This is the third or forth I have seen concerning Non-Profit hospitals. The issue being whether a Nonprofit hospital provide enough nonprofitable care to be considered nonprofit which entitles them to tax exemptions. As the authors discuss, some for-profit hospitals provide greater nonprofit care. Read on and I am sure there will be more to come on this topic. Do Nonprofit Hospitals Deserve Their Tax Exemption? NEJM, Ge Bai, Sunjay Letchuman, and David A. Hyman. Many hospitals in the United States were founded by religious organizations or philanthropists and were expected to focus on relieving the suffering of poor people. Times change. Hospitals are one of the largest industries in the United States, with annual revenues exceeding .4
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This is the third or forth I have seen concerning Non-Profit hospitals. The issue being whether a Nonprofit hospital provide enough nonprofitable care to be considered nonprofit which entitles them to tax exemptions. As the authors discuss, some for-profit hospitals provide greater nonprofit care. Read on and I am sure there will be more to come on this topic.
Do Nonprofit Hospitals Deserve Their Tax Exemption? NEJM, Ge Bai, Sunjay Letchuman, and David A. Hyman.
Many hospitals in the United States were founded by religious organizations or philanthropists and were expected to focus on relieving the suffering of poor people. Times change. Hospitals are one of the largest industries in the United States, with annual revenues exceeding $1.4 trillion. Nonetheless, roughly 60% of community hospitals are incorporated as nonprofit institutions, which means that they don’t have shareholders and cannot distribute dividends.
Nonprofit status does not automatically confer tax exemption. Section 501(c)(3) of the Internal Revenue Code authorizes tax exemption for nonprofit organizations pursuing charitable, religious, educational, or scientific missions. In 1956, the Internal Revenue Service (IRS) began requiring nonprofit hospitals to “be operated to the extent of [their] financial ability for those not able to pay for the services rendered.”1 This requirement meant that a nonprofit hospital could not deny care to patients who were unable to pay for it if the hospital wanted to keep its tax exemption.
In 1969, the IRS adopted the community-benefit standard, which required nonprofit hospitals to promote “the health of a class of persons broad enough to benefit the community.”1 In practice, this standard meant that nonprofit hospitals’ emergency departments had to be open to all people.
The 1986 Emergency Medical Treatment and Labor Act subsequently imposed another obligation on Medicare-participating hospitals. This obligation came with an emergency department to screen and stabilize all patients presenting to the hospital. It included an obligation to provide inpatient treatment under some circumstances.
In 2010, the Patient Protection and Affordable Care Act (ACA) supplemented these obligations by requiring nonprofit hospitals to report certain information regarding the provision of community benefits in their annual tax filings (Form 990, Schedule H). It included the cost of providing charity care (care for which hospitals receive no or partial payment from low-income patients), the amount of their Medicaid “shortfalls” (the difference between the cost of providing care to patients covered by Medicaid and Medicaid’s payment for such care), and the cost of education, research, and other community activities.
The ACA also requires hospitals to periodically conduct community health needs assessments and develop a plan to address identified needs. The plan included steps to prevent illness and address health disparities and social determinants of health.
Federal tax exemption allows hospitals to receive tax-deductible contributions and to issue tax-exempt bonds. State and local tax exemption (the criteria for which are usually modeled on federal criteria) cover state and local sales tax, property tax, and income tax. An analysis by the Kaiser Family Foundation estimated that the value of nonprofit hospitals’ tax exemption was $28.1 billion in 2020.2
Do nonprofit hospitals provide enough community benefit to justify this sizable subsidy? Many communities seem to have their doubts, judging by challenges to hospital tax exemptions in multiple states. Recent cases in Pennsylvania resulted in four nonprofit hospitals lost their property-tax exemption.
To evaluate this question, in previous work we compared nonprofit and for-profit hospitals on measures of charity care and Medicaid shortfalls. The two largest components of community benefit by amount of spending. For-profit hospitals don’t receive tax exemptions and are not legally obligated to provide community benefit. For every $100 of expenses incurred in 2018, nonprofit hospitals in aggregate spent $2.30 on charity care. In comparison, for-profit hospitals spent $3.80 for charity care.3 In 2019, nonprofit and for-profit hospitals had similar Medicaid shortfalls as a share of total expenses.4
The data suggests many nonprofit hospitals do not provide enough charity care or have a substantial enough Medicaid shortfall (relative to for-profit hospitals) to justify favorable tax treatment. More serious issues being the current subsidies are poorly targeted due to exemptions from property and income tax worth more to financially successful nonprofit hospitals located in high-income areas. Less financially successful nonprofit hospitals in lower-income areas have lesser property and income tax exemptions. In each case, the exemptions are unrelated to the amount of community benefit the hospitals provide.1-5
Many nonprofit hospitals also generate substantial profits from the federal 340B Drug Pricing Program. The 340B program, which was designed to help safety-net hospitals serve low-income patients, allows qualifying nonprofit and government-owned hospitals to purchase discounted drugs from pharmaceutical companies.
