Healthcare Systems and Controversial Tax Breaks: Everything You Need to Know

• Understand the issue of tax-exempt hospitals.
• Learn the financial implications of tax breaks for non-profit hospitals.
• Examine the history and context of current tax-exempt statuses.

Just about everyone has an opinion on the healthcare system in the United States. What many Americans don’t realize, however, is that there’s another tangential battle going on when it comes to healthcare facilities and tax breaks themselves.

Property tax breaks – specifically for non-profit hospitals and clinics – are common. In recent months and years, though, many have questioned whether or not these facilities are paying their fair share. One April 2023 government report notes that many hospitals that are currently tax-exempt have not met required standards for years.

Specifically, Jessica Lucas-Judy, Director of Strategic Issues for the Government Accountability Office (GAO), wrote, “IRS officials told us that the agency had not revoked a hospital’s tax-exempt status for failing to provide sufficient community benefits in the previous 10 years.”

Here, we tell you everything you need to know about this ongoing issue.

The Disparity In Property Taxation

Every year, homeowners like Terry Taylor-Allen and her husband, William, dutifully pay property taxes. The Allens are proud of their bungalow in Charlotte, North Carolina's Dilworth neighborhood. However, a stark contrast unfolds next door, where houses owned by The Charlotte-Mecklenburg Hospital Authority (Atrium Health) enjoy a tax-free status, despite substantial revenue.

This exemplifies a somewhat peculiar fiscal dynamic that exists from coast to coast.

Tax Exemptions For Healthcare Giants

Atrium Health, a healthcare system that boasted $8.9 billion in revenue in 2021, benefits from a property tax exemption due to its status as a hospital authority. They are not alone – this is a tax break given to healthcare facilities throughout the country. This exemption even extends to properties unrelated to medical purposes.

As North Carolina Healthcare News pointed out, a tax-exempt Atrium property in Cornelius, NC houses a PDQ Tenders chicken restaurant. While patrons still pay sales tax on their meals, Atrium doesn’t pay any property taxes for the land the fast food shop sits on.

This narrative is mirrored by Novant Health, a nonprofit hospital that receives tax breaks solely on properties deemed charitable. “If you think about the cumulative total of everything (the hospitals) have taken off the tax rolls over the years, that’s a Godzilla number,” Taylor-Allen told the news outlet. “Think about all the school needs and how much that money could help low-income people who don’t have health care, housing, or food.”

Cumulative Financial Impact

In 2020, non-profit hospitals received an estimated $28 billion in tax breaks. This was an average of $9.4 million per hospital. Many questions have arisen, however, about how much true “non-profit” work these facilities are doing. A report noted that the hospitals in question “spent only an estimated $16 billion on charity care” – that’s a glaring $12 billion difference.

Per North Carolina Health News’s analysis of that state specifically, tax-exempt properties assessed at over $2.4 billion in Mecklenburg County alone. If fully taxed, Atrium and Novant would have ranked as the county's fourth- and fifth-largest property taxpayers in 2022. This would contribute an additional $23 million to the city and county tax base.

Comprehensive Tax Break Analysis: A National Dialogue

Beyond property taxes, hospitals nationwide benefit from income tax waivers, state sales-tax refunds, and the ability to raise money through tax-free bonds.

One specific example is the property tax exemption for nonprofit hospitals in New York City. They are often granted relief from property taxes under [Section 420-a of the New York Real Property Tax Law](https://furmancenter.org/coredata/directory/entry/420-a-tax-incentive#:~:text=The 420-a Tax Incentive, used as low-income housing.). This exemption is contingent on hospitals meeting certain criteria related to providing community benefits and charity care.

Historical Precedence: The National Origin of Hospital Tax Exemptions

The historical origin of hospital tax exemptions dates back over a century. It was a nationwide initiative to ensure service to the poor. The IRS stipulates charitable hospitals qualify for tax exemption based on public interest. They must also focus on community benefits and public welfare, not private interests.

The National Library of Medicine (NLM) points out:

Before 1969, the IRS specified that to maintain tax-exempt status, hospitals were required to provide charity care. While facilities were given latitude to define the amount of care required, the obligation was defined under the law. In 1969, however, the IRS replaced this relatively defined obligation with a more ambiguous standard; Revenue Ruling 69-5455 eliminated the obligation to furnish care on an uncompensated basis.

Hospitals across the nation exist in diverse forms; for-profit entities operating like any other corporation, nonprofit entities eligible for property tax exemptions for charitable purposes, and hospital authorities deemed government entities exempt from taxation. This diversity in hospital types is a national phenomenon with implications for the entire healthcare system.

Nonprofit entities, specifically, have faced scrutiny in recent years. The NLM notes that at least 45 class action lawsuits have been filed over the last several years. There are about 2,900 nonprofit hospitals in the United States right now, representing half of all such facilities.

A Growing National Debate

As hospitals evolve into multi-billion-dollar enterprises, concerns about resembling for-profit companies and the need to justify tax-exempt status transcend regional boundaries. The financial heft of hospitals, typified by Atrium's $12.9 billion and Novant's $7.4 billion revenues, raises questions about the adequacy of public benefits, especially in light of substantial CEO compensations and reserves exceeding $800 million each.

Atrium's assertion of making voluntary payments, despite being exempt from property taxes, casts hospitals as significant contributors to communities nationwide. The debate over tax exemptions transcends state boundaries, with over a dozen states contemplating or enacting laws to enhance transparency regarding the community benefits provided by tax-exempt hospitals. Similarly, bipartisan concern fuels a national conversation about the need for comprehensive healthcare system reform.

Hospital Accountability Nationally: The Future

As hospitals, especially nonprofit entities, face intensifying scrutiny nationwide, the road ahead remains uncertain. The demand for hospitals to provide more substantial community benefits becomes a national imperative. Hopefully, this will prompt a nuanced dialogue about the future of tax exemptions in the healthcare landscape. The imperative is magnified as the entire nation grapples with issues of medical debt and access to care, emphasizing the need for hospitals to give back as much as they receive on a grand scale.

If you have questions or need assistance, schedule a consultation with a Fiducial advisor at https://fiducial.com/consultations.

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