Assessing the Tax Impacts and Community Benefits of Nonprofit Hospitals with IMPLAN

U.S. nonprofit hospital governance has been criticized by media, think tanks, and academic health policy literature since the passage of the 2010 Affordable Care Act (ACA), which formalized the requirement for nonprofit hospitals to provide community benefits to maintain their nonprofit (501(c)(3)) status (Bai et al., 2021). Major media criticisms of nonprofit hospitals have included medical debt collection practices (Evans & Mathews, 2021), bias toward expanding into wealthy places (Evans et al., 2022), patterns in charity care provision (Mathews et al., 2022), and supposed failure to target community benefit spending toward local communities (Ofri, 2020). Think tanks (Lowen Institute, 2023) and health policy scholars (Bai et al., 2021; Bruch & Bellamy, 2021) have argued that nonprofit hospitals are failing to provide appropriate levels of charity care and community benefit services. However, criticisms of nonprofit hospital tax exemptions and community benefit activities concern multiple moving parts: concerns about which types of nonprofit hospital activity should constitute community benefit activity, the supposed burden of nonprofit hospital tax exemptions for local and regional governments, and the limitations faced by nonprofit hospitals in providing community benefits.

We propose that an economic development perspective can help to enrich this debate by highlighting the dual roles of nonprofit hospitals as economic anchors and providers of community benefit spending. We use eight IMPLAN models of nonprofit hospitals located in small and medium metropolitan statistical areas (MSAs) as a heuristic to explore three research questions:

How does a region's economic structure influence the net tax revenue impacts of nonprofit hospitals?

Findings

To contribute an economic development-oriented response to criticisms of nonprofit hospital tax exemptions and community benefit policies, we created two sets of impact models. Hospitals included are located in four small or medium MSAs ranging in population from 102,180 to 329,128, located in the U.S. West, South, Midwest, and Northeast. The size of metropolitan regions fits well with the requirements and limitations of economic impact analysis, while the selected hospitals offered similar baskets of services. We construct these models using Internal Revenue Service (IRS) Form 990 and IRS Form 990 Schedule H data to demonstrate how tax and economic impacts of nonprofit hospitals can be affected by regional contexts.

From our results, we highlight three insights relevant to the ongoing debate about nonprofit hospital tax exemptions and community benefit activity:

Nonprofit hospital tax revenues and tax exemptions can vary considerably from region to region, primarily due to the economic structure of a given metropolitan region. In our models, regional and local tax revenues ranged between 16.68% and 66.51% above the cost of regional and local tax exemptions (see Tables 1 and 5), suggesting that the spatial and economic structure of metropolitan economies complicate the fulfillment of the IRS's Community Benefit Standard.

OPEN IN VIEWER

Table 1.

Estimated Net Tax Revenues (Estimated Tax Revenues Subtracted by Estimated Cost of Tax Exemptions) Sustained by Four Nonprofit Hospitals, Denominated in 2019 USD, Rounded.

	Net federal tax revenue	Net state tax revenue	Net regional a tax revenue
Western Medical Center	$99,702,414	$28,093,921	$5,807,490
Midwestern Medical Center	$31,337,689	$5,720,528	$484,620
Southern Medical Center	$218,236,669	$23,237,536	$18,574,855
Northeastern Medical Center	$27,011,618	$4,545,589	$1,525,335

Note. Authors’ analysis of IRS Form 990 Schedule H data.

^a

County government, subcounty government, and special district tax revenues summed together.

Our findings indicate two important policy insights regarding debates around nonprofit hospital tax exemptions and community benefit spending. While nonprofit hospitals do produce significant tax revenues for their host regions, the benefits of their revenues disproportionately flow to federal and state levels of government, when compared to the costs of tax exemptions imposed by hospitals’ nonprofit status. Also, community benefit spending, particularly uncompensated Medicaid services and financial assistance, sustains important economic impacts for their host regions.

