Nonprofit hospitals received $28 billion in taxpayer subsidies in 2020 but only provided $16 billion in free or discounted care, a new analysis found.

Hospitals have long argued that nonprofit providers do more for their communities than can be adequately measured and that their various investments vastly exceed their exemptions from federal and state income taxes, sales taxes and property taxes. But the latest research from the Kaiser Family Foundation fuels contentions by many healthcare economists and policymakers that nonprofit hospitals are not earning their tax exemptions

“Taxpayers are subsidizing more than their fair share,” said Ge Bai, a health policy and accounting professor at Johns Hopkins University who studies nonprofit hospitals’ charity care spending but did not participate in the analysis. The gap between nonprofit hospitals’ tax exemptions and charity care spending would be even wider if researchers factored in the 340B drug discount program that’s also subsidized by taxpayers, she added.

An American Hospital Association spokesperson said in a statement that the Kaiser Family Foundation’s analysis was narrow and excluded the “pervasive gaps between federal reimbursements for care and the actual cost of care.” The spokesperson cited a 2022 report by consulting firm EY, commissioned by the AHA, that found that for every dollar in tax exemption, hospitals provided $9 in community benefit.

The value of nonprofit tax exemptions, which were not adjusted for inflation, rose from $20 billion in 2011 to $28 billion in 2020, said Zachary Levinson, the project director of the Kaiser Family Foundation’s program on Medicare policy and co-author of the report.

“Having tax-exempt status provides a lot of benefit to nonprofit hospitals,” he said. “We are hoping this data can help evaluate whether the tax benefit is a good deal for the government.”

Charity care, which hospitals calculate as free or discounted care provided to patients, is one component of hospitals’ community benefit spending. Research has shown little variation between the amount of charity care provided by nonprofit and for-profit hospitals. The Medicaid shortfall, or the gap between Medicaid payments and the hospital’s estimated cost for those services, is typically the biggest share of hospitals’ community benefit spending.

But the Medicaid shortfall, which wasn’t included in the KFF analysis, isn’t a good measure of community benefit spending, said Gerard Anderson, a health policy and international health professor at Johns Hopkins University who studies nonprofit hospitals’ charity care spending.

“The whole concept of the Medicaid shortfall makes no sense to me,” said Anderson, who wasn’t affiliated with the KFF study. “The more expensive your hospital is, the higher the Medicaid shortfall.” 

In addition to charity care and the Medicaid shortfall, nonprofit hospitals’ community benefit spending includes public health investments such as testing clinics, workforce training programs and infrastructure improvements like housing developments, among other initiatives. But those are very small portions of hospitals’ community benefit spending, and wide variation exists in the funding amount and the types of programs they offer, said Gary Young, director of the Center for Health Policy and Healthcare Research at Northeastern University, who served on an Internal Revenue Service advisory committee from 2012 to 2015 overseeing data from the hospitals’ federal tax forms

“Hospitals have not been equipped to engage in infrastructure improvements and that type of activity,” he said. “So, we are left with tax exemptions that are of substantial value to nonprofit hospitals, a tremendous amount of variability in what hospitals provide and how to rectify that variability.”

Several states have imposed laws that have forced nonprofit hospitals to dedicate a certain percentage of their overall expenses to community benefit spending. Oregon, for instance, assigns each hospital a mandatory community benefit spending floor every two years based on factors like the hospital’s financial position, workforce and community demographics.

Public officials, including Sen. Chuck Grassley (R-Iowa), have floated several federal policy solutions addressing the shortfall issue, although the proposals typically face staunch opposition from hospital lobbying groups.

Kaiser Family Foundation researchers listed several policy solutions, including a floor-and-trade system where hospitals would have to subsidize other hospitals’ charity care if they didn’t reach a minimum threshold of charity care spending. Another proposal calls for replacing current tax benefits with a subsidy tied to the value of the community benefits provided.

At a minimum, nonprofit hospitals should be required to disclose their estimated tax exemptions on their federal tax forms, Bai said.

Hospitals need more guidance from the IRS on what community investment is expected from them and some flexibility to meet the biggest unmet needs in their communities, Young said.

“The elephant in the room is that there is wide variation in community benefit spending, with some hospitals providing much more than others, and we have largely let that slide,” he said. “Are we going to continue to ignore or do something about it?”