Key Points
Question
What is the total tax benefit received by US nonprofit hospitals?
Findings
Analyzing data from Medicare Cost Reports, a total of 2927 US nonprofit hospitals received a $37.4 billion total tax benefit in 2021. Tax benefit varies widely across states and is highly concentrated among a small number of hospitals. More than half of the total tax benefit was received at the state and local levels.
Meaning
Policy efforts to strengthen nonprofit hospitals’ taxpayer accountability are likely more effective when pursued at the local level. A standardized estimation road map is provided for various stakeholders to value tax benefit for valuation and reporting purposes.
Abstract
Importance
Nonprofit hospitals are under increasing scrutiny to justify the generous tax benefit they receive due to their tax-exempt status. Quantifying the value of the tax benefit they receive at the federal, state, and local levels is critical for designing informed public health policies and ensuring nonprofit hospitals’ taxpayer accountability.
Objective
To estimate the financial benefit that nonprofit hospitals derive from their tax-exempt status and assess how the benefit is distributed across state and local communities.
Design, Setting, and Participants
Using methodologies and measures consistent with current tax law and practice and data from 2021 Medicare Cost Reports, this study calculated the total financial benefit from nonprofit hospitals’ tax-exempt status for all US nonprofit hospitals with the required Cost Reports data.
Main Outcomes and Measures
Nonprofit hospitals’ total tax benefit, which equals the sum of federal and state income tax, sales tax, property tax, the fair market value of charitable contributions from donors, savings from tax exemptions on issued bonds, and federal unemployment tax.
Results
A total of 2927 US nonprofit hospitals received a $37.4 billion total tax benefit in 2021 from federal income tax ($11.5 billion; 31%), sales tax ($9.1 billion; 24%), property tax ($7.8 billion; 21%), state income tax ($3.7 billion; 10%), charitable contributions ($3.2 billion; 8%), bond financing ($2.1 billion; 6%), and federal unemployment tax ($200 million; <1%). Tax benefit varied substantially across states, from $25 098 (Delaware) to $159 464 (Massachusetts) per hospital bed and from $19 (Alabama) to $275 (Massachusetts) per capita. Tax benefit was highly concentrated, with 7% (n = 212) of hospitals accounting for half of the total amount.
Conclusion and Relevance
This study highlights the wide variation of nonprofit hospitals’ tax benefit across states, its high concentration among a small number of hospitals, and the primary role played by state and local taxes. Policy efforts to strengthen nonprofit hospitals’ taxpayer accountability are likely to be more effective when pursued at the local level. The detailed standardized estimation road map can be used by various stakeholders to estimate tax benefit for external valuation and reporting purposes, updated as laws change, and improved upon as better data sources become available.
This study uses data from Medicare Cost Reports to investigate the financial benefit US nonprofit hospitals receive from their tax-exempt status and outlines a standardized estimation methodology that can be replicated at the state and local levels.
Introduction
Nonprofit hospitals in the US originated from entities funded by philanthropy and staffed by volunteers to care for financially disadvantaged patients.1 Nonprofit hospitals have long played a critical role in providing care to and improving the well-being of low-income patients. Under Section 501(c)(3) of the Internal Revenue Code, nonprofit hospitals are exempt from paying federal taxes, can issue tax-exempt bonds, and receive tax-deductible contributions. State and local tax exemptions generally follow, relieving nonprofit hospitals from paying sales tax, property tax, and state income tax.1,2 This arrangement reflects a social contract between nonprofit hospitals and taxpayers: hospitals provide charity care and other community benefit in exchange for the benefit they receive from their tax-exempt status (hereafter, tax benefit).1,3,4,5
Prior research has questioned the adequacy of nonprofit hospitals’ charity care and other community benefit based on comparisons between nonprofit and for-profit hospitals.3,6 Some nonprofit hospitals have also engaged in revenue-enhancing activities that are generally not expected from nonprofit entities, such as declining charity care to eligible patients and garnishing wages for unpaid medical bills.7,8 Policymakers, courts, and other stakeholders are increasingly interested in valuing nonprofit hospitals’ tax benefit to help gauge how much charity care and community benefit should be expected in return. In October 2023, US Senator Bernie Sanders criticized nonprofit hospitals for taking advantage of their tax exemptions by underproviding charity care and overpaying executives.9 In April 2023, the US House Committee on Ways & Means held a hearing on nonprofit hospitals’ tax-exemption issues.10 In August 2023, several US senators requested that the Internal Revenue Service investigate nonprofit hospitals’ potential abuses of their tax-exempt status.11 At the state and local levels, nonprofit hospitals have come under increased scrutiny and pressure as communities see how hospitals’ property and sales tax exemptions directly decrease funding for public schools, transportation and infrastructure, and other state and locally directed services.12 Some states have created minimum spending requirements to justify nonprofit hospitals’ tax exemptions.13 In February 2023, the Pennsylvania Commonwealth Court rejected property tax exemptions for 4 nonprofit hospitals.14
Amidst growing public and policy interest in this topic—especially at the state and local levels—it has become increasingly important to correctly identify and measure the financial benefit that US nonprofit hospitals derive from their tax-exempt status and assess how this benefit is distributed across state and local communities. Nonprofit hospitals are currently not required to publicly disclose their tax benefit, but prior studies have estimated that the tax benefit for all US nonprofit hospitals totaled $24.6 billion in 2011 and $28.1 billion in 2020.15,16 However, these analyses make certain assumptions and use estimation methods that can be improved upon. For example, these studies used hospitals’ net patient revenues or operating expenses to estimate property taxes (an estimation method without support or validation in current property tax literature or tax practice)17,18 and did not measure the sales tax benefit related to hospitals’ equipment purchases. Some studies do not account for nonprofit hospital systems filing consolidated federal tax returns and/or combined state returns, which affect federal and state income tax estimates. In addition, prior studies failed to provide sufficient detail or explanation to allow for a replicable methodology that can be applied to individual jurisdictions or modified to accommodate changes in regulatory parameters over time.