Literature Review

In our study, we group U.S. hospitals by their tax status: nonprofit hospitals, for-profit (investor-owned) hospitals, and public (government) hospitals. Nonprofit hospitals, which account for 58% of short-term acute hospitals (Bai et al., 2021), receive a tax exemption from the IRS in exchange for adhering to the IRS's Community Benefit Standard. Community Benefit Standard criteria for nonprofit status includes offering services for all patients capable of paying for services, providing charity care (financial assistance for care and free or discounted services), providing uncompensated Medicaid and means-tested care, maintaining a board of directors representative of the hospital's community, foregoing profit by reinvesting revenues into facility and service improvements, and investing in medical education and research (Internal Revenue Service, 2023). On their tax forms (Form 990 Schedule H), nonprofit hospitals list “Financial Assistance and Certain Other Community Benefits at Cost,” by categories labeled Financial Assistance at Cost; Uncompensated Medicaid (net expenses); Costs of Other Means-Tested Government Programs; Community Health Improvement Services and Community Benefit Operations; Health Professions Education; Research; and Cash and In-Kind Contributions for Community Benefit (Internal Revenue Service, 2022). State governments can also play an important role in regulating Community Benefit Standards by mandating additional standards and requiring detailed reporting, with state-level mandated reporting having an association with higher community benefit expenditures from nonprofit hospitals. Prior research shows that state mandates are associated with higher community benefit spending (as a share of total hospital expenditures­) by nonprofit hospitals—9.1% compared to 7.2% in states without these requirements (Zare et al., 2023).

Criticism of nonprofit hospitals’ tax exemption and community benefit practices can be broken down into two categories: (1) criticism of the level of nonprofit hospital spending on community benefit activities and (2) criticism of the activities nonprofit hospitals use to fulfill the Community Benefit Standard, particularly regarding nonprofit hospitals’ provision of benefits for the local and regional communities in which they operate.

Critics have argued that nonprofit hospitals tend to hold weak commitments to community benefit activities. Nonprofit hospitals are legally and normatively expected to provide community benefit and charity care spending, particularly for lower socioeconomic status communities. The expectation that nonprofit hospitals expend a share of their total revenue on community benefit spending was further codified in the 2010 ACA, which emphasized that nonprofit hospitals should produce “benefits to a class of persons that is broad enough to benefit the community” (Internal Revenue Service, 2023). This mandated annual reporting of community benefit spending to the IRS began in 2014. Prior to and after the implementation of the ACA's codification of community benefit spending as a prerequisite for maintaining nonprofit status, the bulk of nonprofit hospitals’ community benefit spending went toward funding clinical care (Young et al., 2013). Post-ACA, between 2012 and 2019, nonprofit hospitals’ overall operating profits and cash reserves rose by an average of $99 million (68%) compared to for-profit hospitals’ rise of $79 million (78%), yet their community benefit spending did not rise (Jenkins & Ho, 2023).

Scholars tracked the impact of the ACA on nonprofit hospital community benefit activities with mixed findings. Post-ACA, nonprofit hospitals’ community benefit spending did not change appreciably and the increases that occurred generally took the form of discounted charity care (Bai et al., 2022). State-level Medicaid expansions were associated with reductions in uncompensated Medicaid and means-tested care, which did not translate into increased community benefit spending (Dranove et al., 2016). Moreover, in states with specified minimum charity care provision requirements, nonprofit hospitals’ community benefit spending remains low overall, but there is evidence that these policies induce greater charity care among hospitals with the lowest levels of charity care provision (Rothbart & Yoon, 2021). In states where the ACA helped reduce uncompensated Medicaid costs, analysts found that other community benefit spending categories did not increase (Stoecker et al., 2020; Young et al., 2018). Another analysis found that smaller nonprofit hospitals are more likely to provide high rates of charity care, while larger nonprofit and for-profit hospitals do not differ significantly from one another in their rates of charity care provision (Bruch & Bellamy, 2021).

Academic and think tank-based critics have argued that charity care deserves more weight when judging community benefit performance than Medicaid expenses and medical education and research, which tend to constitute most of nonprofit hospitals’ community benefit spending. Bai and colleagues found that nonprofit hospitals did not outperform their for-profit and public counterparts in terms of charity care spending. In fact, a key finding was that “in 2018, among Medicare-certified general acute care hospitals, nonprofit hospitals provided the lowest aggregated charity care per dollar of expense and government hospitals had the highest percentage of hospitals with charity-care-to-expense ratios of less than 1 percent” (Bai et al., 2021, p. 633). Based on these findings, the authors advocated for greater transparency and reform of state-level charity care standards for all three types of hospitals. The American Hospital Association (AHA) responded in a press release, arguing that nonprofit hospitals invest considerable time and effort into enrolling patients into Medicaid specifically because continuous Medicaid coverage for patients is more effective for ensuring health care access than charity care. Additionally, the AHA highlights the role played by federal subsidies for hospitals in aiding the affordability of prescription drugs for patients (Hatton, 2023).

