What nonprofit hospitals did with billions saved in taxes

The nation’s nearly 3,000 nonprofit hospitals collected billions in tax breaks but paid less than half that amount in charity care to low-income patients.

Nonprofit hospitals have a de facto pact with federal, state and local government.

In exchange for not paying income, property, sales or other taxes, these hospitals are expected to provide free or reduced-cost care to low-income patients as well as other community benefits.

A new study published today by Johns Hopkins University and Texas Christian University researchers estimates the enormous size of this collective tax break. The study reported the nation’s nearly 3,000 nonprofit hospitals were spared $37.4 billion in federal, state and local taxes in 2021, a reflection of how lucrative these tax benefits can be for medical centers.

The purpose of the study was to inform taxpayers and elected officials how much tax relief nonprofit hospitals get in exchange for providing benefits to their communities, said Ge Bai, a a Johns Hopkins University professor of accounting and health policy and management who co-authored the study.

While the study did not detail how much hospitals returned in charity care, that information is reported in public documents. Medicare filings show hospitals paid out $15.2 billion in charity care in 2021, said Bai.

For years, these tax-exempt hospitals have been required to detail their community benefit in a worksheet included in federal tax documents. But the study suggests these federal tax filings don’t shed enough light on their overall tax benefit.

In 2021, the study estimated the nonprofits hospitals federal tax break totaled $11.5 billion, or less than one third of their overall tax relief. Nonprofit hospitals also got the following tax relief: $9.1 billion in sales tax, $7.8 billion in property tax, $3.7 billion in state income tax, $3.2 billion in charitable contributions, $2.1 billion in bond financing and $200 million in federal unemployment tax.

Hospitals say the exemptions are a good deal for local communities because they deliver wide-ranging benefits.

The American Hospital Association commissioned an analysis from the accounting firm Ernst and Young that measured foregone federal taxes and community benefit. The analysis, released this week, reported the amount of federal tax revenue hospitals did not pay in 2020 was $13.2 billion. In comparison, hospitals returned $129 billion in community benefit ‒ about 10 times the amount they saved in federal taxes.

‘Money that would have paid for schools, firehouses or police’

Bai said study aims to give taxpayers and elected officials a better understanding of the tax relief nonprofit hospitals get in exchange for providing benefits to their communities.

Nonprofit hospitals must publicly disclose the benefits they provide to communities in “Schedule H” worksheets as part of their annual tax filing with the Internal Revenue Service. However, hospitals aren’t required to estimate the totality of their tax savings.

“The equation is really a contract between taxpayers and nonprofit hospitals. The nonprofits provide community benefit, so in return, they receive tax benefit,” Bai said. “But we only see one side ‒ the community benefit they provide. We have no idea what the tax benefit is.”

The study is important because it breaks down state and local tax exemptions, said Dr. Vikas Saini, president of the Lown Institute, a Massachusetts-based health think tank.

He said state and local elected officials who must make difficult budget choices might be interested in seeing the value of these tax breaks. The tax exemptions equate to “money that would have paid for schools, firehouses or police,” said Saini, who was not involved in the study.

Tax benefits vary widely by state

The study did not disclose estimated tax relief for each hospital. However, it reported averages by state and found large swings.

Massachusetts hospitals had the most lucrative tax exemptions at an average of $159,464 per hospital bed. Delaware hospitals had the tiniest benefit, $25,098 per bed.

Larger hospital that earned more money had the most lucrative tax break; 29 hospitals ‒ representing 1% of all nonprofits ‒ accounted for 19% of the total tax benefit, the study said.

Bai said hospitals with the largest tax breaks earned strong profits and tended to be in wealthier communities with expensive real estate.

“Hospitals in rich areas with expensive properties and hospitals that make a lot of money would have a higher tax exemption,” Bai said.

Hospitals: Tax exemptions return benefit to local communities

Hospitals say the tax exemptions are a good deal for local communities because they deliver wide-ranging benefits.

AHA officials said community benefit represents what hospitals reported in schedule H documents filed with the IRS. The hospitals can count far more than free or reduced-price care they give away to patients.

Hospitals also count payments from Medicaid ‒ the government health program for low-income families ‒ that don’t fully cover the cost of care delivered to patients. Other categories such as community health improvement, housing programs, research and medical education also are added to the mix, said Aaron Wesolowski, the AHA’s vice president of research strategy and policy.

The AHA analysis didn’t include hospitals’ state and local tax savings.

“Even if you roll in those state and local tax exemptions, the benefits to communities from not-for-profit hospitals still greatly outweigh that foregone tax,” Wesolowski said.

Experts disagree on what counts as community benefit

Health policy experts long have debated what should be counted as a community benefit.

Charity care to the poor is “the least squishy, the least gameable and the most comparable and verifiable component of community benefit,” Bai said.

Wealthier hospitals can afford to hire consultants to calculate the spending on non-charity care categories, she said.

Other analysts have questioned whether the amount nonprofit hospitals return to their communities justify the tax-exemptions. A 2024 analysis by Lown Institute reported 80% of nonprofit hospitals gave back to their communities less than what they got in tax breaks. Those hospitals collected $25.7 billion more in tax breaks than they paid out to communities, according to Lown Institute.

The Lown Institute analysis excluded community benefit items such as Medicaid payments shortfalls, medical education and research.

AHA disputed the Lown Institute analysis because it excluded those items, particularly Medicaid payment shortfalls that affect hospitals financial health.

“Charity care and Medicaid shortfall are directly related,” Wesolowski said. “You can’t ignore those other components, those other populations that hospitals serve.”