Nonprofit hospitals in the U.S. received $37.4 billion in tax benefits in 2021, more than half of which came from state and local tax exemptions, according to a recent study published in JAMA.
Moreover, the tax benefits were concentrated among a small number of hospitals: 7% of the nearly 3,000 nonprofit hospitals included in the study accounted for half of the tax benefits, the study finds.
This “study is the first I’m aware of that compares the tax benefits across states, and the disparities are remarkable,” Dr. Vivian Ho, chair in health economics and a professor in the Department of Economics at Rice University, wrote in an email. She was not involved with the study. “This suggests that states need to be more proactive in setting tax policy [with regard to] nonprofit hospitals.”
Originally funded by philanthropy, staffed by volunteers and established to care for low-income patients, nonprofit hospitals now make up about 58% of more than 6,100 hospitals in the U.S., according to the American Hospital Association, which represents hospitals in the U.S. Today the hospitals’ main sources of funding are revenue, mostly for providing care to patients who have health insurance, and borrowing money through bonds or from banks.
U.S. nonprofit hospitals are exempt from paying federal taxes, state income tax, and local sales and property taxes. To qualify for federal tax exemptions, nonprofit hospitals must meet two requirements. First, they should provide community benefits, including charity care, which is free or discounted medical care for patients who can’t afford their treatment. Second, they should conduct community health needs assessments every three years and refrain from aggressive billing and collection methods. States can also set certain requirements for nonprofit hospitals to receive their state tax benefits, and several do.
It’s a social contract of sorts between nonprofit hospitals and taxpayers: they provide community benefits, and in exchange, they receive tax benefits due to their tax-exempt status.
But this equation — community benefit provided by hospitals versus tax benefits they receive — is poorly understood, says the JAMA study’s senior author Dr. Ge Bai, professor of accounting and health policy at Johns Hopkins University. It has also come under scrutiny from lawmakers, as studies and analyses suggest that many nonprofit hospitals don’t provide enough community benefits, including charity care, to justify their tax-exempt status.
Bai has explored the nonprofit hospitals’ community benefits in her previous research.
“So we aimed to crack open the tax benefit side in this paper,” says Bai.
The findings
The JAMA study is based on an analysis of data from 2,927 nonprofit hospitals, using the 2021 Medicare Cost Reports, a mandatory annual filing for all Medicare-certified hospitals. Medicare is a federal health insurance program that mainly covers people 65 years and older.
The authors calculated nonprofit hospitals’ tax benefit as the sum of taxes not owed, including federal and state income taxes, local sales and property taxes and federal unemployment tax; savings from issuing tax-exempt bonds; and the fair market value of charitable contributions from donors.
In 2021, the average nonprofit hospital’s tax benefit was $78,570 per bed and $113 per capita nationwide. Below is the breakdown of the nonprofit hospitals’ $37.4 billion tax benefits in 2021, according to the study:
- Federal income tax: $11.5 billion.
- Local sales tax: $9.1 billion.
- Local property tax: $7.8 billion.
- State income tax: $3.7 billion.
- Charitable contributions: $3.2 billion.
- Bond financing: $2.1 billion.
- Federal unemployment tax: $200 million.
Overall, 55% of the total tax benefits were directly attributed to state and local tax exemptions.
“The local taxpayers actually are subsidizing most of the tax benefits,” Bai says.
State-by-state and tax benefit comparisons
The study also provides a state-by-state comparison of tax benefits, revealing wide variations.
The top five states with the highest tax benefit per hospital bed were Massachusetts, Alaska, Utah, Illinois and Indiana.
Mississippi, Tennessee, Wyoming, Alabama and Delaware had the lowest tax benefit. The study does not include the names of the hospitals.
Massachusetts had the highest tax benefit per bed at $159,464, while Delaware had the lowest at $25,098.
Massachusetts also had the highest tax benefit per capita at $275, while Alabama had the lowest at $19.
“If you are a profitable hospital and you are located in a rich area, you would receive higher tax-exempt benefits, because you would have higher income and more expensive properties,” Bai says.
Put another way, the more income a hospital brings in, the greater the benefits they accrue from not having to pay state and federal income taxes. Other tax benefits, including state and local sales taxes and property taxes, don’t have much of an association with hospital income, the authors explain.
“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,” they write, noting that nearly one-third of hospitals operate at a loss, which could affect their not only their financial health but also lead to a reduction in services, charity care and other community benefits.
In 35 states, non-income-related tax benefits for nonprofit hospitals exceeded their income tax benefits.
When ranked by net income — total revenues minus total expenses — the 29 hospitals that make up the top 1% accounted for one-quarter of the total net income of all the nonprofit hospitals studied. Meanwhile, the bottom 90% of the hospitals, 2,635 of them, accounted for about one-third of the total net income.
Teaching hospitals, which made up 34% of the sample, accounted for about 72% of the total net income and tax benefit.
Estimations from the American Hospital Association report
In a September report, the American Hospital Association estimates nonprofit hospitals’ federal tax exemption at $13.2 billion. AHA’s analysis is based on Medicare cost reports for 2,500 nonprofit hospitals.
Unlike the JAMA study, the AHA report does not include local and state tax benefits or charitable contributions received by hospitals.
Bai says AHA’s figure is close to the $13.8 billion in federal tax exemptions she and her colleagues calculate in their JAMA study. The number is the sum of $11.5 billion in federal income tax, $2.1 billion in bond financing and $200 million in federal unemployment tax.
Community benefits
Over the years, various reports and studies have examined whether nonprofit hospitals offer sufficient community benefits to warrant their tax-exempt status. The results have varied, depending on who conducted the study and what numbers were included.
