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An International Meeting of American Accounting
Association
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An Empirical Investigation of Changes in Charity Care Spending by Nonprofit Hospitals in Response to Mandatory Threshold Law |
Frances A. Kennedy
Clemson University
Laurie B. McWhorter
Mississipi State University
Jennifer Troyer
University of North Carolina Charlotte
Caleb Stroup
University of North Carolina Charlotte
Abstract: There is growing concern that nonprofit hospitals receiving favorable tax treatment may not be providing sufficient indigent care to their community. Of the 18 states that have enacted legislation regulating charity care, the most stringent is Texas who passed a law in 1993 requiring nonprofit hospitals to spend a minimum of 4% net patient revenue on indigent care in order to retain their tax-exempt status. Two years later, this law was modified to allow the deduction of bad debts (in accordance with GAAP), effectively lowering the spending threshold. Grounded in theories of altruism and heuristics, this study tests the effects of both changes in Texas law by examining charity care spending patterns between 1992 through 1997. As expected, results show that nonprofit hospitals spending below the 4% threshold did increase their spending. However, many hospitals already above the threshold responded by reducing their spending charity care, though to a lesser degree.