A more public-facing round of debate about community benefit spending emerged in the late 2010s in academic, media, and think-tank sources. In a 2018 article, a team of health economists found that 62% of nonprofit hospitals had community benefit spending that exceeded the value of their tax exemptions (Herring et al., 2018). This was corroborated by a 2022 analysis produced by Ernst & Young, which estimated that nonprofit hospitals’ community benefit spending exceeded the value of nonprofit hospitals’ tax exemptions by $86 billion in 2019 (Ernst & Young, 2022). A competing analysis produced by the Lowen Institute, using 2020 data, found that 77% of all U.S. nonprofit hospitals spend less on community benefit spending than the value of their tax exemptions, resulting in an approximate community spending deficit of $14.2 billion (Lowen Institute, 2023). Subsequent debate between the AHA and its critics has concerned which types of community benefit spending should be counted in analyses (Pollack, 2022), with uncompensated Medicaid and means-tested spending being a major target of nonprofit hospital critics.

Many of the criticisms put forth by academic and think-tank sources became circulated through media coverage in The Wall Street Journal and The New York Times. UCLA law scholar Jill Horwitz argued against many of the more aggressive criticisms, claiming that nonprofit hospitals are being unfairly targeted as responsible for system-wide flaws in the U.S. health care system:

“Unfortunately, nonprofit hospitals cannot fix this vast, national problem. On average, nonprofit urban hospitals have long experienced annual operating losses. Increases in supply and labor costs have made things worse even as government subsidies during the pandemic helped keep hospital doors open. Imposing these free-care requirements on the average community hospital could be financially devastating, even more so for rural hospitals. Indeed, even profitable nonprofit hospitals do not have the resources to fill this gap” (Horwitz, 2024).

This touches on an important aspect of nonprofit hospitals’ relationship with their local and regional communities, which we argue deserves greater attention in debates about tax exemptions and community benefit spending: their dual role as providers of community benefits and their role as important economic actors (Fleming, 2023). An economic development perspective on nonprofit hospitals can highlight the tax and economic windfalls of nonprofit hospital operations, while accounting for the structural limitations faced by these institutions.

In this study, we use economic impact analysis to demonstrate crucial relationships between nonprofit hospitals and their host regions, particularly regarding tax revenue that nonprofit hospitals produce despite their tax exemptions and the economic importance of community benefit activities. This can fill a gap in the literature by bringing an important economic development perspective to the scholarly debate about the role of nonprofit hospitals in the communities and regions that host them. Also, this paper offers a novel application of economic impact analysis. Studies of nonprofit hospitals that use economic impact analysis have usually been produced as grey literature reports by consultants and think tanks. Often, these studies are a full accounting of all economic impacts generated by a specific hospital or hospital system (Silverlode Consulting, 2021) or the economic impacts of all hospital activity across a broader geographic region, such as an entire state (Oliver et al., 2017). However, research question- or hypothesis-driven studies using these methods have been less common.

Data

We derive employment, employee compensation, and total expenses data for four nonprofit hospitals from 2019 IRS Form 990 and IRS Form 990 Schedule H forms (Internal Revenue Service, 2022) located in four small-to-medium MSAs. Each institutional model is generated using 2019 nonprofit hospital employment, employee compensation, and total expenses data as inputs, which are modeled within the broader regional economy of each hospital. IMPLAN's models of regional economies use U.S. Census Bureau, U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS), and U.S. Department of Agriculture (USDA) data sources (IMPLAN Group LLC, n.d.) (Table 1).

Data on hospital behavior are derived from IMPLAN's Social Account Matrix, which uses federal industrial, commercial, and household economic data to model a typical hospital's service and commodity spending (Clouse, 2021a), drawing from 290 types of services and commodities. The spending patterns of specific industries shift year over year. Per 2019 data, the largest recipients of hospital spending were insurance (12.16%), real estate services (9.37%), employment services (7.26%), management and consulting services (4.6%), and legal services (4.01%). Most other services and commodities, including health care equipment, labor, and facilities costs, were spread out among the other types of commodities, services, and capital spending. We judged IMPLAN's spending pattern assumptions to be realistic, with the large shares of spending on professional and employment services representing the influence of the Baumol Effect on health care spending patterns. We deemed IMPLAN's spending patterns to be workable for both nonprofit and for-profit hospitals. While differences in service mix have been found between nonprofit and for-profit hospitals, they have usually concerned the relative profitability of services provided by hospitals, with capital and labor spending having similar patterns at both types of institutions (Horwitz, 2005). The four hospitals selected for analysis do not specialize in specific forms of care and offer a typical basket of services, such as primary care, trauma and emergency care, and common types of specialist physician services.

