Nonprofit Hospitals Topped $37 Billion in Tax Breaks: Study

Nonprofit hospitals in the United States received tax breaks worth $37.4 billion in 2021, subsidized partly by property taxes in surrounding communities, a new JAMA study reported.

The findings are likely to renew the long-running debate over whether some large, consolidated health systems including medical groups and hospitals should continue to retain their nonprofit status.

Researchers used Medicare cost reports to scrutinize the finances of nearly 3000 US nonprofit hospitals and quantify the benefits to hospitals of not paying different kinds of taxes on sales, state income, federal income, bond financing, and charitable contributions.

Not paying federal income tax, for example, accounted for $11.5 billion in nonprofit hospital tax benefits. Foregone property tax totaling $7.8 billion, or 21%, of the total tax break for nonprofit hospitals.

This last item may be vexing for physicians struggling to maintain independent local practices amid consolidation, said the study’s lead author, Ge Bai, PhD, CPA, of Johns Hopkins University, Baltimore.

Physicians in independent practice face the costs of property taxes either through direct payments on offices they own or indirectly through rent, but this is a cost many hospital systems are spared due to their nonprofit status, she said.

“As a local physician, you are paying the property tax to subsidize your competitor,” Bai said.

Tax Exemptions Fuel Physician Practice Acquisitions

Bai’s new research comes amid growing concern not only about the tax breaks themselves but the role they play in helping nonprofit health systems acquire physician groups.

Between 2012 and 2022, the share of physicians working in private practices fell from about 60% to about 47%, while the share working in hospitals as direct employees or contractors increased from 5.6% to 9.6%, according to the American Medical Association.

Tax exemptions have helped fuel these trends, Shawn Martin, the chief executive officer of the American Academy of Family Physicians, last year told the Senate Finance Committee. The tax breaks provided some hospitals with increased greater capital and financial resources to purchase physician practices, he said.

In their new paper, Bai and coauthors noted that the tradition of exempting some hospitals from certain societal financial obligations arose decades ago. These tax breaks were meant to recognize the contributions of philanthropists and volunteers in caring for financially disadvantaged patients.

As a result, nonprofit hospitals don’t pay federal taxes, can issue tax-exempt bonds, and receive tax-deductible contributions. State and local governments generally follow along and provide further tax exemptions, but officials are beginning to ask new questions about this approach, Bai and coauthors wrote.

“At the state and local levels, nonprofit hospitals have come under increased scrutiny and pressure as communities see how hospitals’ property and sales tax exemptions directly decrease funding for public schools, transportation and infrastructure, and other state and locally directed services,” they wrote.

In their work, the researchers drew from sources including Medicare Cost Reports, which hospitals are required to submit annually. They also considered factors such as interest expense savings from issuing tax-exempt bonds.

There were substantial variations across states: Massachusetts had the highest tax break per bed (about $160,000), and Delaware had the lowest (about $26,000). Bai and coauthors said limitations to their research included assuming that nonprofit hospitals would not change their behavior if they were not tax exempt.

“However, management might undertake tax-planning activities to reduce taxable income, such as shifting taxable income across years and entities,” they wrote.

When asked to comment on the new paper, the American Hospital Association (AHA) referred Medscape Medical News to another recent estimate on the tax benefits.

AHA commissioned the accounting firm EY, or Ernst and Young, to analyze the federal revenue forgone due to the tax exemption of nonprofit hospitals relative to the community benefits they provide. The result was a report that estimated forgone federal tax revenue for about 2500 hospitals in 2020 of $13.2 billion.

AHA said these hospitals provided benefits to their communities estimated to be $129 billion. This includes what hospitals deem to be “unreimbursed” costs for treating people enrolled in Medicaid and Medicare, bad debt due to financial assistance and community health improvement services.

There’s debate about how to value some of these items, said Gary Young, JD, PhD, director of the Northeastern University’s Center for Health Policy and Healthcare Research, Boston. For example, there’s some agreement that Medicaid programs in many states may not fully fund the cost of hospital care for people enrolled in the program, he said.

“But Medicare shortfall? That’s just a real stretch” in terms of claims of nonprofit hospitals providing community benefit, Young told Medscape Medical News.

Young also said that many nonprofit hospitals already do contribute toward the cost of services in their local communities through what are called payment in lieu of taxes (PILOT). Cities including Boston and Baltimore, which are home to large universities and nonprofit health systems, have used PILOT agreements for many years.

But he also noted that there have long been criticisms of tax exemptions granted to some hospitals — including from rivals that don’t qualify for exemptions. Tax-paying hospitals account for about 20% of community hospitals in the United States, according to the Federation of American Hospitals, which represents them.

“The for-profit investor-owned hospital community has said for years, ‘We provide community benefits and we don’t get tax breaks’,” Young said.

And there appears to be stepped-up interest in reexamining the issues of how hospitals qualify for tax breaks, Young said.

The House Committee on Ways and Means, which has jurisdiction on tax matters, last year held a hearing about nonprofit hospitals. Also in 2023, Sen. Elizabeth Warren (D-Mass.) and several colleagues requested that the Internal Revenue Service investigate nonprofit hospitals’ potential abuses of their tax-exempt status. They were concerned in particular about cases where nonprofit hospitals took actions like placing liens on the homes of former patients in poor and rural communities.

Lawmakers’ concerns might spur a revamp of federal laws governing tax-exempt status, Young said.

“A window opens when policymakers decide that something has to be done,” Young said, “That’s where we are right now. There will be ferocious debate about what should be done.”

Among those pushing for change is Vikas Saini, MD, president of the nonprofit, nonpartisan Lown Institute, a think tank that emphasizes research into patient safety and health equity. The institute says it is the first organization to develop a ranking to measure meaningful community investment for nonprofit hospitals nationwide.

In March 2024, the Lown Institute said more than 1900 hospitals pay less than their “fair share” — meaning that the value of their meaningful community contributions falls short of the value of their tax breaks. The combined fair share deficits of nonprofit hospitals totaled $25.7 billion, enough to pay off the medical debt of everyone in California, Texas, New York, and Pennsylvania combined, the institute said.

There’s great variation in how hospitals operate, with some smaller nonprofit organizations struggling to stay open while larger ones build generous surpluses, Saini told Medscape Medical News. There has not been the needed discussion about whether tax-exemption for certain hospitals is delivering the expected benefits, he said.

“The business model needs to be revisited,” Saini told Medscape Medical News. “We need a real reset.”

The researchers reported receiving grants from MANA Action and Arnold Ventures while conducting the study.

Kerry Dooley Young is a freelance journalist based in Washington, DC.