This study addressed these assumptions and methodology issues, used the most recent data available, and conducted a nationwide analysis of the estimated tax benefit received by US nonprofit hospitals. The study objective was to assist the public, policymakers, and the medical community in understanding the benefit that tax exemption affords nonprofit hospitals. In addition, a detailed standardized estimation road map is provided that can be used by various stakeholders to estimate tax benefit, including for external valuation and reporting purposes. The study methods and measures have limitations, but are more consistent with actual tax law and practice than those used in prior analyses. The study estimation methodology (outlined in the eAppendix in Supplement 1) can be consistently applied, replicated, and improved upon as more data become available.
Methods
This study follows the STROBE reporting guidelines for cross-sectional studies. Institutional review board approval was not sought because no human participants were involved. All hospital-level data were obtained from Medicare Cost Reports (mandatory annual filing for all Medicare-certified hospitals) for 2021 (the most recent year available). Supply expenses were obtained from the 2021 American Hospital Association Survey. Our sample included 2927 nonprofit hospitals from all 50 states, plus the District of Columbia.
We calculated nonprofit hospitals’ tax benefit as the sum of (1) taxes not owed: federal and state income tax, sales tax, property tax, and federal unemployment tax (FUTA); (2) interest expense savings from issuing tax-exempt bonds; and (3) the fair market value of charitable contributions from donors. The eAppendix in Supplement 1 provides details on the methodology, data sources, and specific Cost Reports data items used.
Federal Income Tax
We multiplied hospitals’ estimated taxable income by the 21% federal corporate tax rate. We aggregated hospital-level federal taxable income to the system level before estimating this benefit. This allows losses from 1 hospital to offset income from other hospitals in the same system, consistent with hospital systems filing consolidated federal tax returns that include all system hospitals. Our estimated federal taxable income is the sum of operating income, investment income, and other revenues and expenses minus our estimates of hospitals’ state income tax, sales tax, property tax, FUTA, and additional interest expense (amounts deductible for federal tax purposes).
State Income Tax
We multiplied hospitals’ estimated state taxable income by the applicable state corporate tax rate to compute this benefit. We aggregated hospital-level income to the system-state level. This allows income and losses from different hospitals in the same system and state to offset one another, consistent with hospital systems filing combined state returns. State taxable income was the sum of operating and investment income and other revenues and expenses minus estimates for sales tax, property tax, FUTA, and additional interest expense.
State and Local Sales Tax
Most states impose state and local sales tax on purchases of tangible personal property (eg, supplies, furniture, equipment). We estimated the sales tax benefit by multiplying the applicable state and local sales tax rate by hospitals’ purchases of non-drug tangible items and equipment.
Property Tax
Commercial property taxes are generally assessed on a property’s fair market value (FMV). The most common strategy used to determine FMV for hospital real estate is the cost approach, which bases value on what it would cost to construct a new building and its related structures (eg, a parking garage) on hospital land.17 Appraisal districts then apply a depreciation factor to the building (for age) and add the estimated FMV of the land.18 Accordingly, property taxes are directly related to hospitals’ buildings, land, and equipment (eg, medical equipment and beds). Because direct measures of FMV are not observable, we used net book values (NBVs) of land, buildings, and equipment multiplied by the applicable average state property tax rates, following prior literature.19 We excluded equipment for 12 states that do not tax equipment and included inventory for 9 states that tax inventory. NBV was equal to an asset’s purchase price minus accumulated depreciation (buildings and equipment). Thus, NBV was generally less than FMV, especially for real estate values. Our base estimate of property tax benefit was $7.8 billion. Applying the average 5-year increase in US commercial real estate prices increased this benefit to $10.5 billion.
