Are tax-exempt hospitals giving back their fair share to communities? It depends on what you count

Nonprofit hospitals in the U.S. are exempt from most taxes. To earn this status, they are supposed to engage in activities that benefit their communities, such as providing free care to uninsured people or programs to improve neighborhood health. For many, though, their real community contributions fall far short of the tax breaks they receive.

A recent report from our organization, the Lown Institute, found that 82% of nonprofit hospital systems spent less on charity care and community investment than the value of their estimated tax exemptions in 2019, adding up to $18.4 billion in forgone community spending. Given the critical public health needs across the country, that failure has serious human consequences. Those $18 billion dollars could be used to provide Supplemental Nutrition Assistance Program benefits to 12 million more people for a year, end homelessness in the San Francisco area, or double the current federal investment in replacing all lead water pipes in the country.

Rather than engage constructively in how to address the shortfall in community spending, the hospital industry pushed back. Its main criticism is that we did not include every type of community benefit that nonprofit hospitals are allowed to report.

It is true that the Lown report excluded certain categories of community benefits. This was done by design, because it’s an open secret that not all spending hospitals can claim as community benefits are actually meaningful for community health. The broad definition of community benefit — one of many loopholes in the U.S. tax code — allows hospitals to include spending on items that don’t directly address community health needs. That’s why we focused on the spending that matters most for local communities, some of which are losing tens of millions of dollars in property tax revenue to support nonprofit hospitals.

The Internal Revenue Service allows hospitals to report spending on several categories under the community benefit umbrella on Form 990 Schedule H. One category is financial assistance that hospitals provide for eligible patients to help them pay for care (also known as charity care). Other categories include programs to improve community health like free clinics in underserved neighborhoods, free screenings or health literacy events, donations to local groups, investments in affordable housing, and the like.

Yet the majority of community benefit spending that hospitals report is for items that have little effect — if any — on community health.

For example, the largest share of the reported community benefit spending by nonprofit hospitals is for their Medicaid shortfalls. That’s the difference between what Medicaid pays for the care hospitals provide and what hospitals say is their actual cost. We certainly believe in the importance of hospitals caring for patients covered by Medicaid. But while Medicaid reimbursement rates may be lower than rates from private insurance, calling this a “shortfall” is puzzling. Medicaid shortfall isn’t money that goes into the community to improve health, nor does it have a tangible impact on patients’ financial health, the way charity care does.

Hospitals already make up for the shortfall by charging private insurers more or by receiving Disproportionate Share Hospital payments, which are given to hospitals that serve a large number of uninsured or Medicaid patients (43% of U.S. hospitals receive these payments). If the discounts hospitals give to other payers aren’t considered community benefits, why should Medicaid discounts be different?

Nonprofit hospitals also report as a community benefit what they spend to train health professionals. While it’s important for society to have well-trained clinicians, this isn’t an activity that directly addresses the specific health needs of hospitals’ surrounding communities. If the majority of a hospital’s trainees went on to work in medically underserved areas or understaffed specialties after training, the hospital’s cost for providing that training might well be justified as a community benefit. But that isn’t the case. Only about one-quarter of resident physicians report practicing in medically underserved areas after their training and, despite the looming primary care clinician shortage, only 35% of residents go on to practice primary care. Instead, training programs reflect a merry-go-round of the income incentives in health care: the more specialists hospitals have in their training programs, the more cheap labor they have to support revenue from high volumes of lucrative elective procedures. And after being trained in those procedures, many of these new specialists go out into the community to do them, which is not usually aligned with community health needs.

Hospital-based medical research is also reported as a community benefit, despite having no direct connection to local health needs. Research agendas are often driven by interests far beyond the health priorities of the community, such as clinicians’ personal academic interests and the pressure on researchers to publish or perish. While good research is the bedrock of modern health care, crediting this as a community benefit without any accountability to the community is wholly inappropriate, particularly when one takes into consideration the scandalous amount of poor-quality research that wastes precious resources.

Double dipping is another reason to re-examine what hospitals can report as community spending: Teaching hospitals do not subtract from community benefit reporting the indirect medical education payments they receive from Medicare. They are also allowed to report the cost of federally-funded research as a community benefit even if the hospital did not put any of its own money into the work.

The discrepancy between what communities need and what their hospitals spend on community benefits has been a long-standing concern. Experts on community benefit have recommended policies to reallocate community benefit spending toward community investment programs and to ensure that at least some funds are spent on addressing the local social drivers of health. Some state policymakers are going further. Since 2018, Massachusetts has required nonprofit hospitals to report community benefit spending that directly addresses priority health needs. These policymakers, like the Lown Institute, do not include Medicaid shortfalls, training, or research as community benefits.

The fact that nonprofit hospitals care for Medicaid patients, train residents, and conduct research is undoubtedly a social good. But to justify their tax exemption, the focus should be on programs that address specific community health needs, not on spending for the general good, for which they are already being paid.

It is past time for a national conversation on what should really count as a community benefit for nonprofit hospitals.

Judith Garber is a senior policy analyst at the Lown Institute in Needham, Mass. Vikas Saini is a cardiologist and president of the Lown Institute.