U.S. nonprofit hospitals enjoyed a total annual tax benefit of $37.4 billion, according to our study published in JAMA today. More than 70% of U.S. private hospitals are nonprofit, operating 80% of total inpatient beds. By not levying taxes and providing related benefits, US taxpayers are, in effect, writing these hospitals a big check each year.
Since the establishment of the first non-wartime federal income tax in 1913, nonprofit hospitals have received tax exemptions due to their “charitable” purposes. In the early years, they were indeed charitable organizations, primarily funded by churches and philanthropists, staffed by volunteers, and focused exclusively on caring for disadvantaged patients.
How times have changed. Those charity hospitals have disappeared. Today, many nonprofit hospitals are gigantic enterprises that profit not only from caring for patients but also from a broad variety of sophisticated and lucrative businesses, such as investing, insurance, and joint ventures. The profit orientation is often too strong for nonprofit hospitals to refrain from price gouging, aggressive debt collection, or anti-competitive activities. The behavioral distinction between nonprofit hospitals and for-profit entities is increasingly murky.
Yet, as detailed in our study, the total estimated tax benefit provided to nonprofit hospitals amounted to $37.4 billion in 2021, with more than half subsidized by state and local taxpayers. The breakdown is as follows: $11.5 billion in federal income tax, $9.1 billion in sales tax, $7.8 billion in property tax, $3.7 billion in state income tax, $3.2 billion in charity contributions, and $2.1 billion in interest savings from tax-exempt bond financing.
Not surprisingly, nonprofit hospitals that generate high profits and own expensive properties receive greater tax-exemption value. The top 7% of nonprofit hospitals received the same amount of tax benefit as the remaining 93% combined.
“The purpose of the tax exemptions is to provide benefits to local communities,” said Mariana Socal, MD, PhD, an associate professor at the Johns Hopkins Bloomberg School of Public Health and coauthor of the study. “It is important to create a culture of accountability to ensure that nonprofit hospitals continue to benefit the local communities that they aim to serve.”
While receiving their tax benefit, aren’t nonprofit hospitals more charitable than for-profit hospitals? Research shows that, in aggregate, nonprofit hospitals did not spend a greater proportion of their expenses on either charity care or Medicaid services for low-income patients than for-profits did. In fact, government programs, such as Medicare and Medicaid, provide more direct subsidies to nonprofit hospitals than these hospitals spend on uncompensated care.
“At a minimum, state and local governments should consider requiring nonprofit hospitals to estimate and disclose the value of their property tax and sales tax benefits. This would inform local taxpayers about the tax subsidies they provide to these hospitals, and local taxpayers are the ones most directly affected by their hospitals’ care provision and tax subsidies,” said the study’s lead author, Accounting Professor Elizabeth Plummer of the TCU Neeley School of Business.
More importantly, we must recognize that tax benefit has tilted the playing field in favor of nonprofit hospitals, disadvantaging competing for-profit hospitals and physician practices that offer the same services. Hospital market consolidation occurs as a result, giving rise to ever-expanding nonprofit hospital empires, driving up healthcare prices, and harming local economies and jobs.
Tax benefit is not the only government policy that has led large nonprofit hospitals to consolidate smaller ones and physician practices. The 340B Drug Pricing Program, for which for-profit hospitals or physician practices are not eligible, is another example. More broadly, the site-based payments from government programs and the Affordable Care Act’s restrictions on physician-owned hospitals further disadvantage physicians’ ability to compete and invite hospitals to acquire them.
Policymakers have been tilting the playing field in favor of nonprofit hospitals for too long, treating them as preferred players with more noble intent. However, “good” players engage in bad practices when competition is minimal, while “bad” players do the right thing when competition is strong. Ultimately, only fair and free competition can compel all players to work hard to benefit patients as well as themselves. Policy failures, not market failures, are preventing all players from doing the right things.