FUTA
FUTA is the federal unemployment tax paid by employers. FUTA’s rate is 6% and only applies to the first $7000 in wages paid to each employee (full-time, part-time, and temporary). Employers receive a credit (up to 5.4%) if they pay state unemployment tax. We assumed hospitals obtained the maximum credit and used a 0.6% effective rate, which likely understated our FUTA estimate.
Charitable Contributions
We used donations reported on hospitals’ Cost Reports as our benefit measure. This assumed nonprofit hospitals would not receive donations absent their tax-exempt status, which allows donors to make tax-deductible contributions. Analysis of Cost Reports data supported the reasonableness of this assumption.
Bond Interest Expense
Nonprofit hospitals benefit from being able to issue tax-exempt debt. Because interest received by debtholders is not taxable, nonprofit hospitals pay lower interest rates compared with taxable debt. We estimated this benefit by multiplying hospitals’ long-term debt liabilities by the difference in interest rates on tax-exempt vs taxable bonds, assuming investors had a 30% marginal tax rate.
We summarized the nationwide amount for each tax benefit category. For each state, we calculated tax benefit per nonprofit hospital bed and per capita, and compared state/local tax benefit vs federal tax benefit and income-related tax benefit (ie, federal and state income tax benefit) vs the remaining tax benefit (ie, non-income–related tax benefit). We examined the concentration of tax benefit across hospitals and separately analyzed how income-related tax benefit and the remaining tax benefit varied across hospital profitability. Lastly, we examined how tax benefit varied across the hospital community’s socioeconomic level, urban or rural location, size, teaching status, and religious affiliation.
Results
Tax Benefit Estimation
Our sample included 2927 nonprofit hospitals, with a median of 89 beds and 16 740 annual patient days (Table 1). Hospitals were approximately split between urban and rural locations. About 34% were teaching hospitals and about 20% had a religious affiliation.
Table 1. Characteristics of Nonprofit Hospitals in the Sample (N = 2927)a.
| Characteristicb,c | No. (%) |
|---|---|
| No. of beds, median (IQR) | 89.0 (25.0-223.0) |
| No. of inpatient days, median (IQR) | 16 740.0 (3870.0-53 903.0) |
| Hospital group size,d median (IQR) | 7.0 (1.0-19.0) |
| Urban location | 1455 (49.7) |
| Rural location | 1472 (50.3) |
| Teaching hospital | 1001 (34.2) |
| Nonteaching hospital | 1926 (65.8) |
| Religious affiliation | 580 (19.8) |
| Nonreligious affiliation | 2347 (80.2) |
Analysis of data from nonprofit hospitals’ 2021 Medicare Cost Reports. A detailed discussion of the data sources is provided in the eAppendix in Supplement 1.
Number of beds and number of inpatient days are from Cost Reports Worksheet S-3.
Urban/rural location, teaching status, and affiliation are from Cost Reports Worksheet S-2. Urban/rural designation is based on a hospital’s reported standard geographic classification status. Teaching hospitals are those that report they are involved in training residents in approved graduate medical education programs. Religious affiliation hospitals are those that report type of control as “nonprofit, church.”
Number of hospitals in an affiliated system (nationwide). See eAppendix in Supplement 1 for computation.
In 2021, the estimated total tax benefit received by nonprofit hospitals was $37.4 billion (Table 2; eFigure 1 in Supplement 1). Federal income tax benefit was the largest component ($11.5 billion; 31%), followed by sales tax benefit ($9.1 billion; 24%) and property tax benefit ($7.8 billion; 21%). Benefit related to state income tax ($3.7 billion), charitable contributions ($3.2 billion), bond financing ($2.1 billion), and FUTA ($200 million) accounted for the remaining 25%. Overall, 55% of the total tax benefit received was directly attributed to state and local taxes through sales tax (24%), property tax (21%), and state income tax (10%).
Table 2. Summary of Tax Benefit for 2021 by Category and Statea.
