Researchers: Time to Require Tax-Exempt Hospitals to Document Community Benefit

July 25, 2023
A team of healthcare policy researchers is asserting that tax-exempt hospitals should be required to document explicit levels of community benefit in order to retain their tax-exempt status

A team of academic healthcare policy researchers is questioning hospital tax-exempt status, and insisting that non-profit hospital organizations should be required to document monetary levels of community benefit in order to continue to maintain their tax-exempt status.

Writing in the op-ed section of The New England of Journal of Medicine online, Ge Bai, Ph.D., C.P.A., Sunjay Letchuman, B.B.A., and David A. Hyman, M.D., J.D., go straight to the point in the title of their analysis, with the question, “Do Nonprofit Hospitals Deserve Their Tax Exemption?” The article was published online on July 20.

The authors are from the Carey Business School and the Bloomberg School of Public Health, Johns Hopkins University, Baltimore (Bai); the Icahn School of Medicine at Mount Sinai, New York (Letchuman); and Georgetown University Law Center, Washington, DC (Hyman).

They begin by noting that “Many hospitals in the United States were founded by religious organizations or philanthropists and were expected to focus on relieving the suffering of poor people. Times change. Hospitals are one of the largest industries in the United States, with annual revenues exceeding $1.4 trillion. Nonetheless, roughly 60 percent of community hospitals are incorporated as nonprofit institutions, which means that they don’t have shareholders and cannot distribute dividends.”

At the same time, the researchers note, “Nonprofit status doesn’t automatically confer tax exemption. Section 501(c)(3) of the Internal Revenue Code authorizes tax exemption for nonprofit organizations pursuing charitable, religious, educational, or scientific missions. In 1956, the Internal Revenue Service (IRS) began requiring nonprofit hospitals to “be operated to the extent of [their] financial ability for those not able to pay for the services rendered.”1 This requirement meant that a nonprofit hospital couldn’t deny care to patients who were unable to pay for it if the hospital wanted to keep its tax exemption.”

The complication in all this is the community-benefit standard, established by the IRS in 1969 as a standard by which to determine whether hospitals should receive and maintain their tax-exempt status. Further, EMTALA, the 1968 Emergency Medical Treatment and Labor Act, “subsequently imposed an obligation on Medicare-participating hospitals with an emergency department to screen and stabilize all patients presenting to the hospital, which included an obligation to provide inpatient treatment under some circumstances.” And then, in 2010, the Affordable Care Act added the further requirement for nonprofit hospitals to report certain types of information on the provision of community benefits in their annual tax filings (Form 990, Schedule H), including the cost of providing charity care.

At this point in time, the article’s authors argue that this entire set of assumptions need to be questioned. They ask, “Do nonprofit hospitals provide enough community benefit to justify this sizable subsidy? Many communities seem to have their doubts, judging by challenges to hospital tax exemptions in multiple states, including recent cases in Pennsylvania in which four nonprofit hospitals lost their property-tax exemption.” And they note that their previous analyses have found that, “In 2018, for every $100 of expenses incurred, nonprofit hospitals in aggregate spent $2.30 on charity care, as compared with $3.80 spent by for-profit hospitals.3 And in 2019, nonprofit and for-profit hospitals had similar Medicaid shortfalls as a share of total expenses. These data,” they write, “suggest that many nonprofit hospitals don’t provide enough charity care or have a substantial enough Medicaid shortfall (relative to for-profit hospitals) to justify their favorable tax treatment. What’s more, current subsidies are poorly targeted because exemptions from property and income tax are worth more to financially successful nonprofit hospitals located in high-income areas than to less financially successful nonprofit hospitals in lower-income areas and aren’t related to the amount of community benefit that hospitals provide.”

So what’s the solution? The researchers write that, “There are insufficient data to compare the amount of community benefit provided by individual nonprofit hospitals with the subsidies they receive. To close this information gap, the IRS could revise Schedule H of Form 990 to require nonprofit hospitals to report on forgone federal, state, and local taxes (broken out separately); savings associated with using tax-exempt bonds; gross profits from the 340B program, if applicable; and charitable contributions received by the hospital, with standardized reporting for each of these elements. Nonprofit hospitals could use their existing financial records to generate most of the requested information, which would limit the administrative burden associated with compliance. Periodic audits could be conducted to ensure that hospitals don’t understate the direct and indirect subsidies they receive or overstate the amount of community benefit they provide.”

And they further insist that though disclosure alone “might not be sufficient to catalyze changes in hospital behavior… we believe greater visibility is a prerequisite for policy action. Texas already requires some nonprofit hospitals to provide community benefit that is at least equal in value to their self-reported tax exemption. Tax authorities in other states might find it easier to challenge the tax-exempt status of some local hospitals once hospitals’ own disclosures make it clear they aren’t providing enough community benefit to warrant tax exemption.”

They acknowledge that “Many nonprofit hospitals face substantial fiscal challenges, so heavy-handed policies — such as eliminating tax-exempt status across the board — are likely to be counterproductive.” At the same time, they conclude, “[A]llowing nonprofit hospitals to shirk their obligations has its own costs, which are borne by patients, their families, and the community. Mandating increased financial transparency would give stakeholders and policymakers the flexibility to understand, design, and test approaches to encourage nonprofit hospitals to provide meaningful community benefit and to move away from the current open-ended subsidies tied to ownership status. The alternative is to continue playing Whac-A-Mole with the many nonprofit hospitals that don’t provide sufficient community benefit.”

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