The 2024 AHA report, for instance, estimates that the 2,500 nonprofit hospitals in its analysis provided $129 billion in community benefits, nearly 10 times their federal tax benefits.
The association calculates community benefits using Schedule H of Form 990, an IRS form tax-exempt hospitals fill out. In the 990 form, the hospitals report community benefits, financial assistance policies, billing and collection practices, bad debt and Medicare and Medicaid shortfalls, and community-building activities.
But in a Sept. 26 article in STAT, journalist Tara Bannow points out that the $129 billion figure includes categories many health policy experts don’t consider community benefits, including Medicaid shortfalls and bad debt, which refers to the money hospitals can’t collect from patients because they’re unable or unwilling to pay. (In contrast, hospitals do not seek reimbursement for charity care.)
The AHA told Bannow that “all these expenses are included on Schedule H for a reason and it is appropriate to include them when considering the many ways that hospitals serve and support their communities.”
Other analyses find that overall, nonprofit hospitals fall short in providing community benefits.
A March report by the nonpartisan think tank Lown Institute finds that 80% of nonprofit hospitals give back less to their communities than they receive in estimated tax benefits. It also finds that hospitals spent 3.87% of their budget on community investments, on average, although this proportion varies widely.
The Lown report is based on 2021 Form 990 data for 2,425 nonprofit hospitals across the U.S. To calculate community benefits, the analysis adds up free or discounted care provided to eligible patients, community health improvement services such as immunizations, subsidized health services such as free clinics and addiction treatment, grants to community groups and other nonprofits, and building activities such as affordable housing.
Unlike AHA, the report does not take into account bad debt and Medicare shortfalls.
The AHA has issued a criticism of Lown’s 2024 report, as it had previously in 2022.
Scrutiny at federal and state levels
The federal tax-exempt status of nonprofit hospitals has drawn criticism from some lawmakers. Several states have also addressed the issue of hospitals’ state income tax exemptions.
In an October 2023 report, the U.S. Senate Health, Education, Labor and Pensions committee, chaired by Sen. Bernie Sanders, criticized nonprofit hospitals’ tax-exempt status, writing, “These hospitals cannot be permitted to continue to hide the availability of financial assistance programs or ignore patients’ eligibility for fundamental care while ruthlessly pursuing collections in favor of their bottom line.”
The House Ways & Means Committee held a hearing in April 2023 on nonprofit hospitals’ tax-exempt status and community benefits. And in August 2023, several senators, including Sen. Elizabeth Warren, asked the IRS to investigate the nonprofit hospitals’ potential abuse of their tax-exempt status.
The National Academy for State Health Policy lists the states that have set parameters for nonprofit hospitals to qualify for tax exemptions.
States can set a required minimum amount that hospitals must spend on community benefits, include community benefit requirements in their hospital licensing program, audit the hospital to determine community benefit spending, require hospitals to link spending to community health improvement activities, and require hospitals to invest in their community through community service contributions.
For instance, an Illinois law requires nonprofit hospitals to spend their property tax benefits on services that address the health care needs of low-income individuals in order to receive the tax exemption. Connecticut has used the Certificate of Need process to ensure that community benefit spending addresses community needs.
Meanwhile, the Pennsylvania Commonwealth Court last year rejected property tax exemptions for four nonprofit hospitals because they couldn’t convince a court that they were purely public charities. The state has several community benefit standards for a hospital to be tax-exempt. In 2018, when a local hospital in Pennsylvania converted to a nonprofit, the local public school system lost more than $900,000 a year because the hospital no longer had to pay local property taxes, KFF Health News reported in 2023.
Researchers suggest better reporting requirements for hospitals to help clear up the murky balance between tax benefits and community benefits
For example, the IRS could revise its Schedule H of Form 990 to require nonprofit hospitals to report the value of their sales tax and property tax benefits, which are straightforward to estimate, Bai says.
“Once these figures are publicly available, it will be apparent which nonprofit hospitals aren’t doing their part,” she writes in a 2023 perspective in The New England Journal of Medicine.
Ho of Rice University expressed a similar sentiment.
“The federal government should require auditing of IRS 990 forms that nonprofit hospitals submit, so we get an accurate accounting of community benefits provided by these hospitals,” she wrote.
Additional resources
The Determinants of Nonprofit Hospital CEO Compensation
Derek Jenkins, Marah N. Short and Vivian Ho. PLOS One, July 2024.
Who Pays for Rising Health Care Prices? Evidence from Hospital Mergers
Zarek Brot-Goldberg, et al. National Bureau of Economic Research, June 2024.
Do Nonprofit Hospitals Deserve Their Tax Exemption?
Ge Bai, Sunjay Letchuman and David A. Hyman. The New England Journal of Medicine, July 2023.
Nonprofit Hospitals: Profits And Cash Reserves Grow, Charity Care Does Not
Derek Jenkins and Vivian Ho. Health Affairs, June 2023.
The Estimated Value of Tax Exemption for Nonprofit Hospitals Was About $28 Billion in 2020
Jamie Godwin, Zachary Levinson and Scott Hulver. KFF, March 2023.
Hospital Charity Care: How It Works and Why It Matters
Zachary Levinson, Scott Hulver and Tricia Newman. KFF, November 2022.
Comparing the Value of Community Benefit and Tax-Exemption in Non-Profit Hospitals
Hossein Zare, Matthew D. Eisenberg, Gerard Anderson. Health Services Research, May 2021.
How States Can Hold Hospitals Accountable for Their Community Benefit Expenditures
Allie Atkeson and Elinor Higgins. National Academy for State Health Policy, March 2021.
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