By Guest commentary Friday, August 13th, 2021

By Bruce DeBoskey

The charity “grand bargain” in the United States allows nonprofit organizations to perform charitable, religious, educational and scientific duties for the “public good,” often relieving government from performing those same functions.

In return for their contribution to the public good, nonprofits are deemed tax-exempt organizations, which means they typically don’t pay income, sales or property taxes to local, state and federal governments. Also, donations to support those organizations are usually tax deductible, resulting in the loss of additional tax revenue.

This arrangement has recently come under growing scrutiny by many observers (including me, in earlier columns) because of the lack of clear definitions around what constitutes public good to justify such favorable tax treatment. Nonprofit hospitals provide yet another example of how little clarity or consistency there is about what benefit they provide to society (versus tax-paying hospitals), and the inadequate accountability and oversight they receive.

The presumption is that, in return for their enormous tax advantages, nonprofit hospitals will provide charity care to patients who otherwise wouldn’t be able to afford it, and provide other significant benefits that improve community health. The tax exemption — the taxes nonprofit hospitals don’t pay — was estimated in 2015 to be $25 billion, and presumably is even higher today. This doesn’t include lost income tax revenue due to the deductibility of charitable contributions to those institutions.

Decades ago, many hospitals were funded by religious groups and philanthropists to provide medical care to indigent patients. The health care environment has changed dramatically since then, and now, nonprofit hospitals actively compete with tax-paying, for-profit hospitals for health care business.

Today, nearly 60% of all acute care hospitals in the U.S. are non-governmental, nonprofit hospitals. Many are among our most respected institutions, often associated with universities and faith-based organizations.

“Automatic tax exemption for nonprofit hospitals is a long-standing but poorly targeted policy that has outlived its sell-by date. In its current form, tax exemption provides no assurance that nonprofit hospitals will behave in accordance with their charitable mission,” according to Ge Bai, associate professor of public health at Johns Hopkins University, and David Hyman, professor of health law and policy at Georgetown University.

Nonprofit hospitals are required to provide community benefits that include charity care, community health improvement efforts, medical training and research, and the assessment of community health needs. Except for charity care, most of the community benefit requirements are vaguely defined, hard to quantify, and have been criticized by observers as “squishy, easy to game, or at best, contestable measures of community benefit.”

A 2020 U.S. Government Accountability Office study revealed that the IRS doesn’t even track community benefit performance when evaluating a nonprofit hospital’s continued favorable tax status. Because of that lack of oversight, no nonprofit hospital had its tax-exempt status revoked for failure to provide community benefit information in the prior decade.

One of the more measurable community benefit factors is the provision of charity care — helping to pay the costs of medical care for those who can’t afford it. Consider these facts:

• One study found that only 20% of nonprofit hospitals provided incremental charity care that exceeded the value of their tax exemption. Viewed differently, 80% of nonprofit hospitals in the U.S. didn’t provide incremental charity care in an amount even equivalent to the amount they saved on taxes due to their tax exemption.

• In another study, for-profit hospitals — those that are not exempt from taxes and receive no charitable contributions — provided 65% more charity care than their nonprofit counterparts.

Many nonprofit hospitals are multi-billion-dollar, multi-faceted businesses, with huge marketing and advertising budgets, big salaries, large fundraising teams, major endowments, and actual net income or profit. When they need police or fire protection, they utilize the same emergency services funded by citizen taxpayers and tax-paying businesses. Likewise, nonprofit hospitals benefit from all of the state and federal services and support that other taxpayers help pay for, such as public schools, parks, and military and environmental protection.

It’s time for the charity “grand bargain” to be reexamined by asking some very important questions, beginning with:

• How does society define the public good or community benefit in ways that will prioritize those nonprofit programs needed by our country now?

• Does a careful cost/benefit analysis of the charity exemption and donation deductibility demonstrate that they make good economic and policy sense for 21st century society?

• Can our government make the commitment to provide greater transparency, accountability and oversight of the nonprofit sector to ensure that the charity “grand bargain” works?

Let’s make sure that the charity “grand bargain” actually improves our cities, states, country and world in ways that make sense for the times in which we live.

• Bruce DeBoskey is the president and founder of The DeBoskey Group, a Denver-based philanthropy consulting firm.