The “buy low, sell low” program has evolved into a “buy low, sell high” program enabling eligible hospitals to generate profits by providing these drugs to well-insured patients. Many nonprofit hospitals have acquired or become affiliated with clinics located in high-income communities and have shifted care away from outpatient physician offices to more expensive hospital outpatient centers. Some hospitals have adopted aggressive revenue-enhancing activities, such as declining to offer charity care to eligible patients, suing patients, and garnishing wages due to unpaid medical bills. These examples make it clear that nonprofit status provides no assurance hospitals will behave in accordance with their charitable mission or provide sufficient community benefit to justify favored tax status.
There is insufficient data to compare the amount of community benefit provided by individual nonprofit hospitals to the subsidies they receive. To close the information gap, the IRS could revise Schedule H of Form 990 to require nonprofit hospitals to report on forgone federal, state, and local taxes. Breaking each out separately and reporting on savings associated with tax-exempt bonds; gross profits from the 340B program, if applicable; and charitable contributions received by the hospital. Standardized reporting for each of these elements would close the gap in reporting.
Nonprofit hospitals could use their existing financial records to generate most of the requested information, which would limit the administrative burden associated with compliance. Periodic audits could be conducted to ensure that hospitals don’t understate the direct and indirect subsidies they receive or overstate the amount of community benefit they provide. Because Form 990 is reported at the level of individual entities, data from physician practices and health plans belonging to the same nonprofit hospital system would be aggregated to generate an overall picture of the tax subsidies received and the community benefit provided by the system. Once these figures are publicly available, it will be apparent which nonprofit hospitals are not doing their part.
Disclosure might not be sufficient to catalyze changes in hospital behavior. We believe greater transparency is a prerequisite for policy action. Texas already requires some nonprofit hospitals to provide community benefit equal in value to their self-reported tax exemption.5 Tax authorities in other states might find it easier to challenge the tax-exempt status of some local hospitals once a hospitals’ disclosures make it clear they are not providing enough community benefit to warrant tax exemption. Policymakers could examine whether eligible hospitals are using their gross profit from the 340B program to provide community benefit, and other regulatory authorities might use these data for similar purposes.
Many nonprofit hospitals face substantial fiscal challenges. Heavy handed policies such as eliminating tax-exempt status across the board is counterproductive. Allowing nonprofit hospitals to shirk their obligations has its own costs, which are borne by patients, their families, and the community.
Mandating increased financial transparency gives stakeholders and policymakers the flexibility to understand, design, and test approaches to encourage nonprofit hospitals to provide meaningful community benefit and move away from the current open-ended subsidies tied to ownership status. The alternative is to continue playing Whac-A-Mole with the many nonprofit hospitals not providing sufficient community benefit.
- Hyman DA, Sage WM. Subsidizing health care providers through the tax code: status or conduct? Health Aff (Millwood) 2006;25(4):W312-W315.
- Godwin G, Levinson Z, Hulver S. The estimated value of tax exemption for nonprofit hospitals was about $28 billion in 2020. Washington, DC: Kaiser Family Foundation, March 14, 2023 (https://www.kff.org/health-costs/issue-brief/the-estimated-value-of-tax-exemption-for-nonprofit-hospitals-was-about-28-billion-in-2020/. opens in new tab).
- Bai G, Zare H, Eisenberg MD, Polsky D, Anderson GF. Analysis suggests government and nonprofit hospitals’ charity care is not aligned with their favorable tax treatment. Health Aff (Millwood) 2021;40:629-636.
- Bai G, Zare H, Hyman DA. Evaluation of unreimbursed Medicaid costs among nonprofit and for-profit US hospitals. JAMA Netw Open 2022;5(2):e2148232-e2148232.
- Bai G, Plummer E, Anderson GF. Use the hospital compare website to make hospital community benefit more transparent. Health Affairs Forefront. September 10, 2021 (https://www.healthaffairs.org/do/10.1377/forefront.20210903.50737
US: Nonprofit Hospitals Chase Low-Income Patients on Debts, Angry Bear, angry bear blog
Hospital and Pharmacy’s Profit Stream that Was Supposed to Help Patients, Angry Bear angry bear blog
Three ways 340B or Healthcare is failing vulnerable patients, Angry Bear, angry bear blog