Modeling Four Nonprofit Hospitals in Four Different Small-to-Medium MSAs

We present four case studies of economic impact analyses of nonprofit hospitals’ tax exemptions, tax revenues, and community benefit spending within small and medium-sized metros in the United States (see Table 2). Small and medium-sized MSAs are a better fit for economic impact analysis than larger MSAs. Also, literature on anchor institutions and community benefit often favor studies located in larger MSAs, despite hospitals serving as important anchor institutions for small and medium MSAs as well.

OPEN IN VIEWER

Table 2.

Hospitals and Community Characteristics, 2019.

	Metro statistical area population	Proportion of Black residents	Proportion of white residents	Proportion of Latinx residents	Share of residents age >65	Median household income	Uninsured rate (%)	Poverty rate (%)
Western Medical Center (Western MSA	219,186	1.5%	72.1%	16.4%	20.0%	$48,634	9%	15.95%
Midwestern Medical Center (Midwestern MSA)	261,983	1.9%	89.8%	4.6%	23.9%	$64,277	6%	8.24%
Southern Medical Center (Southern MSA)	329,128	11.4%	75.8%	8.0%	19.4%	$41,794	18%	18.5%
Northeastern Medical Center (Northeastern MSA)	102,180	3.9%	76.7%	5.0%	14.8%	$56,539	6%	18.89%
National average	–	12.8%	59.3%	18.5%	16.8%	$69,560	11.1%	14.2%

Note. U.S. Census Bureau, American Community Survey (2015-2019)

The case study hospitals are pulled from four census regions in four states. Within these states, nonprofit hospitals comprise between 37.4% and 73.1% of all hospitals, compared to the national scale, where nonprofit hospitals constitute 58% of non-federal, short-term acute hospitals (Bai et al., 2021). The metropolitan regions ranged in population from 102,180 to 329,128 residents in year 2019. Three of the four regions had populations older than the national average. All regions had populations with lower Hispanic and Black populations than the national average, although the Southern MSA's Black population was close to the national average, as was the Western MSA's Hispanic population. The Southern MSA has a substantially higher uninsured rate than the other metros, likely due to it being in a non-Medicaid expansion state with an above-average poverty rate. Because prior research has shown that nonprofit hospitals in service areas with higher uninsured rates have higher community benefit spending, we also provide the adult uninsured rate.

The four modeled nonprofit hospitals vary in operational size, number of employees, and ratio of labor expenses to nonlabor operating expenses. There is notable variation in the ratio of employee compensation to total expenditures and revenue, which is discussed in the results section. For all four hospitals, total revenues are above total expenses by thin margins.

Methods

Estimating Nonprofit Hospital Tax Exemptions and Tax Revenue

The model for each nonprofit hospital uses employee head count, employee compensation, and total expenses data as the model type inputs for Industry Impact Analysis (Detailed), with Hospitals-490 set as the industry. For the Industry Impact Analysis event, employee head count is entered as Wage & Salary Employment, employee compensation is entered as Employee Compensation, and total expenses is entered as Total Output. There are other possible model inputs: Proprietor Income/Employment, Taxes on Production & Imports, Other Property Income, Intermediate Inputs, Total Employment, and Total Labor Income. For both types of models, intermediate inputs are left blank, with IMPLAN filling in intermediate inputs based on its built-in assumptions about 2019 hospital spending patterns. Also, both types of models have Proprietor Employment, Proprietor Income, and Other Property Income set to $0, meaning that they are excluded from the model. The use of Industry Impact Analysis for modeling both for-profit and nonprofit hospital operations aligns with best practices for hospital modeling within IMPLAN, and our selection of inputs follows IMPLAN's guide for nonprofit and for-profit hospital modeling (Clouse, 2021b). Although total revenues are not used as an input, they are included in Table 3 to illustrate institutional differences between the modeled hospitals.

OPEN IN VIEWER

Table 3.

Characteristics of Modeled Nonprofit Hospitals, 2019.