| Rankb | State | Nonprofit hospitals, No. | Nonprofit hospital beds, No. (%)c | Estimated amount of tax benefit by category, $ | Total tax benefit | Total tax benefit per bedd | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Federal income tax | State income tax | Sales tax | Property tax | Charitable contributions | Tax-exempt bond financing | FUTA tax | ||||||
| Total | 2927 | 476 274 (62) | 11 458 095 377 | 3 658 696 925 | 9 068 750 862 | 7 764 981 795 | 3 169 521 722 | 2 080 807 133 | 220 145 757 | 37 420 999 572 | 78 570 | |
| 1 | MA | 55 | 12 038 (66) | 894 382 760 | 369 744 415 | 272 227 616 | 262 022 622 | 50 259 898 | 62 143 553 | 8 845 703 | 1 919 626 567 | 159 464 |
| 2 | AK | 7 | 675 (43) | 7 376 365 | 23 612 488 | 3 053 943 | 12 415 023 | 48 671 029 | 3 624 318 | 372 105 | 99 125 270 | 146 852 |
| 3 | UT | 27 | 2544 (45) | 188 030 028 | 47 040 530 | 66 198 848 | 26 014 578 | 405 882 | 344 876 | 1 220 940 | 329 255 682 | 129 424 |
| 4 | IL | 147 | 24 191 (83) | 608 209 924 | 307 514 522 | 536 715 620 | 697 806 807 | 383 685 818 | 252 533 921 | 11 381 218 | 2 797 847 831 | 115 657 |
| 5 | IN | 85 | 10 519 (64) | 520 763 484 | 153 455 111 | 166 891 417 | 265 695 259 | 27 864 137 | 18 299 158 | 4 499 226 | 1 157 467 792 | 110 036 |
| 6 | WI | 123 | 10 925 (83) | 422 570 237 | 190 571 190 | 159 292 295 | 315 214 555 | 73 898 050 | 30 726 703 | 5 976 588 | 1 198 249 618 | 109 680 |
| 7 | CO | 50 | 5788 (54) | 67 654 038 | 25 092 531 | 165 037 682 | 177 744 252 | 155 856 031 | 6 509 796 | 3 105 238 | 600 999 568 | 103 835 |
| 8 | ID | 18 | 1542 (45) | 59 602 939 | 21 161 667 | 37 052 762 | 18 457 496 | 14 408 337 | 49 953 | 930 584 | 151 663 738 | 98 355 |
| 9 | VA | 63 | 10 438 (64) | 526 325 418 | 159 257 114 | 172 010 922 | 95 028 784 | 29 722 219 | 27 301 367 | 4 401 682 | 1 014 047 506 | 97 150 |
| 10 | OH | 144 | 25 003 (77) | 1 269 799 335 | 127 895 102 | 478 528 475 | 294 261 030 | 83 240 083 | 121 233 780 | 12 583 801 | 2 387 541 605 | 95 490 |
| 11 | CT | 30 | 6407 (85) | 188 883 237 | 87 344 025 | 109 546 755 | 132 231 371 | 54 646 038 | 31 496 472 | 3 521 170 | 607 669 067 | 94 845 |
| 12 | GA | 73 | 12 769 (55) | 517 339 294 | 150 000 195 | 250 127 459 | 152 445 631 | 104 341 597 | 21 369 651 | 5 173 710 | 1 200 797 537 | 94 040 |
| 13 | SC | 31 | 5003 (41) | 208 075 700 | 52 177 797 | 113 432 906 | 62 696 268 | 10 026 264 | 4 964 988 | 1 931 315 | 453 305 238 | 90 607 |
| 14 | AR | 54 | 6140 (63) | 256 836 559 | 96 989 645 | 106 912 582 | 41 724 273 | 29 505 155 | 3 839 618 | 1 940 432 | 537 748 264 | 87 581 |
| 15 | NE | 52 | 3701 (80) | 99 013 443 | 40 950 052 | 71 650 773 | 90 072 144 | 16 709 097 | 2 745 817 | 1 606 210 | 322 747 537 | 87 205 |
| 16 | ME | 33 | 2799 (90) | 48 656 915 | 22 647 331 | 50 457 495 | 33 626 056 | 72 245 159 | 8 047 497 | 1 922 656 | 237 603 109 | 84 889 |
| 17 | VT | 15 | 1145 (98) | 35 047 849 | 16 344 625 | 19 547 845 | 21 030 789 | 1 334 603 | 1 597 954 | 943 394 | 95 847 059 | 83 709 |
| 18 | FL | 94 | 28 524 (50) | 867 063 849 | 203 342 796 | 543 559 553 | 391 273 856 | 212 823 858 | 85 340 196 | 10 629 423 | 2 314 033 530 | 81 126 |
| 19 | KS | 41 | 3361 (39) | 88 978 560 | 35 101 012 | 55 780 960 | 59 835 445 | 18 492 517 | 5 126 567 | 1 440 535 | 264 755 596 | 78 773 |
| 20 | NY | 135 | 33 163 (79) | 529 922 030 | 175 688 553 | 1 084 790 724 | 444 990 159 | 100 185 089 | 240 248 930 | 18 588 959 | 2 594 414 443 | 78 232 |
| 21 | OK | 38 | 5716 (52) | 21 869 008 | 10 799 362 | 0 | 57 690 007 | 7 763 799 | 344 239 918 | 1 507 799 | 443 869 893 | 77 654 |
| 22 | NJ | 57 | 16 228 (75) | 191 852 808 | 119 868 798 | 422 877 880 | 341 214 078 | 22 888 046 | 98 781 692 | 6 947 953 | 1 204 431 254 | 74 219 |
| 23 | TX | 136 | 24 735 (36) | 572 107 311 | 120 273 073 | 461 660 596 | 459 662 034 | 159 683 058 | 48 431 329 | 8 248 832 | 1 830 066 233 | 73 987 |
