Ethan Rhodes
Nonprofit hospitals in the United States are exempt from federal, state, and local taxes, amounting to an estimated $28 billion in 2020. This exemption is contingent on these hospitals providing community benefits, such as free or discounted care to eligible patients and unreimbursed Medicaid expenses. However, there is no federal or state mandate linking the level of community benefit spending to a hospital's tax exemptions, leading to variations in how much hospitals contribute to community welfare. The Internal Revenue Service (IRS) has faced challenges in verifying compliance with exemption requirements due to the ambiguity of federal regulations and the difficulty of measuring community benefits. The debate surrounding the tax-exempt status of nonprofit hospitals highlights the need for a more transparent and equitable framework that ensures these institutions provide sufficient charity care to justify their tax exemptions.
| Characteristics | Values |
|---|---|
| Total estimated value of tax exemption for nonprofit hospitals in 2020 | $28 billion |
| Percentage of net income (revenues minus expenses) earned by nonprofit facilities in 2020 | 44% |
| Number of community hospitals in the US | 5,000 |
| Percentage of community hospitals in the US that are private, nonprofit organizations | 50% |
| Number of nonprofit hospitals in the US | 2,900 |
| Estimated value of hospitals' tax-exempt status in terms of federal, state, and local tax revenues foregone in 2002 | $12.6 billion |
| Estimated value of federal tax exemption in 2002 | $13 billion |
| Number of class-action lawsuits challenging the tax-exempt status of nonprofit hospitals | 45 |
| Percentage of total expenses allocated to community benefits by teaching hospitals | 9.2% |
| Percentage of total expenses allocated to community benefits by non-teaching hospitals | 8.6% |
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What You'll Learn
Nonprofit hospitals' community benefit activities
Nonprofit hospitals are required by federal tax law to spend some of their surplus on "community benefits", which are goods and services that address a community need. These community benefits can include unreimbursed Medicaid expenses, unreimbursed health professions education, and subsidized health services that are not means-tested. Hospitals must report this spending to the Internal Revenue Service (IRS) each year to maintain their tax-exempt status.
The community benefit activities of nonprofit hospitals can vary widely. Examples include:
- Providing free or discounted services to eligible patients who are unable to afford their care
- Participating in means-tested government programs, such as Medicaid
- Health professions education and research
- Health services research
- Subsidized health services
- Community health improvement activities
- Cash or in-kind contributions to other community groups, such as donating funds to a community health screening event or hosting a blood drive
- Investments in housing or environmental improvements that are linked to health improvement
The value of tax exemption for nonprofit hospitals was estimated to be $28 billion in 2020, which exceeded the estimated charity care costs among these hospitals in the same year ($16 billion). However, charity care only represents a portion of the community benefits reported by nonprofit hospitals. The Congressional Budget Office estimated that the value of federal, state, and local tax exemptions, tax-deductibility of charitable contributions, and tax-exempt bond financing was $12.6 billion in 2002.
There has been public controversy over whether nonprofit hospitals provide sufficient community benefits to justify their tax-exempt status. This scrutiny led to the inclusion of new community benefit requirements in the Affordable Care Act (ACA). These requirements aim to improve transparency and accountability and address the ACA priorities of preventive care and population health through community health improvement activities. However, there is still a lack of clear guidance on what activities qualify as community benefits and how much hospitals must spend on them, leading to variation in community benefit spending among nonprofit hospitals.
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Tax exemptions' value exceeding community benefits
The value of tax exemptions for non-profit hospitals has been estimated at $28 billion annually. This figure is based on hospital cost reports, filings with the Internal Revenue Service (IRS), and American Hospital Association (AHA) survey data. It includes exemptions from federal and state corporate income taxes, state and local sales taxes, and local property taxes.
While non-profit hospitals are required to provide community benefits to qualify for tax exemption, the specific services that constitute community benefits are not clearly defined in law. The IRS considers the provision of free or subsidized care to those who cannot afford it as a significant indicator that a hospital is promoting health for the benefit of the community. Other community benefits may include unreimbursed Medicaid expenses, unreimbursed health professions education, and subsidized health services.
A study by Johns Hopkins Bloomberg School of Public Health found that nearly one-quarter of non-profit hospitals receive more in tax exemptions than they provide in community services. This disparity is influenced by geographical location and operational characteristics. The study highlights the need for a more transparent and equitable framework for justifying tax exemptions based on the tangible benefits provided to communities.
Critics argue that non-profit hospitals should provide more "charity care" to justify their tax exemptions. However, defenders of the tax-exempt status point out that these hospitals provide critical services beyond charity care, such as research, training, and specialized clinical services like trauma and burn centers, which would not be possible without tax exemptions.
To address concerns, the IRS has updated its guidance to instruct employees to document whether a hospital satisfies the community benefit standard and established an audit code to track reviews. The IRS has also recommended revisions to tax forms to increase transparency around hospitals' community benefits.
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Policymakers' and interest groups' criticism
Policymakers and interest groups have criticized non-profit hospitals' tax-exempt status, arguing that they do not provide enough "charity care" to justify the substantial tax exemptions they receive. This criticism is based on the estimation that the value of tax exemptions for non-profit hospitals was about $28 billion in 2020, exceeding the estimated charity care costs of $16 billion in the same year.
One of the main concerns raised by critics is the lack of a clear definition of "community benefit" and inconsistent reporting of community benefits by hospitals. The Internal Revenue Service (IRS) defines community benefits to include unreimbursed Medicaid expenses, unreimbursed health professions education, and subsidized health services. However, the current tax forms do not require hospitals to specify the amount of surplus funds used for community benefits, resulting in challenges for the IRS to verify compliance. This lack of transparency has led to criticism and calls for enhanced scrutiny of non-profit hospitals' contributions.
