As diligent taxpayers breathe a sigh of relief that the hassle of filing their tax forms is over for another year, the Internal Revenue Service continues to let most U.S. hospitals pay nothing in federal taxes. It’s time for Congress to take a hard look at the IRS’s hand in health care.
The agency uses a vague “community benefit” standard to liberally grant tax-exempt status to so-called nonprofit hospitals even as many of them are financially taking advantage of sick Americans with inflated medical bills. Several of my Johns Hopkins colleagues and I published a study in the Journal of the American Medical Association showing that some nonprofit hospitals sue and garnish the wages of low-income patients who can’t afford to pay their medical bills. Where’s the community benefit in that? Nonprofit hospitals are supposed to be compassionate and merciful, not predatory and ruthless.
Many hospitals force people who are suffering and seeking care in earnest to sign their financial life away as a condition of treatment. Some make contesting a bill difficult and others do not comply with the federal hospital transparency rule which requires hospitals to post prices for common shoppable services. The most recent money game that nonprofit hospitals are dialing up is adding billions of dollars in “facility fees” for routine care. These billing tricks are fleecing everyday Americans. Congress could make them disappear overnight if it passed a law disqualifying hospitals that use them from getting the coveted tax-exempt benefit.
Many tax-exempt hospitals argue that they provide millions of dollars in free care. But here’s what’s really going on: Much of what they call free care is emergency care that hospitals are required to provide by law (the 1986 Emergency Medical Treatment and Labor Act requires hospitals to care for anyone who walks in with an emergent condition). But after the care has been provided, patients are often hounded for payment, often at an artificially inflated price. Hospitals then report the difference between their high sticker price and what they actually collect after shaking down a patient as charity care.
But that’s not charity. In a twist of irony, a 2021 study published in Health Affairs found that for-profit hospitals provided 65% more charity care than nonprofit ones.
The bar for receiving tax-exempt status should not be simply abiding by the law.
Hospitals leaders across the nation have told me that they need to avoid federal taxes in order to survive. But the way taxes work, businesses are taxed only on their profits. Some hospitals hide their profits in cost-shift accounting and loan refinancing, even engaging in aggressive real estate and venture capital investing. According to public tax records, Cedars Sinai in Beverly Hills had an income surplus of $750 million in 2022 and paid no federal taxes. Memorial Sloan Kettering Cancer Center in New York had $400 million and also paid no federal taxes. The top three hospital administrators there made nearly $20 million in salaries.
Try booking an appointment at these or any nonprofit hospital and see if you can do it without insurance or cash up front. It’s nearly impossible. Most nonprofit hospitals will refuse to schedule appointments, even cancer care, unless you financially qualify by showing your ability to pay.
If hospitals schedule appointments and operations only for people who financially qualify, arguing that they are a business, they should pay their fair share of taxes like every other American business. A Kaiser Family Foundation study estimated the total value of tax exemptions for nonprofit hospitals was $28 billion in 2020 alone. By my calculation, that’s equivalent to a $107 tax credit for every American who filed a return that year.
Momentum to stop this gaming of the system is growing. In August, a bipartisan group of U.S. senators including Bill Cassidy and Elizabeth Warren demanded more transparency from the IRS on the issue after a General Accountability Office report found that the agency “did not have a well-documented process” to ensure that hospitals met tax-exempt criteria.
In October, Bernie Sanders, the chair of the Senate Health, Education, Labor and Pensions committee stressed the need to address the problem. “Many nonprofit hospital systems across the country are failing to provide low-income Americans with the affordable medical care required by their nonprofit status — despite receiving billions in tax benefits and providing exorbitant compensation packages to their senior executives,” he said in a statement.
In another sign that government officials are getting fed up with hospitals paying no taxes, in 2023 a Pennsylvania judge revoked a hospital’s property tax exemption. This action came after the Pottstown school district sued the hospital, arguing that its special tax treatment resulted in $900,000 less revenue for the school each year.
It’s not just the IRS’s lackadaisical approach to hospitals that’s mind-boggling. It’s also the agency’s hostility to direct primary care and other creative strategies developed by doctors to address chronic diseases. The IRS does not allow individuals or families who subscribe to direct primary care — a type of intensive primary care that takes extra time to focus on prevention — to include that cost as a tax-deductible health savings account expense. A 2019 White House executive order challenged this position to no avail. Last month, the IRS sternly warned Americans that they cannot use their own health savings account to buy healthy foods as directed by their doctors.
The IRS continues to propagate a reactionary approach to sickness rather than a proactive approach to health. Chronic diseases are the leading cause of death in the U.S. and consume a majority of the $4.5 trillion Americans spend on health care. The current Whac-a-Mole system isn’t working. Most American adults take 4 or more prescription medications regularly, making the U.S. the most medicated population in the world. The country needs to try new approaches to health.
Instead of scolding Americans who sign up for direct primary care or want to eat healthier foods, the IRS should hold hospitals accountable for the taxes they should be paying.
Marty Makary, M.D., M.P.H., is a professor at the Johns Hopkins School of Medicine and Carey Business School and author of the forthcoming book “Blind Spots: When medicine gets it wrong and what it means for our health” (Bloomsbury Press, Sept. 2024).