| 24 | NH | 23 | 2065 (73) | 89 339 856 | 36 767 862 | 0 | 14 397 883 | 464 858 | 9 952 018 | 1 618 316 | 152 540 793 | 73 870 |
| 25 | AZ | 48 | 9811 (61) | 161 048 813 | 49 965 114 | 229 531 245 | 212 564 338 | 28 987 851 | 14 492 359 | 3 603 662 | 700 193 382 | 71 368 |
| 26 | CA | 207 | 44 781 (61) | 600 588 422 | 286 229 873 | 1 099 181 472 | 546 620 168 | 492 056 374 | 115 745 862 | 19 290 494 | 3 159 712 665 | 70 559 |
| 27 | MI | 116 | 17 886 (77) | 194 004 829 | 59 569 119 | 269 185 763 | 549 639 410 | 72 245 157 | 106 015 321 | 8 436 989 | 1 259 096 588 | 70 396 |
| 28 | MN | 103 | 8495 (78) | 121 922 868 | 60 303 056 | 183 553 636 | 119 779 834 | 68 242 103 | 26 836 289 | 6 149 126 | 586 786 911 | 69 074 |
| 29 | LA | 35 | 7865 (47) | 181 423 613 | 76 070 133 | 0 | 114 520 978 | 129 109 646 | 36 129 394 | 3 396 903 | 540 650 668 | 68 741 |
| 30 | MO | 68 | 13 631 (71) | 255 974 709 | 43 910 899 | 273 694 540 | 243 657 183 | 75 671 205 | 31 841 319 | 6 019 344 | 930 769 199 | 68 283 |
| 31 | KY | 75 | 10 666 (77) | 325 141 652 | 81 878 934 | 148 288 221 | 106 108 737 | 31 027 905 | 29 942 308 | 3 822 569 | 726 210 326 | 68 086 |
| 32 | RI | 9 | 1952 (78) | 37 554 817 | 13 643 995 | 31 631 554 | 38 925 537 | 13 501 | 4 904 563 | 1 059 369 | 127 733 336 | 65 437 |
| 33 | ND | 42 | 2209 (86) | 60 332 184 | 13 285 128 | 43 265 879 | 11 593 648 | 8 123 734 | 6 562 395 | 1 351 430 | 144 514 398 | 65 421 |
| 34 | SD | 45 | 2365 (84) | 50 913 789 | 0 | 37 633 916 | 21 239 834 | 3 851 014 | 37 357 468 | 1 322 664 | 152 318 684 | 64 405 |
| 35 | WV | 34 | 4361 (72) | 133 474 914 | 44 275 473 | 0 | 54 867 856 | 11 478 402 | 11 645 295 | 2 022 347 | 257 764 286 | 59 107 |
| 36 | OR | 46 | 5379 (75) | 47 136 973 | 23 197 435 | 0 | 87 689 383 | 141 517 904 | 9 691 992 | 2 684 124 | 311 917 811 | 57 988 |
| 37 | IA | 57 | 4886 (64) | 69 619 923 | 35 617 591 | 78 434 593 | 76 989 418 | 11 034 472 | 6 800 587 | 2 227 748 | 280 724 331 | 57 455 |
| 38 | PA | 138 | 28 202 (79) | 315 461 956 | 166 052 092 | 518 844 729 | 386 110 521 | 137 307 810 | 78 134 279 | 12 541 673 | 1 614 453 060 | 57 246 |
| 39 | DC | 6 | 1996 (65) | 7 522 807 | 11 142 173 | 35 571 604 | 42 043 729 | 14 159 289 | 1 786 627 | 1 057 730 | 113 283 958 | 56 755 |
| 40 | NM | 14 | 1562 (36) | 2 334 368 | 2 715 604 | 34 857 182 | 21 842 356 | 22 702 673 | 2 536 940 | 976 410 | 87 965 533 | 56 316 |
| 41 | NC | 53 | 11 150 (48) | 242 388 718 | 29 677 705 | 204 980 749 | 92 063 223 | 10 411 571 | 11 660 285 | 4 871 507 | 596 053 758 | 53 458 |
| 42 | NV | 10 | 1328 (18) | 5 085 107 | 4 222 296 | 31 825 095 | 12 624 086 | 7 083 997 | 7 777 128 | 634 385 | 69 252 094 | 52 148 |
| 43 | MD | 49 | 10 664 (87) | 3 227 788 | 4 103 342 | 181 926 832 | 279 126 803 | 32 435 361 | 24 596 270 | 5 147 613 | 530 564 009 | 49 753 |
| 44 | WA | 49 | 8249 (67) | 183 617 793 | 0 | 0 | 79 187 314 | 86 642 213 | 44 189 323 | 4 287 339 | 397 923 982 | 48 239 |
| 45 | HI | 16 | 2376 (87) | 41 120 538 | 13 264 603 | 20 680 687 | 12 500 173 | 15 975 280 | 7 897 546 | 887 751 | 112 326 579 | 47 275 |
| 46 | MT | 52 | 2540 (82) | 50 400 163 | 19 284 251 | 0 | 25 531 589 | 12 116 815 | 4 389 557 | 1 452 971 | 113 175 345 | 44 557 |
| 47 | MS | 35 | 3644 (37) | 35 040 120 | 10 791 590 | 38 550 114 | 51 469 703 | 14 241 918 | 8 481 152 | 1 243 191 | 159 817 788 | 43 858 |
| 48 | TN | 46 | 9191 (49) | 32 351 816 | 8 526 253 | 210 502 947 | 76 331 783 | 20 708 546 | 13 732 162 | 3 735 716 | 365 889 222 | 39 810 |
| 49 | WY | 10 | 410 (29) | 3 224 365 | 0 | 5 033 743 | 2 716 790 | 4 173 570 | 429 967 | 175 500 | 15 753 935 | 38 424 |
| 50 | AL | 26 | 3027 (21) | 3 112 345 | 848 311 | 44 221 252 | 9 438 908 | 33 064 257 | 2 873 770 | 991 062 | 94 549 904 | 31 236 |
| 51 | DE | 7 | 2229 (80) | 14 369 040 | 6 482 162 | 0 | 22 248 095 | 6 018 532 | 5 406 908 | 1 418 354 | 55 943 092 | 25 098 |
Abbreviation: FUTA, federal unemployment tax.