Furthermore, critics argue that the focus on "charity care" alone is too narrow and ignores the broader benefits provided by non-profit hospitals, especially academic health systems. These hospitals offer critical services such as Level I trauma centers, burn units, transplant centers, and psychiatric care, which are often avoided by for-profit hospitals. Additionally, non-profit teaching hospitals use their tax-exempt status to subsidize the cost of medical education, training, and complex clinical services, which are essential for the healthcare system.
Some policymakers and interest groups have advocated for targeted revisions to the IRS Form 990, Schedule H, and the development of a more comprehensive definition of "community benefit" to address these concerns. They urge stakeholders to recognize the broader contributions of non-profit hospitals beyond charity care and to reject the elimination or restriction of their tax-exempt status.
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The IRS's role in overseeing tax-exempt status
The Internal Revenue Service (IRS) plays a crucial role in overseeing and regulating the tax-exempt status of nonprofit organisations, including hospitals. Nonprofit hospitals are exempt from paying federal and state corporate income taxes, state and local sales taxes, and local property taxes. The IRS recognises the promotion of health as a charitable purpose and has specified that nonprofit hospitals are eligible for tax exemption.
To maintain their tax-exempt status, hospitals must satisfy three sets of requirements. Firstly, they must meet certain legal requirements, such as setting billing and collection limits. Secondly, they must provide community benefits, such as operating an emergency room that is open to everyone, regardless of their ability to pay. Finally, they must demonstrate that they are providing services that benefit their communities as a whole.
The IRS faces challenges in overseeing hospitals' tax-exempt status, particularly in verifying compliance with community benefit requirements. The law does not clearly define which services qualify as community benefits, making it difficult for the IRS to assess whether hospitals are meeting this requirement. In addition, the current tax forms do not require hospitals to provide detailed information on their community benefit activities, resulting in incomplete data.
To address these challenges, the Government Accountability Office (GAO) has made several recommendations. They suggested that Congress should clarify the law by specifying what services and activities constitute sufficient community benefit. The GAO also recommended that the IRS update its tax forms to increase transparency and improve the reporting of hospitals' community benefits. In response, the IRS made minor adjustments to the form's instructions, but it still relies primarily on a narrative description of community benefits.
The IRS is required to review hospitals' community benefit activities at least once every three years. However, in 2020, the GAO identified 30 hospitals that reported no spending on community benefits in 2016, indicating potential non-compliance. The IRS was unable to provide evidence of conducting these reviews due to a lack of well-documented processes. As a result, the GAO recommended improving the IRS's oversight processes and establishing an audit code to track reviews of community benefit standards.
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The impact of losing tax-exempt status
Losing their tax-exempt status could have a significant impact on non-profit hospitals. Firstly, it would result in a substantial financial burden for these hospitals, as they would become liable for federal, state, and local taxes, including income, sales, and property taxes. This could lead to a decrease in net income, impacting their ability to invest in improvements and potentially affecting patient care. For example, the estimated value of tax exemption for non-profit hospitals was approximately $28 billion in 2020, exceeding charity care costs for that year.
Secondly, the loss of tax-exempt status could hinder the ability of non-profit hospitals to provide critical services, particularly in underserved rural and urban areas. These hospitals often operate at a loss, and tax exemptions help subsidize essential services such as burn units, psychiatric care, and substance use disorder treatment. Additionally, non-profit hospitals, especially teaching hospitals, allocate a significant portion of their expenses to community benefits such as Medicaid shortfalls, charity care, and unreimbursed education. Without tax exemptions, hospitals may struggle to maintain these services.
Thirdly, the impact of losing tax-exempt status could extend beyond the hospitals themselves and affect the broader community. Non-profit hospitals provide various community benefits beyond charity care, including research and training. The elimination of tax exemptions could result in reduced investment in these areas, impacting the overall healthcare system. Moreover, non-profit hospitals often serve as community anchors in areas with limited healthcare options, and their ability to provide essential services to vulnerable populations may be compromised.
Furthermore, the loss of tax-exempt status could lead to increased scrutiny and legal challenges for non-profit hospitals. There have already been numerous class-action lawsuits challenging the tax-exempt status of non-profit hospitals based on their billing practices and treatment of low-income uninsured individuals. Without tax exemptions, hospitals may face even more legal challenges and public criticism, particularly if they are perceived as not adequately contributing to community welfare.
Lastly, the impact of losing tax-exempt status could influence policy discussions and healthcare reform. Policymakers and special interest groups are already questioning whether non-profit hospitals provide enough "charity care" to justify their tax exemptions. The loss of tax exemptions could further fuel debates around healthcare reform and potentially lead to significant changes in the healthcare landscape. However, it is important to note that the community benefit standard for tax-exempt status is currently vague and subject to individual hospital discretion, state law requirements, and informal IRS guidance.
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Frequently asked questions
Non-profit hospitals being tax-exempt helps them subsidize critical services such as burn units, psychiatric care, and Level I trauma centers, which are often operated at a loss. It also helps offset the cost of medical education, training, and research.
Non-profit hospitals must meet certain federal requirements to be tax-exempt. These include providing community benefits such as running an emergency room open to all, regardless of ability to pay, and setting billing and collection limits.
Critics argue that non-profit hospitals do not provide enough "charity care" to justify their tax exemptions, which were estimated to be worth $28 billion in 2020. There is also a lack of transparency and equity in how these tax exemptions are allocated, with some hospitals benefiting from tax breaks without adequately contributing to community welfare.
To improve the system, there have been calls for a more transparent and equitable framework for allocating tax exemptions. This includes defining and measuring community benefits more clearly and consistently, and linking the level of tax exemptions to the level of community benefit spending.
