Regulating Charitable Care
The majority of hospitals in the US operate under a tax-exempt not-for-profit status and are expected to provide charitable care to their communities in return. However, recent evidence has shown that tax-exemption and compensating payments exceed charitable care costs nearly two to one. Moreover, the burden of care is unequal, with some hospitals providing no charitable care and others more than their tax benefits. We study the optimal regulation of charitable care, accounting for the heterogeneous demand and the opportunity cost for hospitals associated with displacing profitable patients. We leverage regulatory shocks to the supply of charity care in Wisconsin to estimate the cost and value of free care and evaluate counterfactual policies. We show the effectiveness and welfare consequences of a recently proposed floor-and-trade policy that requires not-for-profit hospitals to deliver a fixed share of revenue as charitable care. The policy allows hospitals to buy credits from hospitals that face a greater local demand for such care, improving the allocative efficiency and effectiveness of the tax incentive imposed by the tax benefit.
