Nonprofit hospitals' tax exemptions paid off big once COVID relief began flowing in

Nonprofit hospitals saw the collective value of their tax exemptions rise from an estimated $23.7 billion in 2019 to $27.6 billion in 2020 thanks in part to “substantial amounts” of government relief funding that pumped up their untaxed net incomes, according to a new analysis from the Kaiser Family Foundation.

The 2020 total represents 43% of the net income nonprofit hospitals reported earning in 2020, KFF analysts wrote. It’s just a few billion below the $31.9 billion in Medicare and Medicaid disproportionate share hospital payments received that same year, KFF analysts wrote, and $11.6 billion more than the total charity care costs those hospitals reported.

The value of tax exemptions grew 41% from about $20 billion in 2011 to about $28 billion in 2020.

“The rising value of tax exemption means that federal, state and local governments have been forgoing increasing amounts of revenue over time to provide tax benefits to nonprofit hospitals, crowding out other uses of those funds,” KFF’s analysts wrote in the report. “This has raised questions about whether nonprofit facilities provide sufficient benefit to their communities to justify this tax benefit.”

The estimate comprises the federal and state corporate income taxes, sales taxes and property taxes avoided by nonprofit hospitals thanks to their tax-exempt status, as well as any increases in charitable contributions and decreases in bond interest rate payments tied to their status, KFF wrote. The group collected the data from hospital cost reports, IRS filings and American Hospital Association (AHA) survey data.

2020’s 16% increase came during a year when hospital operations saw frequent disruptions that hindered patient care income, the analysts wrote. Those declines were "more than offset" by government pandemic support, increases in charitable contributions and investment income, they wrote, and came on the heels of a nine-year, 143% rise in nonprofits’ total net income.

Additionally, the $27.6 billion of 2020 far outstrips the $16 billion in total charity costs reported by nonprofit hospitals that year, though KFF Senior Analyst Jamie Godwin told Fierce Healthcare that hospitals "also provide other types of benefits to the communities they serve" aside from charity care.

Tax exemption and community benefit have been contentious subjects between policy researchers and the hospital industry, who often disagree on where the line on community benefit should be drawn.

One Lown Institute analysis from last year, for instance, reviewed 275 nonprofit hospital systems’ 2018 and 2019 IRS filings and tallied an $18.4 billion charity care deficit. Another study penned by Johns Hopkins researchers that reviewed multiple data sources from 1,472 hospitals between 2011 to 2018 found that 38.5% of nonprofits provided less community benefit than the value of their tax exemptions.

Historically, the AHA has critiqued the methodologies of such analyses for not including what they believe to be the entirety of a hospital’s community benefit, and KFF’s most recent estimate appears to fall under that umbrella.

In an email statement responding to the latest analysis, Melinda Hatton, general counsel for the AHA, pointed to “a more comprehensive report” conducted by Ernst & Young and backed by the hospital group. It concluded that nonprofit hospitals and health systems provided $9 in community benefits for every tax dollar they didn’t pay during 2019.

“A narrow reading of community benefit limited to financial assistance misses the important work hospitals do to close the pervasive gaps between federal reimbursements for care and the actual cost of care as well as the many other benefits hospitals provide directly to their communities,” Hatton told Fierce Healthcare in the email statement. “Whether it is public health activities, such as clinics and testing, training for the next generation of caregivers or efforts to prevent illness, including wellness education or more hands-on efforts to improve living conditions, hospitals continually give back to the communities they serve.”