The 'Non-Profit' Hospital Industrial Complex

Large tax breaks, tiny community benefit.

Photo credit: L

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Of the more than 5,000 general hospitals that serve patients in the United States, nearly 60 percent are non-profits, meaning they are exempt from many forms of taxation. A study last year pegged the total of those tax exemptions at about $28 billion in 2020 between the state and federal level.

And that number is growing. Over the next ten years, federal tax exemptions for non-profit hospitals alone will total about $260 billion, and then more at the local, state, or county level, where non-profits often don’t have to pay sales or property taxes, among others.

In return for those tax benefits, non-profit hospitals are supposed to provide benefits to the local community, such as care for those who can’t afford it or services that aren’t available elsewhere. The trade is, essentially, that non-profit hospitals pay no taxes in return for providing the sort of services that might be funded by the public otherwise.

But non-profit hospitals are not keeping up their end of the bargain. For years now, researchers have found what they’ve dubbed a “fair share deficit” — the gap between what non-profit hospitals receive in tax exemptions versus the community benefits they pay out in exchange. This year, the IRS announced that it is going to audit 35 non-profit hospitals for compliance with tax-exemption rules.

Though we don’t yet know which 35 hospitals are under scrutiny, any movement to take a closer look at non-profit hospitals is good news for taxpayers, as some are clearly non-profit in name only.

Indeed, loads of studies have found that, in many ways, non-profit and for-profit hospitals are indistinguishable aside from their tax status. Seven of the 10 most profitable hospitals in the country in a 2016 study were non-profit. In 2019, non-profit hospitals “held more than $283 billion in stocks, hedge funds, private equity, venture funds and other investment assets,” according to KFF Health News, and they’re increasingly consolidating and looking for private equity investments.

Consider the University of Pittsburgh Medical Center, a non-profit hospital conglomerate more commonly known as UPMC, which has gone on a merger spree not just in Pennsylvania but across the world. It now owns facilities in Ireland, Italy, and Croatia, and has been leasing a $50 million corporate jet to fly its executives to fancy beach locales, all while being subsidized by federal and Pennsylvania state taxpayers. (See the first update below for more interesting news on UPMC.)

Most importantly for our purposes here, 77 percent of non-profit hospitals spend less on charity care and community spending than the value of their various tax exemptions, resulting in a $14.2 billion deficit between what the public is spending to subsidize those hospitals and the benefits it’s receiving. The Lown Institute, which calculated that number, pointed out that $14.2 billion is “enough to erase the medical debts of 18 million Americans or rescue the finances of more than 600 rural hospitals at risk of closure.”

If you want to see a list of the hospitals with the best and worst fair share deficits, you can click here. And while the amount claimed in non-profit hospital tax exemptions is growing — it increased by nearly $10 billion between 2011 and 2020 — the amount spent on community benefits has remained stagnant.

To be fair, part of the issue is that the rules around what qualifies as legitimate community benefit spending are maddeningly vague, giving hospital executives ample wiggle room to say they’re putting money into the community when they’re not. In a 2020 report, the Government Accountability Office (GAO) noted that the standards for what constitutes “community benefit” are a mess, and have been since the late 1960s, when that standard came into vogue.

Still, GAO noted that, in its own appraisal of IRS records, it found 30 non-profit hospitals that reported no community benefit spending at all — so no matter what the standard was, they weren’t meeting it. And to make matters worse, “while IRS is required to review hospitals' community benefit activities at least once every 3 years, it does not have a well-documented process to ensure that those activities are being reviewed.”

So this is a boondoggle that implicates federal and state policymakers and agencies, and that trickles down into local communities in the form of fewer public resources and less health care — which, ultimately, is the life and death thing that really matters.

Prior to the IRS announcing its audit this year, some local governments have gone it alone. Most notably, Pittsburgh launched an inquiry into tax-exempt property across the city, which clearly implicates UPMC, as I wrote here.

I’ll keep tabs on these efforts and report back, but in the meantime, know that, even if you see “non-profit” in your local hospital’s name or description, it might not be anything of the sort.

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UPDATE/SHAMELESS SELF-PROMOTION: Speaking of UPMC, the Department of Justice this week filed a statement of interest in a class action lawsuit alleging that UPMC used its power and a slew of anticompetitive tactics to drive down wages and working conditions across Western Pennsylvania. My organization, the American Economic Liberties Project, put out a report last year explaining how UPMC built its monopoly in Pennsylvania and detailing the potential policy response. I talked about the case on CBS’ Pittsburgh affiliate, which you can watch here.

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UPDATE II: I’ve written several times about algorithmic price-fixing in rental housing markets and what policymakers are doing to respond. San Francisco, California, last month became the first city to ban the use of price-fixing software to determine rents, and now both Philadelphia, Pennsylvania, and San Jose, California, have similar legislation pending before their respective city councils.

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SIMPLY STATED: Here are links to a few stories or reports that caught my eye this week.

• Over the last three decades, monopoly electricity utilities have overcharged American consumers by an average of $5 billion annually.

• The attorney general of Arkansas is suing YouTube, Google, and their parent company Alphabet, alleging that they’ve intentionally made their products addictive to children.

• South Dakota legislators are considering age verification rules for app stores and mobile devices.

• The Michigan legislature has approved a new tax break for data centers that will last 30 years and cost up to $90 million.

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— Pat Garofalo