Nonprofit Hospitals Took in Over $37 Billion in Tax Benefits in 2021

In 2021, the estimated total tax benefit received by U.S. nonprofit hospitals was $37.4 billion and was concentrated among a small number of hospitals, according to a study in JAMA.

In this video interview, study author Ge Bai, PhD, of Johns Hopkins Carey Business School and Johns Hopkins Bloomberg School of Public Health in Baltimore, discusses the findings and implications.

The following is a transcript of her remarks:

There is an implicit contract between taxpayers and nonprofit hospitals. On one hand, nonprofit hospitals take all sorts of tax breaks or tax benefits from the community. In other words, the taxpayers in the local community and at the federal level are subsidizing nonprofit hospitals.

But on the other hand, nonprofit hospitals must fulfill their community benefit obligation, that is, to help a patient in need — for example like charity care — and do other activities to deserve their tax break. This is a fundamental contract between taxpayers and nonprofit hospitals.

Prior studies have focused on one side of the equation, that is how much benefit has been provided by nonprofit hospitals. But relatively few reports have looked on the other side of the equation, which is how much tax benefit nonprofit hospitals have received. So this study aims to fill that knowledge gap to bring insights on how much tax benefit actually is received by nonprofit hospitals.

Our study has three main findings. Number one, in 2021, which is the most recent year with data available, nonprofit hospitals in the United States received about $37.4 billion in tax benefits. The biggest chunk in that $37.4 billion is federal income tax, which is 31%, and then sales tax (24%), after that property tax (21%), and state income tax (10%). Also we have charitable contributions, which are 80%, and tax exempt bond financing (6%). And then we have the last part, federal unemployment tax, which is less than 1%. Remember, more than half of this $37.4 billion tax benefit comes directly from state and local taxes. That’s number one.

Number two, among the $37.4 billion in tax benefits, we see huge variation across states. So for example, in Massachusetts, the benefit per bed is almost $160,000, but in Delaware, the tax benefit per bed is only about $25,000.

The last main finding is that the tax benefit is very highly concentrated among a very small number of nonprofit hospitals. So overall, about 7% of nonprofit hospitals in the United States accounted for half of the total tax benefits. That’s not very surprising, right? Because hospitals in richer areas with very expensive properties and also hospitals that have made a lot of money would enjoy a higher tax exemption value or tax benefit.

So I think given the very large variation across states in the tax exemption value received by hospitals, a federal-level one-size-fits-all approach probably won’t work or would even be counterproductive. Let’s say we have some kind of bright-line regulation, then guess what? It will just pass through to commercial payers, you and me, almost like a tax.

So I think a more sensible approach would be to ask each individual state and local community to decide what they’re going to ask their hospitals to do. So, for example, the state can require nonprofit hospitals to disclose their tax exemption value for sales tax and property tax. These two tax components are very straightforward to estimate with a very limited burden on hospitals, and also can be estimated in comparable ways. That information can give local taxpayers and policymakers an insight on what is the best way to evaluate the community benefit provided by nonprofit hospitals and how to incentivize them to do more.

So fundamentally, we have to recognize there is in place a contract between taxpayers and nonprofit hospitals. At the same time, you also have to recognize that the consolidation of the physician market and the hospital market is not accidental. It’s really a result of some policy failures, including this tax benefit given to hospitals but not to physician practices.

At the policy-making level as well as the public-awareness level, we should all recognize these two important components that will really help us guide more sensible health policy going forward.

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