	Number of beds	Employee count	Total employee compensation	Total expenditures	Comp. over expenses (%)	Total revenue
Western Medical Center	298	3,803	$335,556,146	$654,410,124	51.3%	$647,008,862
Midwestern Medical Center	61	1,543	$133,342,971	$218,505,274	61.0%	$228,108,243
Southern Medical Center	1,162	12,302	$673,086,194	$1,584,941,279	42.5%	$1,651,639,117
Northeastern Medical Center	204	1,916	$118,996,579	$242,896,301	49.0%	$270,258,668

Note. Authors’ analysis of IRS Form 990 Schedule H data.

Northeastern Medical Center's tax impact model is run as an Industry Contribution Analysis, instead of an Industry Impact Analysis, because it is the sole provider of hospital services within its region. This poses the issue of potential excessive industry “buybacks” in the analysis results. In a regular impact analysis, IMPLAN assumes that a given hospital will purchase some hospital services from other hospitals within the study region, hence the term buybacks. Using Industry Contribution Analysis removes the assumed intraregional transactions between hospitals.

Southern Medical Center is also notably different from the other modeled nonprofit hospitals due to its status as a teaching hospital. This affects modeling for this hospital's community benefit spending impacts, rather than its tax impacts. This means that Southern Medical Center offers relatively large amounts of pro bono medical care and spending on medical education and research. Also, Southern Medical Center does not incur uncompensated Medicaid costs, or similar means-tested medical service costs, due to its status as a teaching hospital. Instead, most of its uncompensated care is classified as Financial Assistance.

Results

Tax Exemptions and Tax Revenues of Four Nonprofit Hospitals

In Table 4, tax impacts produced in IMPLAN at the county, subcounty general (city and township), and subcounty special district (police, fire, school, utility, etc.) scales are summed together as Regional Tax Exemption and Regional Tax Revenues. Regional Tax Revenues include direct, indirect, and induced tax revenues.

OPEN IN VIEWER

Table 4.

IMPLAN Estimated Economic Impact Output of Nonprofit Hospitals (Used to Calculate Tax Impacts in IMPLAN), Denominated in 2019 USD, Rounded to Nearest Dollar.

	Direct impact	Indirect impact	Induced impact	Total impact
Western Medical Center	$654,410,124	$191,789,909	$250,463,717	$1,096,663,751
Midwestern Medical Center	$218,505,274	$37,542,096	$77,546,880	$333,594,250
Southern Medical Center	$1,584,941,279	$676,490,578	$524,683,622	$2,786,115,479
Northeastern Medical Center	$242,896,302	$57,287,945	$54,113,021	$354,297,268

Note. Authors’ analysis of IRS Form 990 Schedule H data.

All four nonprofit hospitals produced tax revenues above the value of their tax exemptions, ranging from 16.68% (Midwestern Medical Center) to 71.85% (Southern Medical Center) above the value of exemptions (see Table 5). Whether modeled as for-profit or nonprofit, most tax revenues were produced by indirect and induced effects. However, when modeled as for-profit institutions, most of the hospitals did produce additional direct tax revenues compared to the nonprofit models, through direct effects. For example, when Western Medical Center is modeled as for profit, it produces estimates of $860,119 in county, $1.3 million in subcounty special district, and $1 million in subcounty general tax revenues through direct tax impacts. Nonprofit status reduces tax revenues for all three levels of government to a total of $163,500 in direct tax impact. Most revenue “lost” in the nonprofit models were direct tax revenue impacts of sales and property taxes at the subcounty special district, subcounty general, and county levels. For each of the three regional levels of government for the four modeled nonprofit hospitals, between 22.65% (Southern Medical Center, county) and 46.09% (Midwestern Medical Center, subcounty general) of tax revenue was reduced compared to the for-profit models. State revenues were impacted as well, ranging from a loss of 11.86% (Western Medical Center) to 26.46% (Midwestern Medical Center).

OPEN IN VIEWER

Table 5.

Estimated Regional Tax Exemption and Tax Revenues of Four Nonprofit Hospitals (Denominated in 2019 USD, Rounded).

	Regional for-profit tax rev.	Regional nonprofit tax rev.	Regional tax exemption	Regional tax revenue	Regional exemp. subtracted from regional rev.	% of rev. above exemp.	Tax rev. % of total expenses
Western Medical Center	$11,574,366	$8,690,928	$2,883,438	$8,609,646	$5,807,490	66.51%	1.32%
Midwestern Medical Center	$5,325,537	$2,905,078	$2,420,458	$2,905,078	$484,620	16.68%	1.33%
Southern Medical Center	$33,641,651	$26,108,253	$7,533,398	$26,108,253	$18,574,855	71.85%	1.65%
Northeastern Medical Center	$8,428,076	$4,976,706	$3,451,370	$4,976,706	$1,525,335	30.65%	2.05%

Note. Authors’ analysis of IRS Form 990 Schedule H data.

