Nonprofit classification decisions in response to threshold-based charity care incentives

We examine how the threat of losing income tax-exemption affects U.S. nonprofit hospitals' misclassification of the components of uncompensated care when the hospitals (i) are required to provide charity care subject to a minimum threshold in exchange for keeping the tax-exemption, (ii) are reimbursed for their bad debts, and (iii) can misrepresent their privately observed information regarding bad debts and charity care provided. Using an analytical model, we illustrate the optimal misclassification strategies of bad debt and charity care.