Are tax exemptions justified?

Colorado officials say the real question is whether the needs of communities are met

A new report alleges Colorado’s nonprofit hospitals aren’t giving as much as they get from avoiding taxes, but state officials question the conclusions and say the real issue is whether hospitals are meeting communities’ needs.

Nonprofit hospitals are exempt from most local, state and federal taxes if they conduct an assessment of their communities’ needs at least every three years and spend some money on “community benefits,” which can include offering free or discounted care to people who can’t pay, health education programs or even medical research. (There are other requirements to ensure hospitals aren’t improperly excluding patients and requiring them to reinvest any profits.)

The IRS doesn’t set a minimum amount that hospitals have to spend on community benefits, though, and gives them fairly broad discretion to decide how to use that money.

The Lown Institute, a think tank focused on health care reform, calculated how major American nonprofit hospitals’ charitable care and community investment spending compare to the amount of taxes they would have paid if they weren’t exempt.

The institute determined nonprofit hospitals in Colorado received about $229 million more in tax relief than they provided in community benefits, ranking the state 30th in the country.

Aaron Toleos, vice president of communications at the Lown Institute, said they estimated taxes as 5.9% of hospitals’ annual spending, based on previous research. They excluded community benefit spending on medical research and staff training, since research is usually paid for with federal funding, and the public may not see much benefit from training, he said.

“That may not be something the local taxpayers want to be subsidizing,” he said. “We’re only counting things with direct and meaningful benefit to the community.”

A separate report from the Colorado Department of Health Care Policy and Financing, which included all categories of community benefit, found that most systems provided more than they received in tax exemptions. Catholic Health Initiatives and Adventist Health, which are the parents companies of Centura Health, were the outliers, receiving $71 million more in exemptions.

Lindsay Radford, spokeswoman for Centura, said measures of community benefit don’t include all of the system’s investments in

improving public health.

“Centura was the only health care system to operate free COVID-19 mass vaccine clinics in partnership with the state of Colorado,” she said in a statement. “We invested millions more in projects like a ‘Mask Up’ public service campaign and educational programs in underserved communities to stop the spread of COVID-19.”

Overall, the Department of Health Care Policy and Financing found Colorado nonprofit hospitals were beneficiaries of just short of $560 million in foregone taxes, but provided about $836 million in community benefit — meaning the net benefit to the state was about $276 million.

Lown did not provide a breakdown of the figures it used to find hospitals received $229 million more in tax relief than they provided in benefits to their communities.

Tom Rennell, senior vice president of financial policy and data analytics at the Colorado Hospital Association, said it’s “reasonable” to compare the full range of community benefits with foregone taxes, but that doesn’t capture all the ways nonprofit hospitals help their communities. For example, a hospital might not make money off a mental health unit, but decide to open one anyway because there’s a strong need, he said.

Rennell also pointed to Colorado’s hospital provider fee, which raises about $1 billion for the state, allowing it to access matching funds from the federal government, and to partnerships with community organizations to meet patients’ needs outside the health care system.

“Some of it counts (as community benefit) and some of it doesn’t,” he said. “When you compare the direct and indirect benefits … it far outweighs the tax savings.”

Nancy Dolson, director of the Department of Health Care Policy and Financing’s special financing division, said the division has questions about how the Lown Institute arrived at its numbers. Any attempt to calculate taxes is an estimate, she said, and Colorado lawmakers could get a more precise answer about how community benefit spending stacks up against foregone taxes by asking the state auditor’s office to look into it.

The health care policy department estimated Colorado hospitals provided about $836 million in community benefits in 2020, not counting any shortfalls from Medicaid payments, which also affect for-profit hospitals. That’s about 6% of their revenue, though it varied from system to system.

More than half of the spending was attributed to programs for improving health behavior or risks. About a quarter went to providing free or reduced-cost care. Only about 3% went to programs to address social determinants of health, such as assistance paying for food or rent, and 15% of the spending was categorized as meeting other “community identified needs.”

The department has asked the legislature to clarify what should count as community benefit, and to give it permission to require hospitals to report more information about their community benefit spending. It’s not likely a bill will pass during this session.

“Those are pretty board categories,” Dolson said. “We’re wanting more detail with that reporting.”

Right now, hospitals are required to assess community needs and to provide community benefit, but those two things don’t necessarily have to be aligned, Dolson said. She’s optimistic that the department, hospitals and community organizations can work together to steer money toward the most urgent needs, like mental health and addiction treatment.

“I think the question is: What’s the benefit to the community? Does that match what communities have identified?” she said.