Are Hospitals Cheating their Communities?

Most U.S. community hospitals are private nonprofits, and nonprofit status grants these hospitals an estimated $24.6 billion in annual tax benefits. As healthcare spending continues to rise, journalists and policymakers have begun questioning whether these hospitals’ contributions to their communities outweigh the tax revenues lost. In a recent article in Inquiry, researchers aim directly at these concerns by using data from IRS, CMS, and AMA databases to compare the money saved by nonprofit hospitals on tax exemptions to money spent on community benefits.

For-profit hospitals also provide meager community benefits. Because nonprofit hospitals arguably shouldn’t get benefits for the contributions they’d already be making if they were for-profit, the authors calculated the incremental community benefits nonprofit hospitals provided to their communities by subtracting the average spending of for-profit hospital on the same community benefits.

Their analysis shows that, on average, nonprofit hospitals’ community benefits are roughly equal to the tax benefits they receive. Nonprofit hospitals technically saved more money from taxes than they spent on their communities, but the difference of just 0.16% of total hospital spending is miniscule.

Behind these unexciting results, though, lie staggering data about these hospitals on an individual level. Some hospitals spend just as much on their communities as they save in taxes. Others donate way more than they make back. However, on the other side of that same coin, hundreds of hospitals are spending many times less on community benefits than they make in tax exemptions.

Even if the average difference between community spending and tax exemption were much bigger, I wouldn’t call for mass recension of hospitals’ nonprofit status. Calling for increased taxes on hospitals by the same administration who just cut corporate taxes by trillions, or from local governments who offer multi-million-dollar stadiums to NFL teams, makes little sense to me. Although obviously biased, I believe hospitals provide community benefit that is not easily measurable.

However, these tax exemptions are an exceedingly blunt instrument. Some hospitals distribute extraordinary charity care, but others reap benefits many times larger than the sum of their contributions. The hundreds of communities on the wrong side of that ratio deserve to know they’re being cheated. Government, whether local or federal, should more precisely enforce the adequacy of community benefits.

This Policy Prescriptions® review is written by Benjamin Sketchler. He is a medical student at Baylor College of Medicine.

Abstract

The tax-exempt status of nonprofit hospitals has received increased attention from policymakers interested in examining the value they provide instead of paying taxes. We use 2012 data from the Internal Revenue Service (IRS) Form 990, Centers for Medicare and Medicaid Services (CMS) Hospital Cost Reports, and American Hospital Association’s (AHA) Annual Survey to compare the value of community benefits with the tax exemption. We contrast nonprofit’s total community benefits to what for-profits provide and distinguish between charity and other community benefits. We find that the value of the tax exemption averages 5.9% of total expenses, while total community benefits average 7.6% of expenses, incremental nonprofit community benefits beyond those provided by for-profits average 5.7% of expenses, and incremental charity alone average 1.7% of expenses. The incremental community benefit exceeds the tax exemption for only 62% of nonprofits. Policymakers should be aware that the tax exemption is a rather blunt instrument, with many nonprofits benefiting greatly from it while providing relatively few community benefits.

PMID: 29436247 

Herring, B, et al. Inquiry. 2018Jan-Dec; 55: 46958017751970.