Do Philly-area hospitals give enough charity care? There’s no simple answer.

By its own numbers, Phoenixville Hospital has recently become much more generous in the amount of care it is offering as charity to people who can’t afford a medical visit.

The figure that it had reported to the government for fiscal 2022 — $305,099 — was among the lowest for nonprofit hospitals in the Philadelphia region, an Inquirer analysis of their financial statements found.

Phoenixville spent 10 times more on charity care in the current fiscal year, the hospital’s owner Tower Health says, providing $3.3 million just in the last 11 months.

The shift happened amid a growing national debate over whether not-for-profit health systems are doing enough to earn their tax exemptions. Under particular scrutiny: the amount they spend on charity health care, a figure reported annually that is supposed to reflect their free and discounted services to financially needy patients.

Experts testifying at a congressional hearing this spring, think tanks, and recent articles by national media outlets such as the New York Times and the Wall Street Journal suggest that most not-for-profit health systems don’t spend enough on charity care and other community programs to balance out their tax breaks.

In reality, charity care calculations are difficult to evaluate, in part because the government doesn’t require not-for-profit health systems to provide such free or discounted care to earn their federal tax exemptions. They can qualify by offering a wide range of services to benefit their communities, including charity care, which virtually all hospitals provide to some extent because federal law requires them to treat people who come to their emergency rooms whether on not they can pay.

And it’s all but impossible to know how much money their tax exemptions are worth.

Phoenixville’s charity care transformation illustrates both sides of the debate:

Phoenixville Hospital became one of the region’s most charitable hospitals after hiring a company to process applications by low-income patients seeking to qualify for the government’s Medicaid health coverage and charity care. The firm also uses data in credit reports and other sources to qualify patients for charity care, even if the patient doesn’t apply.

Tower said the change is unrelated to its court battle over whether it is entitled to local property tax exemptions, which involves separate legal issue that is raising some of the same questions. In February, it lost a lawsuit brought by school districts challenging its claims to the local tax breaks. A Commonwealth Court ruled its approach to executive pay was too profit-oriented.

In an e-mailed statement, Tower said the charity care effort reflected a broader focus on “enhancing the patient experience.” Tower officials declined to be interviewed.

» READ MORE: School districts score major win over Tower Health in property-tax cases

To try to understand how the system works, The Inquirer compiled the numbers for the not-for-profit health systems that own 39 general hospitals in the eight-county Philadelphia area and gathered input from a half dozen experts on why it is so challenging to assess whether hospitals are doing their share for charity.

Not-for-profit hospitals must follow the same rules that apply to all charitable organizations under 501(c)(3) of the federal tax code. Yet hospitals are not the same as universities and other mission-oriented institutions.

No one has to go to Swarthmore College, which charges more than $81,000 in annual tuition and fees, in order to receive an education, or frequent Opera Philadelphia performances for entertainment.

But it’s a rare person who never needs hospital care, and if they don’t have good health insurance, the result can be a mound of unaffordable bills.

The government recognizes that hospitals serve a different purpose and requires them to meet what the IRS calls “the community benefit standard” by operating in a way that benefits the health of their community.

But the IRS does not quantify the requirements.

“The community benefit standard is not really a standard,” Jessica Lucas-Judy, a director of strategic issues at the U.S. Government Accountability Office told a U.S. House of Representatives committee in April.

She explained that the IRS simply provides examples of what could count to show that the hospital is promoting the health of the community it serves. These include things like having an emergency room open to all, regardless of ability to pay; reinvesting profits in education, training, and research; and having a board of directors from the community.

However, no single factor is a deal-breaker for the IRS.

In fact, hospital representatives often say true charity care is just a small portion of the community benefits they provide.

Qualifying for federal tax exemption does not guarantee a free ride on property taxes.

In Pennsylvania, hospitals and other not-for-profits must meet five criteria to qualify for a property tax exemption. One of them says a charitable organization must “donate or render gratuitously a substantial portion of its services.”

The standards, which were established in a 1985 state Supreme Court ruling, do not specifically say what a substantial portion translates to in percentage terms.

Philadelphia-area hospitals reported a huge range of charity care levels in their Medicare cost reports for the years that ended in June 2022, and December 2021. Some hospitals operate on a traditional calendar year. Others have a fiscal year that begins July 1.

Chestnut Hill Hospital, then owned by Tower Health, had the lowest level of charity care at 0.02% of expenses, or $190,223.

Tower’s hospitals in Phoenixville and Pottstown were also among the five lowest providers of charity care — though in all cases, the charity care numbers have soared this year, according to Tower.

Under its new approach, Tower told The Inquirer that its charity care levels through May have risen to 2.2% of operating expenses at Phoenixville and 2.1% at Pottstown.

Financial statements verifying the organization’s claims were not yet available.

Einstein Medical Center Philadelphia and Einstein Medical Center Montgomery also stood out for low levels of charity care in fiscal 2022. (Thomas Jefferson University acquired both hospitals in October 2021, partway through the reporting year.)

Combined, the two hospitals’ charity care amounted to just 0.12% of expenses, or $1.4 million.

The performance was especially striking at Einstein Philadelphia, where more than half of patients qualified for Medicaid in 2021. Jefferson did not respond to multiple requests for comment.

Nazareth Hospital in Northeast Philadelphia reported the highest level of charity care at Philadelphia-area hospitals, at 2.51%. That amounted to $4.2 million.

“We provide medical treatment to the most vulnerable members of our community,” according to a statement from the hospital owned by the Trinity Health Mid-Atlantic.

