Tax Incentives for Physicians Providing Charity Care

By Joseph J. Wang
jwang@central.uh.edu

Charity care involves the provision of free or reduced fee health services. For the over 40 million Americans who are either uninsured or underinsured at any given time, charity care represents an important part of the safety net for health services provided to the medically indigent. Charity care offered by physicians, community health centers, free clinics and others fills in the void for health services that both public insurance programs (e.g., Medicare, Medicaid, and CHIP) and private sources (e.g., health insurance, out-of-pocket expenditures, and philanthropy) fail to cover .

With rising health care costs and medical inflation in general, charity care is not cheap. For example, in 1998, the Texas Department of Health estimated that total hospital charity care was over $1 billion, even after adjusting for the ratio of cost to charges. The Texas Medical Association and MVA Research Inc. estimate that total charity care by physicians was over $914 million, or approximately $22,200 per Texas physician in 1997. See Texas Comptroller on Public Accounts report on Texas Health Care Spending, available at http://www.window.state.tx.us/specialrpt/hcs/.

So given the expensive price tag for charity care, how can any hospital or health care organization afford to provide it at all? Part of the reason is that qualifying hospitals are exempt from paying federal, and sometimes, state and local income taxes. Not-for-profit hospitals and many other charitable health care organizations receive federal tax exempt status under Internal Revenue Code Section 503(c)(3). This tax status confers great benefits to the qualifying entity not only through an exemption from federal income taxation, but also through favorable tax treatment with respect to receiving contributions and securing financing. Such tax incentives encourage the charitable purpose, i.e., the promotion of health, for which these hospitals and organizations were created. A zero income tax liability and other tax incentives help to offset the high cost of charity care.

Physicians, however, receive no tax benefits for providing charity care. They cannot write off the cost of charity care from their personal or business taxes. The current tax code allows deductions for certain out-of pocket expenses in giving services to a qualified organization (e.g., travel expenses) but does not allow such deductions for the value of your time or for the services itself. See Publication 526 on Charitable Contributions, available at http://www.irs.gov/pub/irs-pdf/p526.pdf. So, for example, a physician who volunteers at a not-for-profit hospital could get reimbursed for gas and parking related to her volunteer work, but not for her time off of work or for her help.

There are conflicting reports on the amount of charity care given by physicians. In August 2001, the Center for Studying Health System Change released an Issue Brief entitled "Physicians Pulling Back from Charity Care," which is available at http://www.hschange.org/CONTENT/356/356.pdf. The report cites a four percent decline in physicians providing charity care between 1997-1999, which raises concerns about the growing problem of access for the poor and uninsured. In contrast, the AMA Center for Health Policy Research released its April 2002 Physician Marketplace Report on "Physician Provision of Charity Care, 1988-1999" which is available at http://www.ama-assn.org/ama/upload/mm/363/charity_care_2002.pdf. This report produces data to suggest that "physician commitment to charity care remains strong."

Regardless of what these reports say about physician commitment, a tax incentive for providing charity care would probably increase physician participation and hours in such care. With the financial and administrative burdens imposed by health plans and our multiple payer system, physicians may be less inclined to spend time on charity care these days. A tax incentive in the form of a tax credit or deduction could sway physicians toward spending more time on charity care. The net effect is that physicians would play an even greater role in giving free medical care to those who need it most.

While Congress and state legislatures across the country wrestle over ways to expand public insurance programs like Medicare, Medicare, and CHIP or over schemes to make private health insurance more affordable, they should also consider utilizing tax incentives to promote charity care by physicians. Although creating a favorable tax incentive will result in less tax revenue, generating more charity care could create long-run cost savings to public insurance programs that would help to offset any tax revenue losses. Of course, expanding the role of physicians in charity care will not solve all the problems of the uninsured. Access will always be an issue under our current system. However, until every American has access to basic health services, rewarding physicians who provide charity care is a great start.

07/03/02