Not-for-profit hospitals don’t earn tax exemptions, researchers say

Not-for-profit and for-profit hospitals report similar levels of unreimbursed Medicaid costs even though not-for-profits receive billions of dollars a year in tax subsidies, new research shows.

The Medicaid shortfall, which is the difference between a hospital’s estimated cost of providing services to Medicaid beneficiaries and the payments they receive, is the largest component of not-for-profit hospitals’ community benefit spending.

Not-for-profits facilities’ Medicaid shortfall as a share of expenses was less than for-profit hospitals’ in half of the 45 states where both types operate, according to an analysis of 2019 data from 3,446 hospitals that JAMA Network Open published Monday.

“The nonprofit hospitals have not done enough to deserve their tax subsidy,” said Ge Bai, an accounting professor at Johns Hopkins University and lead author of the study. “Taxpayers subsidize hospitals to help struggling, working-class Americans, but many nonprofits are not doing enough.”

The latest research builds on other studies that have shown little difference in community benefit spending by not-for-profit hospitals versus for-profit ones. These findings have spurred questions about whether not-for-profit hospitals earn their estimated $25 billion in annual property, income and sales tax subsidies.

Charity care—free and discounted care hospitals provide low-income patients—is typically regarded as the most tangible metric to judge a hospital’s tax-exempt status. But not-for-profit hospitals’ charity care was 2.3% of total expenses in 2018, compared to 3.8% and 4.1% at for-profit and government-run hospitals, respectively, Bai and her peers reported in an earlier study.

The Medicaid shortfall study and charity care studies used similar methodologies. Researchers divided total Medicaid shortfall or charity care across the entire samples by total expenses, weighting larger hospitals more than smaller hospitals.

“This is another paper that fits with the larger body of literature that says our tax-exempt hospitals aren’t contributing that much to community benefit relative to what they receive,” said Gary Young, director of the Center for Health Policy and Healthcare Research at Northeastern University. “Whether we look at community benefit as a whole or certain components of how the IRS defines it, it doesn’t always appear that not-for-profits are delivering community benefit at levels of magnitude commensurate with what they actually receive in tax subsidies.”

The Affordable Care Act increased health coverage for millions of Americans, which decreased hospitals’ charity care spending. Policymakers and community leaders expected to see a shift from charity care to initiatives such as housing, education and small business investment. But that hasn’t occurred, at least at scale, according to Young’s research.

As charity care expenses have dropped, Medicaid shortfalls have jumped, a Modern Healthcare analysis revealed.

But the Medicaid shortfall may not be a good measure of not-for-profit hospitals’ charitable mission. For one, Medicaid care is reimbursed through a complicated patchwork of state and federal policy, making it hard to accurately measure and compare. In addition, some of the largest not-for-profit hospitals hire consultants and accountants to maximize how their Medicaid shortfalls appear on the books, and the IRS has limited oversight of Form 990s, Bai said.

“It doesn’t make sense to factor unreimbursed Medicaid costs into community benefit spending given the huge noise in measurement and accountability,” Bai said. “If we include that number, it’s portraying an inflated amount of community benefit spending for not-for-profit hospitals.”

While Congress has had limited traction with its proposals to adjust community benefit accounting policies amid political pressure from hospitals, the dynamic could change as the President Joe Biden’s administration revamps antitrust regulations.

But even changing the rules might not make a difference, Bai said. “Hospitals have such powerful lobbying that if they remove unreimbursed Medicaid costs from community benefit spending, hospitals could manage to squeeze those costs into another category.”