninsured received only $13,480 (but paid $2,265).
Three-quarters of hospitals in the United States are either nonprofit or publicly owned institutions, exempt from property, sales and income taxes. In return, they must use surplus revenues for vaguely defined “community benefits,” such as improving facilities, undertaking medical research, or providing free and discounted medical care to the poor. This exemption was worth $28 billion to nonprofit hospitals in 2020, but the community benefit requirement includes no specific quantitative requirement or effective enforcement mechanism.
Federal law requires all hospitals receiving money from Medicare to stabilize any patient that arrives at their emergency room, regardless of insurance status. But it does not restrict their ability to subsequently charge for these or other services. The Affordable Care Act of 2010 required hospitals to limit charges for low-income patients, but left hospitals to define their own limits. Only a third of states formally limit what hospitals can charge the uninsured poor for care.
Across the country in 2018, 1.7 percent of hospital spending was associated with the provision of free and discounted care. But the burden of charity care was distributed very unevenly: 40 percent of facilities dedicated less than 1 percent of spending to free and discounted care, while 7 percent of hospitals spent more than 9 percent on charity care.
In 2019, federal and state governments distributed $49 billion in subsidies to support the delivery of “uncompensated care” by hospitals. This exceeded the $42 billion in medical services that the American Hospital Association claims hospitals provided without receiving direct payment — a third of which didn’t go to the uninsured.
The off-target distribution of federal subsidies reflects their origins; more than half of the aid comes from Medicaid’s Disproportionate Share Hospital (DSH) program, which allows states to claim federal matching funds without requiring them to provide specific services for eligible beneficiaries in return. To various degrees, states leapt at the opportunity for a windfall. This pushed DSH spending up from $1 billion in 1990 to $17 billion in 1992, when Congress froze the amount each state could claim. It yielded an absurdly inequitable distribution of funds: in 2023, while New Hampshire harvested $2,123 in DSH grants per poor resident, Wyoming received only $4.
The distribution of DSH funds within states is also hard to justify. Federal auditors routinely protest that hospitals claim subsidies to which they are not legally entitled. In some states (such as California), 100 percent of DSH aid is reserved for public hospitals, where it is captured by state officials for general fiscal purposes — yielding no measurable improvement on patient health.
Hospitals also receive an enormous indirect subsidy through mandatory “340B” discounts on their purchase of drugs, for which they charge insurers the full price. This yields around $85 billion in profit. Initially intended to support hospitals serving poor communities, half of U.S. hospitals now benefit from the 340B program. Hospitals in the wealthiest neighborhoods secure eligibility by buying up small clinics serving low-income areas, allowing them to profit disproportionately from claiming reimbursement for well-insured patients in their core service areas.
A better approach would be to distribute aid for hospitals according to the number of uninsured local residents, and in return to limit the amounts facilities may collect from low-income patients. This would allow accountability in ensuring that aid serves to increase the level of care provided to the uninsured, while encouraging hospitals to concentrate assistance on those who are unable to afford insurance.
Chris Pope is a senior fellow at the Manhattan Institute.