AHA: Financial Assistance One Piece of Hospital Community Benefits

March 20, 2023 - The American Hospital Association (AHA) has responded to a recent analysis from Kaiser Family Foundation (KFF) that found tax exemptions provided to nonprofit hospitals exceeded hospital charity care costs in 2020.

The analysis has raised concerns about whether nonprofit hospitals provide enough community benefits to justify tax exemptions. However, Rick Pollack, president and CEO of the AHA, said the analysis takes too narrow of a view.

“Year after year, these benefits add up to hundreds of billions of dollars, including $110 billion in 2019 alone, the most recent year for which comprehensive data is available,” Pollack wrote in a blog post on AHA’s website late last week. “And that’s only for the benefits the IRS does count, not the many other programs, services, and activities, such as most medical research and the full cost of subsidies to keep burn and neonatal units open, that it doesn’t.”

Pollack reported that just about half of the total benefits accounted for by the IRS are attributable to financial assistance and “funds needed to make up for underpayments endemic in the government’s health insurance program for the needy.”

Hospitals and health systems receive about 87 cents for every dollar they spend caring for Medicare patients, according to the latest data from the AHA. For Medicaid payments, they receive 90 cents for every dollar.

READ MORE: KFF: Varying Hospital Charity Care Policies Influence Spending

While Medicare and Medicaid participation is voluntary, hospitals must treat beneficiaries with public health insurance coverage in order to qualify for nonprofit tax exemptions. This leaves nonprofit hospitals without sufficient payment to cover the costs of treating Medicaid and Medicare beneficiaries.

Still, nonprofit hospitals were able to provide $9 of benefits to their community for every $1 of exemption, Pollack said, citing an EY report from last year. The report analyzed Medicare hospital cost reports for about 2,500 nonprofit general hospitals to determine their community benefit, including their financial assistance programs, Medicare payment shortfall, bad debt from charity care, and community building activities.

Pollack said the EY report is “a much fairer and more comprehensive way” of calculating hospitals’ community benefits compared to the KFF analysis, which he contended lumps charitable contributions into its determinations.

The KFF analysis also failed to include payments in lieu of taxes (PILT), which local governments have increasingly asked hospitals and health systems to pay. PILT payments offset some or all of the tax revenue governments lose due to tax exemptions and help communities deliver vital services, such as firefighting and the construction of public roads. The payments are voluntary. However, some cities have sought to change that.

“To downplay all the work they do to treat, heal, improve, and comfort their communities is a huge disservice to all who rely on our nation’s hospitals and health systems for care,” Pollack wrote.

Nonprofit Hospitals’ Tax Exemptions Exceeded Charity Care Costs in 2020

READ MORE: Most Nonprofit Hospitals Updated Charity Care Policies During Pandemic

Tax exemptions exceeded charity care costs for nonprofit hospitals in 2020, raising concerns about whether these facilities provide enough community benefits to justify their exemption status.

Nonprofit hospitals are exempt from paying federal, state, and local property taxes as long as they invest their profits in charity care and community initiatives.

Recent reports have suggested that nonprofit hospitals are using aggressive tactics to collect unpaid medical bills, including suing patients over outstanding debts. Other research has found that nonprofit hospitals direct a similar share of their operating expenses to charity care as for-profit hospitals.

The Kaiser Family Foundation (KFF) issue brief used data from hospital cost reports, the Internal Revenue Service (IRS), and American Hospital Association (AHA) to determine the estimated value of tax exemption for nonprofit hospitals in 2020.

Tax exemptions for nonprofit hospitals totaled $27.6 billion, representing 43 percent of the net income earned by nonprofit facilities in 2020.

READ MORE: Nonprofit Hospitals Saw High Tax Breaks, Low Charity Care Spending

Around half (52 percent) of the tax exemptions, or $14.5 billion, were from federal exemptions. Over $10 billion was from not paying federal income tax, $2.5 billion was from charitable contribution deductions, and $1.6 billion was from issuing bonds at lower interest rates.

State and local tax exemptions accounted for $13.2 billion of exemptions in 2020 (48 percent). Nearly $6 million was due to not paying state or local sales taxes, $4.4 billion was from not paying local property taxes, and $3.1 billion was from state corporate income tax exemption.

The $27.6 billion in tax exemptions surpassed the $16 billion nonprofit hospitals spent on charity care, the brief revealed. Defined as one aspect of community benefits, charity care programs provide free or discounted services to patients who cannot afford care.

Other community benefits include unreimbursed Medicaid expenses, unreimbursed health professions education, and subsidized health services.

Past research found that the value of tax exemption was higher than the value of community benefits for 19 percent of nonprofit hospitals between 2011 and 2018.

Between 2011 and 2020, the value of tax exemption for nonprofit hospitals increased by 41 percent, from $19.6 billion to $27.6 billion. The value decreased by $5.7 billion in 2018, perhaps due to the implementation of the Tax Cuts and Jobs Act of 2017, which reduced the federal corporate income tax rate from 35 to 21 percent.

The largest year increase occurred in 2020 when the value of tax exemption rose $4 billion from $23.7 billion. This increase overlapped with the start of the COVID-19 pandemic and likely reflected the growth in aggregate net income for nonprofit hospitals from $47 billion in 2019 to $64.5 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 researchers wrote. “This has raised questions about whether nonprofit facilities provide sufficient benefit to their communities to justify this tax benefit.”

Most states have community benefit requirements for nonprofit hospitals, such as requiring them to provide charity care to patients below a specified income threshold.

Other regulations could include mandating nonprofit hospitals to provide a minimum amount of community benefits, replacing current tax benefits with a subsidy tied to the value of community benefits provided, and introducing reforms to better align community benefits with local needs.

However, more research is needed to determine if these regulations impact charity care and the extent to which they are enforced, researchers said.

The original version of this article was published on 03/16/22. The article has been updated to reflect AHA's response to the KFF analysis.