The Charity Care Mirage

60% of Hospitals Overbill Working Families

The charade of hospital chargemaster (retail) pricing and commercial discounts to the big four health insurers has to be the most prominent instance of kabuki theater in American business. Hospitals regularly bill eight to ten times what Medicare would pay, “discount” that 50 to 60% to insurers, and squeal like stuck pigs when employers seek to pay them 140% to 180% of Medicare.

What hospitals don’t want me to tell you is that Internal Revenue Code Section 501(r)(5) flat-out says nonprofit hospitals cannot bill patients more than the “amounts generally billed” (AGB) to insured patients for emergency or medically necessary care. That’s the law. And yet, I regularly see them deny care or threaten patients unless they agree to rates far above that ceiling.

However, when you use reference-based pricing (RBP) with legal savvy, you can push back hard, and all of a sudden, the hospital’s tax-exempt status becomes a blunt guillotine poised just over the back of their necks.

Need help with a hospital bill that you can’t afford to pay? Go HERE to see if you qualify

What Is a “FAP Patient”?

All nonprofit hospitals are required to have a Financial Assistance Policy (FAP) compelling them to define who qualifies for free or discounted care. And it is usually based on income relative to the Federal Poverty Level (FPL).

  • Free care often flows to family members, making up to 200% or 250% of the FPL; while
  • Discounted care frequently extends to 400% of the FPL.

In 2025, a family of four is at the FPL at $31,200. That means stable, working households earning $62,400 (200% FPL) may qualify for free care. Families earning up to $124,800 (400% FPL), many still get deep discounts. Roughly 60% of Americans fall below 400% of the FPL, meaning most of the country could receive charity care if they knew and applied.

“Amounts Generally Billed”

The linchpin of §501(r)(5) lies in the definition and implementation of “Amounts generally billed” (AGB). Those are the amounts that hospitals actually accept from payors, not their phony pie-in-the-sky chargemaster rates that nobody ends up paying. Hospitals must calculate AGB using one of two IRS-approved methods:

  1. Look‑Back Method
    • Analyze the last 12 months of actual payments from Medicare and private insurers.
    • Average permitted payments compared to gross charges.
    • Example: A $100,000 chargemaster item where insurers generally pay $20,000 yields an AGB of 20% of charges.
  2. Prospective Method
    • Estimate Medicare reimbursement for the service, plus an adjustment.
    • Example: If Medicare pays $15,000 and the hospital adds 20%, AGB becomes $18,000.

In reality, AGB usually ends up between 125 and 185% of Medicare, meaning that’s the legal ceiling for billing FAP-eligible patients. If a hospital tries to hit you with 300% of Medicare? They’re potentially breaking the law.

The Hip Surgery Standoff

Imagine one of your employees is making 300% of the federal poverty level (around $93,600 for a family of four). He needs a hip replacement.

§ Your RBP plan will pay 140% of Medicare.

§ The nonprofit hospital demands 450% of Medicare before scheduling.

What the hospital doesn’t want you to know is that if that patient applies for FAP, the hospital must limit billing to its AGB, which is often around 150% of Medicare. Suddenly, your 140% offer is perfectly reasonable, and the hospital’s stance looks indefensible. Never mind the fact that we’d have almost certainly already negotiated up to 185% of Medicare for a surgery like this, completely exposing the hospital’s faux charity care practices.

The moment the patient submits the FAP application and demonstrates eligibility, the hospital is constrained by law. Their 450% demand evaporates unless they foolishly wish to jeopardize their tax-exempt status.

Now, the hospital can still demand the full 150% AGB amount up front. In this case, your team (repricer, TPA, and consultant) can arrange for payment from the plan at that amount, ensuring the patient is not forced to front all of that money they likely don’t have.

Why This Matters for Employers Rocking RBP

Hospitals love to scare patients into submission. Most don’t know their rights. Most don’t even know FAP exists. Even fewer realize the hospital’s entire nonprofit tax exemption depends on honoring it.