The next highest, at 2.5%, was Suburban Community Hospital in East Norriton. This amounted to $1.4 million spent on charity care. Suburban is owned by the not-for-profit Prime Healthcare Foundation but pays an annual management fee to a for-profit subsidiary of Prime Healthcare Corp.

Even within health systems, charity care spending can vary widely.

At Main Line Health, a network whose hospitals mostly serve the affluent suburbs west of Philadelphia, charity care ranged from 0.64% of expenses at Bryn Mawr Hospital to 1.45% at Paoli Hospital. Paoli participates in two charity care programs — Community Volunteers in Medicine and the Phoenixville Free Clinic — that elevated Paoli’s percentage of charity care, a spokesperson said.

The figures reported for charity care do not show how hard hospitals are working to care for lower-income residents, officials stress.

Temple University Health System, at 0.99% of expenses, and the University of Pennsylvania Health System, at 0.69% of expenses, said they have teams of people who attempt to enroll uninsured individuals in Medicaid. (Pennsylvania requires hospitals to help patients get covered.)

Penn’s financial counseling team helped 16,700 patients at its Pennsylvania hospitals (not including Princeton Medical Center) apply for Medicaid in the last year, with 3,600 of them approved, the system said.

Charity care at Penn’s flagship hospital, the Hospital of the University of Pennsylvania in University City, was $18.4 million, or 0.54% of expenses.

The concept of hospitals providing charity care is deeply rooted in history. In fact, Philadelphia was home to America’s first hospital, Pennsylvania Hospital, opened at a time when hospitals primarily served indigent people and volunteers staffed them.

In aggregate, Philadelphia-area not-for-profit hospitals reported $176 million in charity care in their latest Medicare financial filings. More than a quarter of the charity care was for people with insurance who couldn’t afford their co-pays and deductibles.

Across the region, this amounts to 0.85% of the $20.6 billion that local hospitals reported in expenses. The average spending on charity care by Philadelphia hospitals falls well below the national average of 2.6% of expenses in 2020, according to calculations by Kaiser Family Foundation, a nonprofit that studies national health-care policy.

Still, the tallies may not be apples to apples, said Zachary Levinson, an author of the KFF report.

It’s important to note that Pennsylvania hospitals have on average among the lowest rates in the nation of overall uncompensated care, namely the total associated with both charity care and bad debt when patients cannot pay their bills. The state also had a relatively low uninsured rate of 5.9% in 2021, which means that a lot more residents have access to health insurance than states like Texas and Florida, where more than 10% of the population is uninsured.

As a result, Southeastern Pennsylvania hospitals also provide less uncompensated care. It totaled 1.2% of operating expenses in fiscal 2022, compared to the national average of 4.1%, according to a March report by a commission that advises federal regulators on Medicaid policy and payments.

The current low rate means if local hospitals classified every unpaid bill as charity, they would still lag far behind KFF’s national average.

None of these figures, however, reveal how many Pennsylvania residents took on credit card debt or suffered other financial hardships to pay hospitals and doctors.

The difference between for-profits and not-for-profits has nothing to do with making a profit. The central difference is that not-for-profits don’t have owners and therefore can’t pay dividends or profits to them.

“The legally key difference between for-profits and nonprofits is that we have to reinvest our profits, not that we can’t make profit,” said Laura Otten, graduate director for La Salle University’s master’s in nonprofit leadership program. “We have to make a profit or we’re going to go out of business.”

When a not-for-profit is sold to a for-profit, net proceeds must go into a foundation dedicated to the original charitable purpose. (The Philadelphia region is home to at least 10 such foundations with more than $400 million in assets.)

But critics say the not-for-profit world of hospitals and health systems increasingly looks just like for-profit corporations in their size and behavior in the marketplace.

Because millions of Americans get stuck with unaffordable health-care bills, researchers and advocates use charity care as the lens to evaluate whether not-for-profit hospitals deserve their tax breaks. Groups such as KFF and the Lown Institute, a Massachusetts not-for-profit that advocates for equity and accountability in health care, want policies that force not-for-profit health systems to do more to serve vulnerable people and protect people from medical debt.

Making the case that not-for-profit hospitals don’t do enough to earn their tax breaks involves estimating how much they save in federal, state, and local taxes. KFF estimated that in 2020 hospitals’ tax breaks were worth $27.6 billion compared to $16 billion in free care.

Such estimates are based on many assumptions, said Ge Bai, a professor of accounting and health-care management at Johns Hopkins University.

“There’s no way to know at the hospital level how much is the taxpayer subsidy,” she said. One big factor is that taxable income differs from the income reported on publicly available financial statements, Bai said.

“And also property tax, we do not know,” she said.

Health economics expert Mark V. Pauly, a retired professor from the Wharton School of the University of Pennsylvania, doesn’t see a good reason for the tax breaks.

They are an overly complicated approach to “improving the welfare of poor people in your community,” he said.

Some states are trying to change their not-for-profit hospitals to get more community benefits.

In 2019, Oregon was the first, and so far the only state, to require hospitals to spend a minimum amount on community benefits. The minimums are set according to individual hospitals’ financial circumstances and the needs of the community.

“We did this because of the impact that medical debt was having on Oregonians,” Steven Ranzoni, hospital policy adviser at the Oregon Health Authority, said during an online Lown Institute event in April on whether hospitals earn their tax breaks.

Colorado adopted legislation this year that requires hospitals to provide more specific and detailed spending information, including at public meetings, according to Nancy Dolson, director of the special financing division at the Colorado Department of Health Care Policy and Financing.

The legislation also tasks the state auditor with calculating the value of not-for-profit hospitals’ tax exemptions, Dolson said.