Federal tax revenues were relatively unaffected by nonprofit tax exemptions. The loss of federal revenue ranged from 0.19% (Western Medical Center) to 0.9% (Northeastern Medical Center), primarily due to the large amount of payroll taxes directly paid to the federal government, which are not exempted for nonprofit hospitals. Nonprofit status shifted the mix of regional, state, and federal tax revenues. In the nonprofit models, the share of federal tax revenues increases because of the loss of direct tax impact revenue, which has a large negative impact on regional tax revenues. Perhaps more importantly, most tax revenue for each of the four hospitals flows to the state and federal levels of government. The regional share of the modeled hospitals’ tax revenue ranges from 6.16% (Western Medical Center) to 13.07% (Northeastern Medical Center), with all other tax revenues flowing to state and federal governments. However, tax exemptions disproportionately burden local and regional levels of government, ranging from 38.76% of the total tax exemption for Western Medical Center, to 69.01% for Northeastern Medical Center.

We conducted a sensitivity test to determine how the economic structure of each region influenced the impact outcomes. For this test, we switched each pair of nonprofit and for-profit hospital models to different analysis regions, The results indicated that the structure of tax exemptions and revenues are heavily influenced by state and regional economies. Northeastern Medical Center's sales tax rates are split almost evenly between state and county, while the other three hospitals reside in states where state sales tax rates are substantially higher than county sales tax rates. This is reflected in the modeled tax impacts, where Northeastern Medical Center's share of state tax revenue is appropriately higher than the other three hospitals. Rates of effective property tax did not correspond to raw or relative amounts of property tax impact produced by the three nonprofit hospitals. This is likely due to the nature of property tax collections, which are heavily influenced by the demographic mix of a region's population.

Another sensitivity test was conducted on rates of employee compensation versus nonemployee compensation spending by the modeled institutions. The two main effects of changing employee compensation were to increase or decrease direct impacts, while indirect and induced impacts only experienced slight, nonsignificant changes. Also, lowering the rate of employee compensation shifts the mix of tax impacts in favor of regional and state revenues, while increasing compensation increases the share of federal tax revenue. This outcome is sensical, because sustained estimates of federal direct tax impacts are driven by payroll taxes. Both labor and operating costs fund wages and the purchasing of intermediate inputs, the majority of which are sustained estimates of indirect and induced tax and economic impacts.

Community Benefit Impacts of Four Nonprofit Hospitals

For the four hospitals in our sample, the total community benefit expenditure ranges from about $29 million to $164 million, representing substantial sums for anchor institutions within small- and medium-sized metros.

Using the most restrictive definition of community benefit (Model 1), the proportion of community benefit spending as a proportion of total expenditures ranges from 0.17% for Western Medical Center to 13.73% for Northeastern Medical Center. Using the most expansive definition of community benefit (Model 3), the proportion ranges from 7.73% for Southern Medical Center to 25.27% for Western Medical Center (see Tables 6 and 7).

OPEN IN VIEWER

Table 6.

Net Community Benefit Expenditures in 2019, Derived from IRS Form 990 Schedule H.

	Financial assistance	Uncomp. Medicaid and other programs	Community health	Cash and in-kind	Subsidized health services	Health professions education	Medical research	Total
Western Medical Center	$3,363,724	$157,113,271	$992,092	$147,014	$0	$3,198,758	$0	$164,814,859
Midwestern Medical Center	$1,711,800	$25,923,591	$25,427	$138,745	$1,911,82	$0	$104,516	$29,815,906
Southern Medical Center	$75,761,495	$0	$5,694,416	$1,422,14	$0	$24,574,08	$14,984,33	$122,436,484
Northeastern Medical Center	$1,824,794	$16,661,406	$28,774,568	$35,730	$4,538,62	$1,662,856	$0	$53,497,979

Note. Authors’ analysis of IRS Form 990 Schedule H data.

OPEN IN VIEWER

Table 7.

Total Community Benefit Spending in 2019: Three Scenarios.