That’s where we come in, walking into the chaotic trash heap of billing disputes with our concierge service, a repricer, and a bright light. The most powerful RBP-backed plans will:

  1. Educate employees about FAP and their rights.
  2. Provide the specific FAP forms and instructions, hospital by hospital.
  3. Guide employees through applying, while clearly stating that they self-certify their income.
  4. Coordinate with RBP repricers to align FAP caps with negotiation leverage.

Hospitals know IRS audits and state enforcement take this seriously. They’re required to post FAP policies and AGB methods publicly. If they fail to comply, they’re flirting with revocation of tax-exempt status.

The “Nonprofit” Shell Game

  • About 58% of U.S. hospitals are nonprofit. (PMC PubMed)
  • In return for that status, they enjoy an estimated $28 billion per year in tax exemptions, yet only deliver about $16 billion in charity care. (PMC, Johns
  • Hopkins Public Health)
  • And in fact, 86% of nonprofit hospitals provided less charity care than the value of their tax benefits. (Health Affairs)
  • Bottom line: we hand these hospitals billions in subsidies, yet most rake in more in tax breaks than they deliver in free or discounted care. Meanwhile, they’re lettering billboards that say “nonprofit,” while hammering working families.
  • When a hospital tries to charge 450% of Medicare to someone who qualifies for FAP, they gnaw at the foundation of their own nonprofit justification.
  • California Stepping Up: SB 1061 and AB 2297
  • California is taking this battle to the next level:
  • As of January 1, 2025, CA SB 1061 prohibits reporting medical debt to credit agencies. (Consumer Financial Protection Bureau, CMA Docs)
  • Starting July 1, 2025, hospitals must include specific consumer-protection language on any medical debt contract, or the debt is void and unenforceable. (California Hospital Association)
  • Under AB 2297/SB 1061, California expands FAP protections:
  • Eliminates asset testing, hard application deadlines, property liens, and adverse credit reporting.
  • Prohibits forcing patients to apply for other coverage.
  • Allows alternative documentation of income. And,
  • Requires clear billing summaries and record retention. (HCA

Bottom line: in California, even if a hospital tries to slip junk debt off to collections or grey areas, the law strips that away. It empowers patients and gives employers more legal heft. If you’re managing workers here, you’ve been given yet another potent enforcement tool.

The Workflow in Practice

Let’s revisit our patient assistance process with California in mind:

  1. Hospital demands 450% of Medicare.
  2. Employee qualifies for FAP.
  3. You pull the hospital’s FAP policy and guide the employee to apply.
  4. You reference AGB calculations, §501(r)(5), and the California law.
  5. If the hospital tries to report the debt or enforce it improperly, they’re legally toast, and their nonprofit claim gets tested.
    • And you’d better bet I’m there to remind them of that. In writing. On my legal letterhead.
  6. You settle at 140% to 180% Medicare. Employee gets surgery. The hospital collects fair payment.

The Bigger Lesson

RBP isn’t just about cost control. When combined with nonprofit regulations under §501(r) and, in states like California, enhanced protections like SB 1061, you’re swinging a compliance sledgehammer.

Hospitals snarl and stall, but when their $28 billion in tax exemptions and legal footing are on the line, most bluffs fold quickly. I cannot tell you how many times hospital systems have told us, patients, and employers that they won’t accept payment from our plan, only to turn around and quietly see our patient and accept that payment in our very next interaction.

Employers, especially those leveraging RBP, should not hesitate to wield that sledgehammer. Remind hospitals: if you want to keep your nonprofit perks, you can’t treat working families like ATMs by demanding 400% Medicare.

Closing

Hospitals love to post “nonprofit” on their doors while building towers and paying CEOs seven figures. When employers arm themselves with RBP and know how to use FAP law, they protect workers, save money, and hold hospitals to their own bargain.

And if hospitals don’t uphold their side? Then maybe it’s time someone asked why they still deserve that massive tax exemption.

This Compliance Bulletin is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.