Analysis of data from nonprofit hospitals’ 2021 Medicare Cost Reports and American Hospital Association Survey. A detailed discussion of the methodology and data sources is provided in the eAppendix in Supplement 1.
States plus Washington, DC, ranked by total tax benefit per hospital bed.
Number of total nonprofit hospital beds refers to the total number of beds available for use by patients at the end of the reporting period (obtained from Cost Reports Worksheet S-3). The percentage in parentheses indicates the number of beds in all nonprofit hospitals divided by the number of beds in all hospitals, which included nonprofit, for-profit, and government hospitals and excluded non-Medicare–certified hospitals, such as hospitals operating under the US Department of Veterans Affairs or the US Department of Defense.
Total tax benefit per bed is equal to a state’s total tax benefit divided by total number of beds (ie, tax benefit and number of beds are summed across all hospitals within a given state).
Tax Benefit by State
In 2021, the average nonprofit hospital’s tax benefit was $78 570 (state median, $70 559) per bed and $113 (state median, $111) per capita nationwide. There were substantial variations across states: Massachusetts had the highest tax benefit per bed ($159 464) and Delaware had the lowest ($25 098); Massachusetts had the highest tax benefit per capita ($275) and Alabama had the lowest ($19) (Figure 1, Panels A and B; eTables 1 and 2 in Supplement 1). Thirty states had state and local tax benefit greater than federal tax–related benefit (Figure 1, Panel C), and 35 states had non-income–related benefit exceed income-related benefit (Figure 1, Panel D).
Figure 1. Nonprofit Hospital Tax Benefit in 2021 by State.
A, There are 2927 nonprofit hospitals in the sample. States are grouped into 4 quartiles based on their statewide total tax benefit per bed (the highest quartile has 12 states; all other quartiles have 13 states each). Table 2 provides detailed information for each state. B, States are grouped into 4 quartiles based on their statewide total tax benefit per capita. eTable 1 in Supplement 1 provides detailed information for each state. C, State/local tax benefit includes state income tax, sales tax, and property tax. Federal tax-related benefit includes federal income tax, charitable contributions, tax-exempt bond financing, and FUTA. eTable 2 in Supplement 1 provides detailed information for each state. D, Income-related benefit includes federal and state income tax. Non-income–related benefit includes sales tax, property tax, charitable contributions, tax-exempt bond financing, and FUTA. eTable 3 in Supplement 1 provides detailed information for each state. FUTA indicates federal unemployment tax.
Distribution of Tax Benefit
Nonprofit hospitals’ tax benefit was highly concentrated. When hospitals were ranked by their total tax benefit, 7% of hospitals (n = 212) accounted for half of the total tax benefit, with the top 1% (n = 29) accounting for 19% of the total tax benefit (eFigure 2 in Supplement 1). The remaining half of the tax benefit was shared among 93% of hospitals (n = 2715).
Income-related tax benefit is closely related to hospital income, whereas other tax benefits—primarily state and local sales tax and property tax—bore little relation. This distinction is important because it means that these significant state and local tax benefits accrue to nonprofit hospitals even when hospitals are operating at a loss (almost 30% of sample hospitals).
When ranked by net income (measured as total revenues minus total expenses reported on the Medicare Cost Reports), the top 1% of nonprofit hospitals accounted for 25% of total nonprofit hospital net income, comparable to their share of total income-related tax benefit (30%), but substantially higher than their share of tax benefit unrelated to income (7%) (Figure 2). In contrast, the bottom 90% of hospitals (n = 2635) accounted for approximately one-third of total income and one-quarter of income-related tax benefit, but two-thirds of other tax benefit.
