Indiana’s new law sparks debate over hospital tax exemptions
Hospital tax exemptions have been under recent scrutiny for many health care organizations. To that end, Indiana‘s governor just signed a law revoking tax-exempt status for hospitals and health systems if their aggregate patient charges exceed the state’s average prices, effectively capping patient revenue.
Taking a step back to understand how we got here, in 2020, the value of tax exemptions for nonprofit hospitals was estimated at $28 billion, with $14.4 billion in federal exemptions and $13.7 billion in state and local exemptions.
At the same time, the value of charity care was $16 billion, highlighting a $12 billion gap between tax benefits and free or discounted care provided to patients. Recent data shows that nonprofit hospitals have steadily increased their community benefit over the past decade, significantly surpassing the financial value they receive from tax exemptions. Despite improvements, a disparity between charity care, a subset of community benefit, and the value of tax exemption continues.
All the while, medical debt has continued to rise. A Gallup poll revealed that 12% of U.S. adults borrowed an estimated $74 billion in the past year to cover health care costs for themselves or a household member.
According to the U.S. Census Bureau, the average medical debt per household rose to $18,600 in 2021, up from $12,430 in 2017. Disparity between tax exemptions and charity care, coupled with rising medical debt, has drawn the attention of federal and state legislators.
Federal legislators have long focused on hospitals justifying their tax-exempt status and providing charity care, enacting various legislation such as IRC 501(r) and IRS compliance initiatives. Earlier this year, tax exemption was highlighted in the House Ways and Means Committee’s reconciliation report. But despite ongoing scrutiny, no new laws or guidance related to hospitals and community benefit reporting have passed—until now, with Indiana’s announcement.
Currently, at least 25 states require community benefit reporting, with at least five imposing minimum thresholds. Indiana’s new law could signal a broader trend of states taking control of charity care and medical costs to ensure hospitals justify their tax exemptions through community benefits or reduced patient costs.
The takeaway
This development is concerning for nonprofit hospitals striving to provide quality care amid tight operating margins and reimbursement pressures. To better position themselves for future legislation, hospitals can benchmark public data from pricing transparency and Form 990 to gauge their performance against peers and engage in rational pricing studies.
By adopting these measures, nonprofit hospitals can not only demonstrate their commitment to transparency and community benefit but also strengthen their case for maintaining tax-exempt status in an increasingly scrutinized health care landscape.
Learn more about what’s happening in health care in our industry outlook.
