Optimal Threshold of Charity Care and Bad Debts for Maintaining Tax-Exempt Status in Nonprofit Hospitals

Presented at the AAA Western Region Meeting

Federal and state legislative agencies continue to debate whether specific charity care levels should be mandated for nonprofit hospitals to maintain their tax-exempt status. We attempt to model what should be an optimal bundle of charity care for hospitals. To our knowledge, this is one of the first study’s to model a potential optimal level of charity care thresholds. This study is relevant and timely because the tax law does not succinctly define charity care, yet mandates hospitals provide it in order to keep tax-exempt status. Our model illustrates that an optimal charity care threshold policy does exist in certain situations. These findings may be used in future research to empirically examine specific hospital and manager behavior.