Do Nonprofit Hospitals Provide Less Charity Care When Faced with Financial Losses?

This paper studies the impact of financial loss on the provision of social or merit goods by nonprofit hospitals. Specifically, it estimates the effect of the sharp reduction in hospital net income following the 2008 financial crisis on the supply of charity care. Using a quasiexperimental design with both matched and unmatched control groups, we find that hospital income is not predictive of changes in uncompensated care provision at the hospital level (i.e., individual hospitals use their financial surplus to provide uncompensated care) over the period 2007-2008. Given the fact that the market structure of the health services industry did not change, at least in the near term, this evidence suggests that holding constant the crowding-out effect there is no income effect on the supply of charity care. Additionally, from the results of instrumental variable (IV) regressions, hospitals with less Medicare revenue, higher financial risk, lower operating efficiency, higher labor costs, and being located in rural areas are associated with more uncompensated care expenses. Finally, we note that the evidence of the relationship between charity care and hospital size and asset liquidity is mixed.