Figure 2. Distribution of Nonprofit Hospital Tax Benefit in 2021, With Hospitals Ranked by Net Income.
There are 2927 nonprofit hospitals in the sample. Income-related tax benefit includes federal and state income tax. Non-income–related tax benefit includes sales tax, property tax, charitable contributions, tax-exempt bond financing, and federal unemployment tax. Net income is measured as total revenues minus total expenses reported on the Medicare Cost Reports. Total net income ($83.8 billion) is computed using only positive net income values.
Hospitals in counties with higher-than-average poverty rates accounted for approximately 60% of both total net income and total tax benefit (Table 3). Urban hospitals accounted for more of total net income (57% vs 43%) and more of total tax benefit (58% vs 42%) than rural hospitals. The largest hospitals (more than 223 beds) represented 25% of the sample, but accounted for 71% of total net income and tax benefit. Similarly, teaching hospitals only represented 34% of the sample, but accounted for approximately 72% of total net income and tax benefit.
Table 3. Distribution of Nonprofit Hospital Tax Benefit in 2021 by Hospital Characteristicsa.
| Characteristic | Total net income, $b | Percentage of total net income, % | Total tax benefit, $ | Percentage of total tax benefit, % | No. of hospitals | No. of beds | Total tax benefit per bed, $ |
|---|---|---|---|---|---|---|---|
| County poverty ratec | |||||||
| 1st quartile (lowest poverty rate) | 17 216 560 459 | 20.5 | 7 711 867 894 | 20.6 | 715 | 102 611 | 75 156 |
| 2nd quartile | 17 263 651 485 | 20.6 | 7 739 052 513 | 20.7 | 744 | 108 174 | 71 543 |
| 3rd quartile | 24 271 256 833 | 29.0 | 10 918 904 528 | 29.2 | 734 | 138 693 | 78 727 |
| 4th quartile (highest poverty rate) | 25 045 624 067 | 29.9 | 11 051 174 638 | 29.5 | 734 | 126 796 | 87 157 |
| Urban/rural locationc | |||||||
| Urban | 47 947 509 770 | 57.2 | 21 861 942 413 | 58.4 | 1455 | 293 000 | 74 614 |
| Rural | 35 849 583 074 | 42.8 | 15 559 057 159 | 41.6 | 1472 | 183 274 | 84 895 |
| No. of beds | |||||||
| ≤25 | 3 857 910 261 | 4.6 | 1 657 843 963 | 4.4 | 869 | 18 426 | 89 973 |
| 26-89 | 5 867 457 340 | 7.0 | 2 281 337 887 | 6.1 | 596 | 32 385 | 70 444 |
| 90-223 | 14 533 658 982 | 17.3 | 6 819 356 816 | 18.2 | 730 | 108 778 | 62 691 |
| >223 | 59 538 066 261 | 71.1 | 26 662 460 905 | 71.2 | 732 | 316 685 | 84 192 |
| Teaching status | |||||||
| Teaching hospital | 60 161 001 131 | 71.8 | 27 188 634 042 | 72.7 | 1001 | 317 870 | 85 534 |
| Nonteaching hospital | 23 636 091 713 | 28.2 | 10 232 365 530 | 27.3 | 1926 | 158 404 | 64 597 |
| Religious affiliation | |||||||
| Religious affiliation | 12 856 886 965 | 15.3 | 5 593 188 294 | 14.9 | 580 | 97 772 | 57 206 |
| Nonreligious affiliation | 70 940 205 879 | 84.7 | 31 827 811 278 | 85.1 | 2347 | 378 502 | 84 089 |
Analysis of data from nonprofit hospitals’ 2021 Medicare Cost Reports and American Hospital Association Survey. A detailed discussion of the methodology and data sources is provided in the eAppendix in Supplement 1.
Net income is measured as total revenues minus total expenses reported on the Medicare Cost Reports. Total net income ($83.8 billion) is computed using only positive net income values.
County and urban/rural status are collected from hospitals’ Medicare Cost Reports. Poverty-level data were obtained from the US Census website (see the eAppendix in Supplement 1 for details).
Discussion
Using methodologies consistent with current tax law and practices, this study estimated that US nonprofit hospitals received a $37.4 billion tax benefit in 2021, with more than half of the benefit directly attributable to state and local taxes: sales tax (24%), property tax (21%), and state income tax (10%). The tax benefit was highly concentrated, with 7% of hospitals accounting for half of the total tax benefit. Income-related tax benefit closely tracked hospital income. Nationwide, the tax benefit per bed and per capita varied across states and hospital characteristics. The largest hospitals, which accounted for 25% of the sample, received 71% of total net income and tax benefit.
