Approximately 60% of community hospitals are nonprofit hospitals.[1] A nonprofit hospital is a hospital that is granted 501(c)(3) status by the IRS. Nonprofit hospitals benefit from this status by being:
- Exempt from federal, state and local taxes;
- Permitted to receive charitable donations; and
- Allowed to issue tax-exempt bonds.
To qualify for 501(c)(3) status, a hospital must be organized and operated exclusively for tax-exempt purposes.[2] To qualify, no part of a hospital’s net earnings is allowed to inure to the benefit of any private shareholder or individual. Additionally, a hospital must operate exclusively for exempt purposes and is prohibited from receiving any substantial private benefit.[3] The IRS uses the community benefit standard to determine whether a hospital meets the 501(c)(3) requirements. Under the community benefit standard, a hospital must:
- Demonstrate that it provides benefits to a class of persons that is broad enough to benefit the community, and
- Operate to serve a public rather than a private interest.
How do non-profit hospitals measure up?
In 2018, after reviewing the information reported to the IRS on Form 990 compiled by GuideStar in 2012, Dr. Bradley Herring and his colleagues determined that “the incremental community benefit exceeds the tax exemption for only 62% of nonprofits.”[4] Therefore, at least 38% of nonprofit hospitals significantly benefit from their 501(c)(3) status, without providing any significant community benefit.
In 2011, the value of the tax exemption to nonprofit hospitals was estimated to be $24.6 billion.[5] Additionally, in 2017, the public records showed the following financials for the 82 largest non-profit hospitals:
- $296.6 billion = combined revenues
- $203.1 billion = combined net assets
- 6% = combined growth in assets
- $5.2 billion = combined receipt of charitable contributions[6]
What, if anything, is the IRS or are others doing to prevent nonprofit hospitals from abusing their tax-exempt status?
In late 2017, the IRS revoked an acute care hospital’s tax-exempt status after the hospital entered into a joint venture with a for-profit company.[7] This was the only revocation related to for-profit actions found in researching this article.
Most revocations are the result of a failure to comply with certain ACA requirements, such as completing a Community Health Needs Assessment.
In 2019, Senator Chuck Grassley [R-IA] renewed his investigation into whether hospitals were meeting the statutory charity care requirements. In December 2019, Senator Grassley called out Methodist Le Bonheur Healthcare and UVA Health System for their failures to live up to their legal obligations as a tax-exempt organization.
Some state courts are taking action by stripping nonprofit hospitals of their state property tax exemptions (based on state property tax laws) as a result of their for-profit behavior, including Morristown Memorial Hospital (2015).[8] The Tax Court of New Jersey in the Morristown case concluded “[i]f it is true that all non-profit hospitals operate like the Hospital in this case, as was the testimony here, then for purposes of the property tax exemption, modern non-profit hospitals are essentially legal fictions; and it is long established that ‘fictions arise from the law, and not law from fictions.’”
Based on the financial statistics and lack of revocation of the tax-exempt status, the New Jersey Tax Court’s conclusion may be right on the mark.
[1] Bradley Herring, PhD, Darrell Gaskin, PhD, Hosseing Zare, PhD and Gerard Anderson, PhD, Comparing the Value of Nonprofit Hospitals’ Tax Exemption to Their Community Benefits, Inquiry: A Journal of Medical Care Organization, Provision and Financing, Feb. 13, 2018.
[2] https://www.irs.gov/charities-non-profits/charitable-hospitals-general-requirements-for-tax-exemption-under-section-501c3
[3] Id.
[4] Herring, Comparing the Value of Nonprofit Hospitals’ Tax Exemption to Their Community Benefits.
[5] Rosenbaum S, Kindig DA, Bao J, Byrnes MK, O’Laughlin C. The value of the nonprofit hospital tax exemption was $24.6 billion in 2011, Health Aff. 2015;34(7):1225-1233.
[6] Adam Andrzejewski & Thomas W. Smith, Top 82 U.S. Non-Profit Hospitals Quantifying Government Payments and Financial Assets Open the Books Oversight Report, June 2019.
[7] https://www.beckershospitalreview.com/finance/hospital-loses-tax-exempt-status-after-inking-jv-with-for-profit-company.html
[8] AHS Hospital Corp. d/b/a Morristown Memorial Hospital v. Town of Morristown, 28 N.J. Tax 456.