Tax Credits for Physician Charity Care – Background and Issues

Any new taxes on Texas physicians should recognize the large contribution that physicians currently make to the citizens of Texas by donating their medical expertise and resources to care for patients who are unable to pay for their own care.

Hospital and physician charity care is an important method of funding the care for indigent patients. Although many sources of reimbursement are available to hospitals to defray the cost of charitable services, physicians generally must absorb the cost of charity care. That is becoming increasingly difficult due to flat or declining physician payments and rising practice costs. Because physician practices are more efficient providers of non-emergency outpatient care than hospital emergency rooms, overall cost reductions could be accomplished by encouraging care for uninsured or indigent patients in physician offices or clinics. Indemnifying physicians for their charity care services will require choosing methods for identifying and valuing charity care services.


In 2001, the Comptroller of Public Accounts published a comprehensive study to quantify health care spending in the state of Texas. Total Texas spending for 1998, the year studied, was $69 billion. As part of that study, it was determined that Texas hospitals provide $2 billion in charity care to patients per year, and physicians provide another $1 billion, making charity care a significant source of funding for Texas patients.

Hospital charity care is delivered largely as a consequence of the federal Emergency Medical Treatment and Active Labor Act (EMTALA), which requires any Medicare-certified hospital to screen and stabilize any patient who seeks treatment in its emergency room, without regard to ability to pay or payment method. In practice, this has meant that uninsured patients are treated in emergency rooms for both emergency and non-emergency conditions, though many could be treated at less cost in a physician's office or outpatient clinic. To fulfill EMTALA requirements, hospitals often require physicians who have admitting privileges to take emergency room call on a regular basis, making themselves available to treat any patient who needs their services. Thus, EMTALA also effectively requires physicians to provide charity care.

Furthermore, physicians have an ethical duty to continue to care for patients once a physician-patient relationship has been established, whether or not the patient pays for his care. Failure to do so may result in civil liability claims for patient abandonment. Additionally, physicians may provide charity care as part of a charitable calling or mission or from a sense of civic duty. Some may be part of a formal volunteer program such as Project Access; others simply volunteer some of their services when they become aware of specific patient needs.

Sources of Funding for Charity Care

Many hospitals are able to access some outside funds to help cover the cost of charitable care. Foremost among these is the Medicaid Disproportionate Share Hospital (DSH) program, which allows a special pool of Medicaid funds to be distributed to hospitals that treat large numbers of Medicaid or indigent patients. Texas DSH funds for 2004 were approximately $1.5 billion. Other sources for hospital funding for uncompensated care include private donations, federal programs to pay for care to illegal aliens, Medicare reimbursement for bad debt, and the new Texas trauma fund.

Physicians in private practice, on the other hand, have almost no opportunity to be reimbursed for charity care. Although all costs of operating their practices are deductible business expenses, there is no available deduction or credit for the cost of their donated professional time and services. Some physicians have compensation arrangements with hospitals for emergency room coverage, but a 2004 TMA survey shows that two-thirds of physicians are required by hospitals to take emergency room call and fewer than 30 percent were compensated by the hospital for their services.

Issues in Identification and Valuation of Charity Care

Historically, the main obstacles to compensating physicians for charity care have been issues of accountability, identification, and valuation. Increasing automation of physician practices may now provide improved accountability and auditability of physician records.


The following categories of physician services could properly be categorized as charity care:

  • Services are provided with the full advance knowledge that the patient would not pay for the care.
  • Services are provided with or without knowledge of the patient's ability to pay, that are subsequently uncompensated or only partially compensated. This is typical of services provided in hospital emergency rooms.

In most discussions of possible compensation for charity care, there is an implied differentiation between charity care and bad debt; the distinction is generally defined by the patient's ability to pay. If a patient has the means to pay but does not, the unpaid bill would be uncollected debt. Services provided to patients who are unable to pay because they have insufficient income and resources or overwhelming medical debt would generally be considered to be charity care. The identification of charity care may thus hinge on a determination that the patient is unable to pay for the care.

Determining ability to pay, however, may be difficult. Patients seeking non-emergency care may be willing to provide pay stubs or other documentation of income, but patients who have already received emergency care may be unwilling or unable to even provide a home address. That may be one of the reasons that state and federal rules do not prescribe a specific method for providers to use in determining indigence. Most hospitals have established their own methods for determining ability to pay; it would be reasonable to allow physicians to rely on hospital determinations, when they exist. When patients are treated wholly on an outpatient basis, however, physicians should be allowed to develop their own simple determination methods, as physician practices lack the resources to engage in extensive investigations. Physicians also should be permitted to rely on indigence determinations made by other parties, including charitable programs such as Project Access.


Once charity care services have been identified, they must be assigned a reasonable value. Possible methods include:

  • The physician's standard charge. Legislative resistance to this proposal exists, in part, because of the prevalence of contracted discounts.
  • The Medicare allowable. Physicians would need to identify the charitable services, and then assign the appropriate Medicare-allowable amount for their geographic area. This would be fairly simple for some practices but fairly difficult for those that do not normally participate in Medicare. Furthermore, Medicare sets no fees for some services, such as preventive care visits. As Medicare currently pays less than average physician cost and is scheduled for large future cuts, physicians would not generally favor this methodology.
  • The Medicaid allowable. This method has the same problems as the Medicare allowable, but magnified by the lower numbers of Medicaid providers and the even-greater insufficiency of the Medicaid fee schedule.
  • Assigned value per RVU. The state could assign a value per relative value unit (possibly based on average cost per RVU data from MGMA surveys). It might be relatively simple for physicians to associate most procedures with the appropriate relative value units, as the files are readily available. However, Medicare does not assign relative values to all procedures, leaving large gaps for services such as clinical laboratory procedures, implants, supplies, injectible drugs, and vaccines.
  • Ratio of cost to charges. The services could be reduced to cost basis by multiplying the standard charge for the services by the ratio of cost to charges. This method is currently used by hospitals to value services at cost basis on Medicare cost reports and elsewhere. The method is relatively simple, but it would open total charges and total cost to government audit.

It is not clear which of the above methods would be acceptable to the legislature, reasonable for physicians, and simple to calculate and audit.