	Model 1	% of Total expenditures	Model 2	% of Total expenditures	Model 3	% of Total expenditures
Western Medical Center	$4,502,830	0.17%	$7,701,588	0.66%	$164,814,859	25.27%
Midwestern Medical Center	$3,787,799	0.99%	$3,892,315	1.04%	$29,815,906	13.95%
Southern Medical Center	$82,878,060	0.45%	$122,436,484	2.95%	$122,436,484	7.73%
Northeastern Medical Center	$35,173,717	13.73%	$36,836,573	14.41%	$53,497,979	22.02%

Note. Authors’ analysis of IRS Form 990 Schedule H data.

The results of the models show that the total economic impact increases dramatically, depending on the hospital's definition of community benefit spending. With the most restrictive definition of community benefit spending­—excluding education for health professionals and medical research and the estimated value of uncompensated Medicaid and similar means-tested health care—we find that the estimated economic impact of community benefit spending is significantly lower. For example, Western Medical Center's economic impact in the Western MSA would increase by 3600%, from $7.3 million to $267.4 million, if community benefit spending is defined in the most expansive terms possible (Model 3; see Table 8).

OPEN IN VIEWER

Table 8.

Total Economic Impact of Community Benefit Spending: Three Scenarios.

	Model 1	Model 2	Model 3
Western Medical Center	$1,846,145	$7,210,433	$267,383,733
Midwestern Medical Center	$3,078,840	$3,239,004	$44,287,039
Southern Medical Center	$11,792,997	$74,495,354	$200,935,844
Northeastern Medical Center	$46,802,662	$48,989,248	$74,933,055

Note. Authors’ analysis of IRS Form 990 Schedule H data.

Discussion

We sought to answer three research questions:

How do nonprofit hospitals produce regional tax revenue for their host MSAs above revenues lost to tax exemptions?

There are context-specific reasons for comparing raw community benefit spending and the economic impact of that spending. Comparing the two figures may provide a picture of the economic capacity of a given nonprofit hospital, and the potential outcomes of its community benefit spending if the institution, or a replacement, shifted its resources into different types of community benefit categories.

Both sets of models serve as heuristics for examining these relationships, allowing one to observe key features of how nonprofit hospitals may interact with their regional economies. Across the four case studies, there was significant variation in tax revenue produced, with tax revenue being muted in the case of Northeastern Medical Center, due to its status as the only institutional provider of hospital services in its host region. Despite variation in the rate and amount of tax revenue sustained by the four hospitals, all provided a robust stream of county and subcounty tax revenues. However, the nonprofit status of these hospitals shifted the governmental mix of recipients in favor of federal tax receipts, which were proportionally higher than in the for-profit models. Furthermore, the costs of tax exemptions largely landed on subcounty and county governments, while these levels of government proportionately benefited less from tax revenues sustained by nonprofit hospitals. It should be noted that because we do not conduct a thorough accounting of these hospitals’ tax exemptions, it is reasonable to assume that our numbers suggest a wider margin between the value of tax revenues and tax exemptions than previous studies in the health policy literature. The influence of regional economic structure on a nonprofit hospital's ability to sustain tax revenues is our more significant finding.

The findings of the second set of models indicate that key activities, such as uncompensated Medicaid care, may represent an important economic contribution to nonprofit hospitals’ host regions. Unsurprisingly, the least restrictive definitions of community benefit generate the largest estimated total benefit spending and resulting economic impact. Interestingly, the amount of community benefit and the amount of economic impact sustained by different nonprofit hospitals’ community benefit spending varies substantially from institution to institution. For Southern Medical Center, the $62.7 million difference in its estimated economic impact in Models 1 and 2 is attributable to its status as a teaching institution. Essentially, Southern Medical Center's medical education plays a more central role in its operations than it does in the other three hospitals.

Leakage of economic and tax impacts was present in all four models. Leakage refers to economic impact that flows outside of the analysis region, such as payments to workers or firms who reside in a different place than the regions being analyzed. Leakage reduces the estimated impacts of any event. IMPLAN produces estimates of the amount of leakage for specific industries within a region and automatically subtracts them from its estimates of sustained impact within the analysis region. For hospital industry activity, leakage is 17.79% for the Northeastern MSA, 25.15% for the Southern MSA, 16.52% for the Midwestern MSA, and 20.59% for the Western MSA. Other industrial sectors entered into the community benefit spending models have rates of extraregional leakage that tend to be several percentage points higher than that of hospital activity in each of the four MSAs. Rates of leakage are primarily influenced by an MSA's industry mix and proximity to other MSAs. The low rate of hospital activity leakage for Midwestern MSA likely reflects the area's high amount of export-level health care industry activity.

