The nonprofit hospital sector’s tax exemptions provide billions in estimated benefits, but about half of those exemptions are enjoyed by just a couple hundred hospitals, according to a newly published JAMA study.
The analysis also outlines substantial variation among hospitals related to state and local tax benefits, which comprised the majority of the sector’s total exemption in 2021.
Those findings suggest that sweeping one-size-fits-all policies to realign tax breaks and community benefit floated by federal regulators are “unlikely to be effective,” corresponding author Ge Bai, a professor of accounting and health policy at Johns Hopkins, told Fierce Healthcare.
“Nonprofit hospitals and taxpayers are in an implicit contract: hospitals receive tax benefits from taxpayers, and in return, they must deliver community benefits to taxpayers,” Bai said. “While community benefits are disclosed to the public, the other side of the equation—tax benefits—has largely remained in a black box.”
Hospitals' tax breaks 'highly concentrated,' vary 'substantially' from state to state
Across a sample of 2,927 nonprofit hospitals’ Medicare Cost Reports, Bai and coauthors from Johns Hopkins and Texas Christian University estimated a total tax benefit of $37.4 billion during 2021—substantially higher than prior analyses' estimates.
That tally was primarily driven by $11.5 billion of avoided federal income tax (31% of the total), followed by sales tax ($9.1 billion; 24%), property tax ($7.8 billion; 21%) and state income tax ($3.7 billion; 10%). Also contributing were nonprofit hospitals’ charitable contributions ($3.2 billion; 8%), tax-exempt bond financing ($2.1 billion; 6%) and no obligations to pay federal unemployment tax ($200 million; <1%).
However, digging into the findings showed that much of the savings were “highly concentrated” among larger hospitals or those with the highest net incomes, the researchers wrote.
Just 212 hospitals, or 7% of the sample, accounted for half of the $37.4 billion total tax-exemption benefit, according to the analysis. One percent of hospitals received 19% of the sector’s total benefit.
Breaking down the distribution by hospital characteristics, the researchers found that hospitals with over 223 beds, which was about a quarter of the sample, represented 71% of the sector’s total net income as well as 71% of the sample’s collective tax benefit.
Of note, the researchers highlighted a close relation between these hospitals’ net incomes and the size of tax benefits specifically related to that income. Conversely, there was a disconnect between the earnings and any non-income-related tax benefits, and state or local sales taxes and property taxes in particular.
“This distinction is important because it means that these significant state and local tax benefits accrue to nonprofit hospitals even when hospitals are operating at a loss (almost 30% of sample hospitals),” the researchers wrote in their study.
While state and local taxes comprised about 55% of the sector’s total exemption benefits, those savings “varied substantially” from state to state, the analysis showed.
On average nationwide, nonprofit hospitals saw a tax benefit of $78,570 per bed and $113 per capita. The former ranged anywhere from $25,098 (in Delaware) to $159,464 (in Massachusetts) per bed, while the latter went as low as $19 (in Alabama) to $275 (in Massachusetts) per capital.
The researchers’ takeaway from a policy standpoint? Any efforts to hold hospitals to task on their tax-exemptions charity care and community benefit requirements “are likely to be more effective when pursued at the local level,” they wrote.
New estimates join a hard-fought policy dispute
The researchers intended their study to serve as a template for policymakers and others wanting up-to-date methodology for weighing hospitals’ community benefits against their full tax benefits, which the hospitals are not currently required to report. They said it is more consistent with current tax law and practices than prior attempts, as well as more comprehensive.
Bai underscored the lack of transparency and said rectifying the issue could empower local governments to better hold hospitals accountable.
“As an immediate next step, state and local governments should require nonprofit hospitals to disclose the value of their property tax and sales tax benefits. Hospitals can estimate this information with little additional burden, providing local taxpayers with insight into the tax subsidies they offer to these hospitals.”
The debate over hospital tax exemptions has been sounded across competing industry reports and the floor of Congress.
In the most recent of its annual analyses on the subject, the Lown Institute said that four in five nonprofit hospitals are spending less on community benefits than what they receive through tax breaks. The think tank’s review, which leaned on 2,425 hospitals’ 2021 IRS filings, outlined a $25.7 billion “fair share deficit” it said would be enough to wipe 29% of the country’s medical debt.
But the Lown Institute’s approach is frequently criticized by the American Hospital Association (AHA), which accuses the group of bias and excluding relevant spending lines from their community benefit calculations.
In contrast, an Ernst and Young (EY) report released just this week on behalf of the AHA placed 2020 IRS-reported community benefits at $129 billion. That tally was nearly 10 times the $13.2 billion federal tax exemption “upper bound” estimate also cited in the report.
“Nonprofit hospitals have a special obligation to those they serve and this new analysis from EY shows these efforts are more than a worthy investment and that improving the health of their communities remains at the heart of the mission of the hospital field,” AHA President and CEO Rick Pollack said in an accompanying release.
Bai noted that EY’s 2020 estimate was about in line with her colleagues’ 2021 estimate of nonprofit hospitals' federal tax exemptions (about $14 billion). EY and AHA’s report does not address the other state and local tax exemptions highlighted in the JAMA study.
State and federal lawmakers from both sides of the political spectrum have made it clear they’re interested in the debate.
In August 2023, Sens. Elizabeth Warren, D-Massachusetts, Raphael Warnock, D-Georgia, Bill Cassidy, M.D., R-Louisiana, and Chuck Grassley, R-Iowa, penned letters to tax regulators requesting more detailed information on nonprofit hospitals’ reported charity care and community investments.
Last October, Senate Health, Education, Labor and Pensions Committee Chairman Bernie Sanders, D-Vermont, released a review of 16 nonprofit health systems’ 2021 financial statements in which his staff pointed to charity care spending below 2% of the systems’ total revenue.
“Despite these massive tax breaks, most nonprofit hospitals are actually reducing the amount of charity care they provide to low-income families even as CEO pay is soaring,” Sanders said at the time. “That is absolutely unacceptable.”