Friends With Tax Benefits

Deep within the Affordable Care Act is a tax break that could help a lot of budgets.
December 2017
(AP Photo/Mel Evans)
By Justin Marlowe  |  Columnist
Endowed Professor of Public Finance and Civic Engagement at the Daniel J. Evans School of Public Policy & Governance at the University of Washington

Republicans in Congress spent much of 2017 trying to undo the Affordable Care Act (ACA). As the year draws to a close, the individual mandate, the state exchanges and other key features of that law remain in place -- and highly contentious.

But there’s another part of the ACA that’s received far less attention, enjoys bipartisan support, and could mean a world of difference for state and local budgets. In fact, the real legacy of the ACA might be some major changes in how we pay for local public health services.

About two-thirds of hospitals in the U.S. are tax-exempt, nonprofit organizations. Like other nonprofits, the hospitals don’t pay federal, state or local taxes, can issue tax-exempt bonds and can receive tax deductible contributions from donors. These benefits add up. In 2011, the Congressional Budget Office estimated that this preferential tax treatment saves nonprofit hospitals about $25 billion annually.

So what’s in it for taxpayers? Federal law requires tax-exempt hospitals to deliver “community health benefits.” Hospitals can meet that requirement in two ways. One is providing health care to those who can’t afford it -- also known as charity care. The other is community-building activities designed to keep people out of the hospital. This includes investments in everything from health education and affordable housing to environmental conservation and support for the local half-marathon. Since community benefits include such a huge swath of activity, public finance experts often ask if those benefits are larger than the tax revenues we forego to realize them.

The ACA came about in part because of a concern that tax-exempt hospitals don’t meet this standard. But several large states such as Illinois and Texas have minimum charity care obligations that would ensure this benefit equation is in balance.

Neverthelesss, in response to this concern, the ACA included several new requirements around community benefits. Tax-exempt hospitals must now develop a “community health needs assessment” every three years, along with a plan to implement it. And they must provide the Internal Revenue Service with annual reports on their community benefits spending. These new requirements had two goals in mind: Make hospitals more accountable for and encourage them to spend more on community benefits.

The timing of these new requirements was perfect for public health agencies, whose budgets had been savaged by cuts throughout the worst of the Great Recession. In those tough fiscal times, many public health leaders protected their core activities, such as immunizations and water quality inspections. But they did so by cutting other activities. The ACA community benefit requirements set the stage for a new model. To keep their tax-exempt status, hospitals could now partner with public health agencies and pay for intiatives, helping offset those cuts. It seemed like a win-win.

So did it happen? Sort of.

Perhaps not surprisingly, hospitals continue to prefer charity care over community benefits. A study published in the New England Journal of Medicine in 2013 found that hospitals traditionally spend only about 1.5 percent of their operating expenses on community benefits. There’s evidence that that figure hasn’t changed a whole lot post-ACA. That won’t do much to move the needle on expensive but preventable health problems like diabetes and hypertension.

One especially big concern is that spending on community health-building is often disconnected from actual community health needs. In fact, several studies have shown that hospitals haven’t really engaged the community in their health needs assessments.

Lately, though, the conversation has changed. Hospitals are becoming more transparent about why they’re reticent to spend more on community health. One obvious barrier is that it’s bad for business. A healthier population means less demand for hospitals.

But the ACA community benefits experiment has revealed another problem that revolves around the ins and outs of the tax break itself. The IRS, the hospitals say, has given them unclear guidance on precisely what counts as a community benefit. Oddly enough, the IRS and state and local tax authorities could take on this problem -- assuming that some version of the ACA survives.