Tax exemptions for nonprofit hospitals top $28 billion: KFF


Nonprofit hospitals received $28 billion in taxpayer subsidies in 2020 but provided only $16 billion in free or discounted care, a new analysis finds.

Hospitals have long argued that nonprofit providers do more for their communities than can be reasonably measured, and that their various investments far exceed their state and state income tax, sales tax, and property tax exemptions. But the latest research from the Kaiser Family Foundation feeds the arguments of many health economists and politicians that nonprofit hospitals don’t deserve their tax exemptions.

“Taxpayers subsidize more than their fair share,” said Ge Bai, a professor of health policy and accounting at Johns Hopkins University who has researched but not taken part in nursing care expenditures at nonprofit hospitals The analysis. The gap between nonprofit hospital tax exemptions and charitable spending would be even wider if the researchers included the 340B drug rebate program, which is also subsidized by taxpayers, she added.

A spokesman for the American Hospital Association said in a statement that the Kaiser Family Foundation’s analysis was narrow and excluded the “pervasive gaps between government reimbursements for care and the actual cost of care.” The spokesman cited a 2022 report commissioned by the AHA by consulting firm EY, which found that for every dollar in tax exemption, hospitals provided $9 in community services.

The value of non-inflation tax exemptions for nonprofits increased from $20 billion in 2011 to $28 billion in 2020, said Zachary Levinson, project director of the Kaiser Family Foundation’s Medicare Policy Program and co-author of the report.

“Tax-exempt status offers many benefits to nonprofit hospitals,” he said. “We hope this data can help assess whether the tax break is a good deal for the government.”

Charitable care, which hospitals charge for as providing free or discounted care to patients, is a component of hospital charitable spending. Research has shown that there is little difference between the amount of charitable care provided by not-for-profit and for-profit hospitals. The Medicaid shortfall, or the gap between Medicaid payments and the hospital’s estimated cost for those services, typically accounts for the majority of hospitals’ community service spending.

But the Medicaid deficit, which isn’t included in the KFF analysis, isn’t a good measure of spending on community services, said Gerard Anderson, a professor of health policy and international health at Johns Hopkins University, who compares nonprofit hospital spending to charitable ones purposes examined.

“The whole concept of the Medicaid deficit doesn’t make sense to me,” said Anderson, who was not involved with the KFF study. “The more expensive your hospital, the higher the Medicaid deficit.”

In addition to charity care and the Medicaid shotfall, nonprofit hospitals include investments in public health investments such as testing clinics, workforce training programs, and infrastructure improvements such as housing developments, among others. But these are very small portions of hospital charitable spending, and there are big differences in the amount of funding and the types of programs offered, said Gary Young, director of the Center for Health Policy and Health Research at Northeastern University, who serves on an advisory committee of the Internal Revenue Service from 2012 to 2015, which monitored data from hospitals’ federal tax forms.

“Hospitals are not equipped to engage in infrastructure improvements and such activities,” he said. “So we have tax exemptions that have significant value for not-for-profit hospitals, tremendous variability in hospital delivery, and the ability to correct for that variability.”

Several states have enacted laws that require nonprofit hospitals to allocate a percentage of their total spending to charitable causes. Oregon, for example, allocates a mandatory welfare spending cap to every hospital every two years based on factors such as the hospital’s financial position, workforce, and community demographics.

Officials, including Sen. Chuck Grassley (R-Iowa), have pushed several federal policy solutions, though the proposals usually face staunch opposition from hospital lobby groups.

Kaiser Family Foundation researchers identified several policy solutions, including a floor-and-trade system that would require hospitals to subsidize other hospitals’ charitable care if they failed to meet a minimum charitable care spending threshold. Another policy is to replace current tax benefits with a subsidy tied to the value of community services provided.

At a minimum, nonprofit hospitals should be required to disclose their estimated tax exemptions on their federal tax forms, Bai said.

Hospitals need more guidance from the IRS about what community investments are expected of them and some flexibility to address the biggest unmet needs in their communities, Young said.

“The elephant in the room is that there is a huge disparity in spending on community services, with some hospitals doing a lot more than others, and we’ve largely let that slide,” he said. “Are we going to continue to ignore it or do something about it?”

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