Limitations

To estimate nonprofit hospitals’ direct tax exemptions, we subtract the tax revenue of the nonprofit model from the economic impact model of a for-profit hospital with the same characteristics. This method is less exact than established methods for estimating tax exemptions in the academic literature, which triangulate IRS Form 990, HCRIS, and AHA data to estimate specific categories of local, state, and federal tax exemptions (Herring et al., 2018). Accordingly, we frame our results as an opportunity to explore the contributions and dynamics of nonprofit hospital operations in a specific class of MSAs, rather than as a fully accurate reconstruction of existing hospitals.

Also, because this analysis uses the regional scale, we do not differentiate between how tax impacts may affect different local governments or service districts within the same region. For our models, we assume that tax impacts for subcounty special districts are evenly distributed across those districts. In a real-life scenario, this would not be the case. Some special districts would be more greatly impacted by nonprofit hospital tax exemptions and revenues than others.

In the methods section of this paper, we noted that IMPLAN's fixed (static) coefficients did not pose a significant problem for our analysis. However, IMPLAN's fixed coefficients also indicates that we cannot produce estimates of how the modeled hospital activity affects supply chains or the prices of commodities and labor in these regions, which is a notable limitation.

Conclusion

Our findings suggest three insights into the ongoing debate about nonprofit hospital tax exemptions:

The spatial and economic structure of a nonprofit hospitals’ host region plays a major role in the amount of net tax revenue produced by its operations.

Nonprofit hospitals have come under a wave of tough criticism from journalists and scholars over the past decade. Tax exemptions and community benefit practices have been major targets of criticism, but there have been other areas of concern, such as nonprofit hospitals’ trustee compensation practices (Bai et al., 2023), their relative market power within specific regions (Capps et al., 2020), medical debt collection practices (North Carolina State Treasurer, 2022), and their role in gentrification (Tweet & Pardee, 2021). Moreover, prior research shows that hospitals shift the costs of uncompensated care onto private insurers and patients (Frakt, 2011) and, by extension, the inclusion of uncompensated Medicaid and other means-tested program costs in the Community Benefit Standard may shift the incentives and reduce this practice.

In the face of these criticisms, nonprofit hospitals face political challenges and institutional and operational constraints. Specifically, nonprofit hospitals maintain distinctive mixes of medical services (Horwitz & Nichols, 2022) while maintaining narrow revenue margins. As seen with the Southern Medical Center, some nonprofit hospitals may also appear to outperform their peers in community benefit spending, simply because their operational model does not involve uncompensated Medicaid and other means-tested program costs. In fact, analysts should further investigate nonprofit hospitals’ provision of uncompensated means-tested care. Uncompensated Medicaid and other means-tested care function to provide health care services to patients in need while maintaining important streams of economic activity for hospitals’ host regions. Given the dual economic and community importance of nonprofit hospitals’ uncompensated Medicaid and other means-tested care, it may be necessary to inject nuance into criticisms of these categories of community benefit spending in accordance with the Community Benefit Standard (Sherman & Doussard, 2019). Future studies should investigate the role of uncompensated means-tested care in maintaining access to distinctive services offered by nonprofit hospitals.

Local, state, and federal policy makers, when responding to these criticisms, need to account for the limitations faced by nonprofit hospitals. Public policy makers and institutional policy makers within hospital systems should focus on new, constructive policy responses. Policy solutions for improving community and nonprofit hospital relations will likely need to take advantage of the overlap between community and economic development, given these institutions’ constrained resources. One key overlap is workforce development (Horwitz, 2024) because it meets the mutual needs of hospitals and the communities that host them. Health workforce development programs can align with hospitals’ strategies for addressing high and rising labor costs, while increasing opportunities for community members. Health policy scholars have noted the synergy between hospital workforce development and programs guided by Social Determinants of Health perspectives (Fleming, 2023). It also happens to be a policy area where offering community-oriented services and economic development overlap. Moreover, as Fleming and colleagues noted, health systems have already “begun to reconceive their training and employment practices as interventions into the Social Determinants of Health (SDoH)” (Fleming, 2023). The Democracy Collaborative think tank has also outlined strategies for a renewed focus on hospital workforce development, highlighting the possibilities for building trust in underserved communities by connecting health care to community development (Democracy Collaborative, 2019).