States Cracking Down on Nonprofit Hospitals’ Tax-Exempt Status

By Consumers for Quality Care, on July 19, 2023

A recent Pennsylvania state court decision to revoke the tax-exempt status of a nonprofit hospital signals a shift in how states treat nonprofit hospitals that fail to provide adequate charity care and community benefits, according to KFF Health News.

Before 2018, Pottstown Hospital in Pennsylvania paid federal, state, and property taxes, which helped fund the Pottstown School District. In 2018, health care system Tower Health took over the hospital and converted it into a tax-exempt nonprofit entity, causing the school district to lose out on roughly $900,000 per year in tax revenue.

The school district brought a lawsuit against Pottstown Hospital and Tower Health for operating as a for-profit entity despite its legal status as a charitable organization. Earlier this year, Judge Christine Fizzano Cannon agreed with the school district, concluding that Tower Health should not be eligible for property tax exemptions. Judge Fizzano Cannon asserted that Tower Health acted more like a business, rewarding executives with “eye-popping” compensation not in line with charitable operations.

The case could lead to other states examining their nonprofit hospitals and the tax-exempt status they benefit from. Ge Bai, PhD, a Professor of Accounting at Johns Hopkins Carey Business School and Professor of Health Policy & Management stated that, “the ruling sent a warning shot to all nonprofit hospitals, highlighting that their state and local tax exemptions, which are often greater than their federal income tax exemptions, can be challenged by state and local courts.”

The Pottstown case highlights the increasing criticisms of America’s nonprofit hospitals, and the amount of tax breaks these hospitals receive. For these nonprofit hospitals to keep their tax-exempt status, they must provide free or reduced charity care and community services. But there are no guidelines detailing how much charity care must be provided.

Nonprofit hospitals have been found to spend less on charity care than for-profit hospitals, and studies show the amount spent on charity care by nonprofit hospitals is often less than the amount these hospitals receive in tax breaks as a result of their tax-exempt status. A study released last month by Health Affairs found that even as nonprofit hospitals saw their profits increase and their cash reserves grow, they money they spent on charity care actually decreased.

This issue has received more attention in recent years, and states are starting to act. Oregon, Illinois, and Utah have passed legislation to expand community benefit spending as well as increase transparency on charity care services. There has also been action at the federal level with the House Ways and Means Committee holding a hearing back in April. 

Nonprofit hospitals must uphold their end of the bargain when it comes to serving their communities, and lawmakers and regulators must hold them accountable when they fail to do so.