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August 8, 2022

Sustained focus on tax-exempt hospitals emphasizes need for detailed documentation of public benefit

  • A July 2022 study by the Tax Policy Center (Urban Institute & Brookings Institution) reveals that most public charities benefit little from federal tax exemption because they don’t generate income; however, as a group, IRC Section 501(c)(3) hospitals benefit significantly from federal tax exemption as they earn substantial income that would otherwise be taxed.
  • According to a July 2022 Wall Street Journal article, a recent analysis of charity care provided by hospitals found that tax-exempt hospitals provide less charity care than for-profits do; representatives from various hospital systems and industry groups explain their perspectives on the analysis.
  • Annual reporting on Schedule H of the Form 990 continues to be scrutinized not only by the IRS but also the general public. To fully report their community benefit and comply with IRC Section 501(r) and community benefit requirements, tax-exempt hospitals must continue to review their community benefit-related policies and procedures and routinely monitor their IRC Section 501(r) compliance.  These entities should also consider analyzing how the community benefit they provide compares to that provided by for-profit hospitals.

There is increasing focus on the benefit that hospitals exempt from federal income tax under IRC Section 501(c)(3) receive from federal tax exemption and the degree to which they pay that benefit forward by providing charity care to their communities.

Tax-exempt hospitals are subject not only to the community benefit standard set forth in Revenue Ruling 69-545, but also to the requirements of IRC Section 501(r), enacted as part of the Affordable Care Act. (For background, see Tax Alert 2015-0029.) Tax-exempt hospitals are required to annually report both their community benefit and 501(r) compliance to the IRS on Form 990, Schedule H, and their charity care to the Centers for Medicare and Medicaid Services (CMS) on the Medicare Cost Report. These reporting requirements promote transparency; both Form 990 and the Medicare Cost Reports are available to the public and have subjected tax-exempt hospitals to heightened scrutiny.

Two recent published studies illustrate a trend of reports and articles questioning the amount of community benefit provided by tax-exempt hospitals compared to the value of their tax exemptions and, in some cases, challenging their tax exemptions.

Tax Policy Center study

A July 2022 study by the Tax Policy Center (Urban Institute & Brookings Institution) documents the benefit that various categories of tax-exempt organizations receive from their federal income tax exemption. ("How Much Do Tax-Exempt Organizations Benefit from Tax Exemption?," by Nathan Born and Adam Looney, July 2022, Tax Policy Center.)

Based on figures from 2018, the study estimated "the value of income tax exemption for these sectors was $21.2 billion." The study further concluded that, although "[m]ost organizations do not benefit from tax-exemption because they produce no income … [h]ospitals and health systems, which earn profit from providing patient care, benefit the most from tax exemption, followed by institutions with endowment income that is not disbursed furthering exempt causes, and certain other large organizations that derive income from the services they provide."

The Tax Policy Center study found that "[t]ax-exempt hospitals and cooperative hospital service organizations account for both the largest amount [(41%)] and largest share [(62%)] of the total expenditure for charitable organizations." Approximately 94% of tax-exempt hospitals' income "is attributable to program service revenue, which is largely revenue paid by patients or insurers for health services. No other organization category receives a greater proportion of their income from program services than do hospitals."

The Tax Policy Center notes that "across all types of charitable organizations, the gap between how much they spend on program services and how much they charge for those services provides a measure of the net benefits to the people [an organization] serves." It concludes that public charities "provide the most NCS [net charitable services — the difference between program service expenditures and revenues], and hospitals provide the least NCS … charg[ing] $117 billion more for the services they provide than [they spend] on the services themselves … Tax-exempt hospitals are the only type of organization as a sector that earn positive net income from program services," the study states.

Wall Street Journal analysis

A recent Wall Street Journal article highlights results from an analysis of charity care provided by tax-exempt and for-profit hospitals in the United States (WSJ analysis) as reported in Medicaid Cost Reports submitted to CMS. The WSJ analysis concluded that charitable entities appear to have provided less charity care than their for-profit counterparts for fiscal years ending in 2019—2021. ("Big Hospitals Provide Skimpy Charity Care — Despite Billions in Tax Breaks," by Anna Wilde Mathews, Tom McGinty and Melanie Evans, The Wall Street Journal, July 25, 2022.)

According to the WSJ analysis, tax-exempt hospitals "wrote off in aggregate 2.3% of their patient revenue on financial aid for patients' medical bills," while "[t]heir for-profit competitors … wrote off 3.4%." Both categories of hospitals "fell well short of the share of patient revenue that government hospitals, such as those owned by cities and counties, wrote off as financial assistance, which was 4.7% in the most recent year," the article states.

Spokespersons for tax-exempt hospitals quoted in the article noted that IRC Section 501(c)(3) hospitals provide "many other outlays for community benefit" beyond those reflected in the WSJ analysis. Others pointed out that "the national charity-care figures don't provide a full picture, because some states expanded their Medicaid programs under the Affordable Care Act, reducing the uninsured population and resulting in less need for free care."


As noted, the methodology of the WSJ analysis and similar studies (e.g, by Lown Institute (see 2022, Fair Share Spending - Lown Institute Hospital Index (, Pew Trust (see Some Nonprofit Hospitals Aren't Earning Their Tax Breaks, Critics Say | The Pew Charitable Trusts (, have been criticized by some for focusing on only certain categories of community benefit (e.g., financial assistance) and ignoring or dismissing other categories (e.g., research, education, cost of providing care to Medicaid patients, community health improvement services). Nevertheless, this continued public scrutiny underscores the need for continued internal review of exempt hospitals' community benefit-related policies and procedures and for routine monitoring of compliance with IRC Section 501(r), so that tax-exempt hospitals can both fully report their community benefit and comply with community benefit and 501(r) requirements. These entities should also consider analyzing how the community benefit they provide compares with community benefit provided by for-profit hospitals, as state regulators, watchdog groups, press, and others in the general public likely will continue to ask questions about community benefit and challenge the validity and/or efficacy of a hospital's tax exemption if its community benefit seems relatively low.

Please contact your Ernst & Young LLP professional for further information.



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For additional information concerning this Alert, please contact:
Exempt Organization Tax Services
   • Stephen Clarke (
   • Kristen Farr Capizzi (
   • Cal Hoke (