The results of this study highlight the wide variation in tax benefit across states, its high concentration among a small number of hospitals, and the primary role played by state and local taxes. Therefore, policy efforts to strengthen nonprofit hospitals’ taxpayer accountability are likely to be more effective when pursued at local levels. Given the critical role of understanding tax benefit values in such efforts, state, local, and federal lawmakers should consider requiring nonprofit hospitals to disclose their estimated tax benefit. To the extent that they do, this study provides both a conceptual approach and a standard template for implementing such hospital reporting. The resultant transparency would enable local governments and stakeholders to take tailored and targeted approaches to ensure that nonprofit hospitals deliver sufficient charity care and other community benefit.
This study makes at least 2 important contributions to the valuation methodology of nonprofit hospitals’ tax benefit. First, study estimates, especially for state and local sales and property taxes, are consistent with current tax law and practices. For example, the study used hospital asset values rather than patient revenue when estimating property taxes. All federal and state tax laws were confirmed by relying on at least 2 sources. Second, the effects that assumptions have on tax benefit valuation were specified and details of each estimation step were provided. Therefore, the methodology can be applied to individual hospitals or hospital groups within the same or multiple jurisdictions, updated as laws change, and improved upon as better data sources become available.
Limitations
This study has limitations. First, consistent with the Joint Committee on Taxation and prior studies,15,16 it was assumed nonprofit hospitals would not change their behavior if they were not tax exempt. However, management might undertake tax-planning activities to reduce taxable income, such as shifting taxable income across years and entities.20 Estimates of sales tax and property tax benefit would be less affected by management’s tax planning due to the challenges in modifying actual purchases or altering a hospital’s location, as well as the fact that sales tax rates are generally consistent across purchase amounts and years. In addition, if nonprofit hospitals were taxable, they may shift their tax costs to patients and plan sponsors by raising prices, more actively engage in profit-maximizing activities, or lose certain privileges conferred by nonprofit status (eg, the 340B Drug Price Program), all of which could affect their taxable income.
Second, the study assumed hospitals would be taxed as corporations and estimated income-related tax benefit using federal and state corporate tax rates. However, evidence suggests that up to 45% of for-profit hospitals are owned by flow-through entities (eg, partnerships and limited liability companies) and individuals.21 Flow-through entities do not pay income tax, but their owners (ie, corporations or individuals) do. Individuals’ highest federal income tax rate is 37%, plus the 3.8% net investment income tax. Thus, income-related tax benefit could be greater than study estimates to the extent individual ownership is involved.
Third, data limitations prevented the study from estimating the benefit of exemption from numerous other taxes, such as federal and state excise taxes on utilities, communications, and fuel. Study estimation is also sensitive to the boundaries of the assumptions made (described in the eAppendix in Supplement 1), nonrecurring events for specific hospitals (eg, receipt of a large donation), and tax regulations in a given year. Considering all these assumptions together, the study’s $37.4 billion estimate should be viewed as a conservative lower bound for 2021.
Conclusions
This study estimates the financial benefit that nonprofit hospitals derive from their tax-exempt status and assesses how the benefit is distributed across state and local communities. The results highlight wide variations in nonprofit hospitals’ tax benefit across states and various hospital characteristics, the high concentration of tax benefit among a small number of hospitals, and the primary role played by state and local taxes. Therefore, policy efforts to strengthen nonprofit hospitals’ taxpayer accountability are likely to be more effective when pursued at local levels. The detailed standardized estimation road map provided in this study can be used by various stakeholders to estimate tax benefit for external valuation and reporting purposes, updated as laws change, and improved upon as better data sources become available.
eFigure 1. Composition of Nonprofit Hospital Tax Benefit ($37.4 Billion), 2021
eFigure 2. Concentration of Tax Benefit of U.S. Nonprofit Hospitals in 2021, with Hospitals Ranked by Total Tax Benefit
eTable 1. Nonprofit Hospital Total Tax Benefit Per Capita in 2021, by State
eTable 2. Comparison between State/Local Tax Benefit and Federal Tax-Related Benefit in 2021, by State
eTable 3. Comparison between Income-related Benefit and Non-income-related Benefit in 2021, by State
eAppendix 1. Summary of tax benefit definitions and details of the data sources and estimation methodology.
Data Sharing Statement
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Associated Data
This section collects any data citations, data availability statements, or supplementary materials included in this article.
Supplementary Materials
eFigure 1. Composition of Nonprofit Hospital Tax Benefit ($37.4 Billion), 2021
eFigure 2. Concentration of Tax Benefit of U.S. Nonprofit Hospitals in 2021, with Hospitals Ranked by Total Tax Benefit
eTable 1. Nonprofit Hospital Total Tax Benefit Per Capita in 2021, by State
eTable 2. Comparison between State/Local Tax Benefit and Federal Tax-Related Benefit in 2021, by State
eTable 3. Comparison between Income-related Benefit and Non-income-related Benefit in 2021, by State
eAppendix 1. Summary of tax benefit definitions and details of the data sources and estimation methodology.
Data Sharing Statement
