Despite Republicans’ boasts about closing tax loopholes, there’s one sector that the sweeping tax reform bill mostly leaves alone: The tax-exempt hospital sector, which enjoys billions of dollars in tax breaks even as big hospitals raise prices and perform less free care.

Mayo Clinic, a nonprofit health system, cleared more than $1 billion in profit between 2015 and 2016. Cleveland Clinic, another nonprofit hospital, topped more than $715 million in profits in that span.


Congress’ most significant overhaul of the tax code in more than 30 years — finalized on Wednesday — protects those hospitals’ multibillion-dollar tax exemptions, an outcome that frustrates consumer advocates, officials and researchers who say that hospitals are taking advantage of rules that fail to adequately define the benefits they must provide to their communities in order to remain tax-exempt.

“It was, in my view, a missed opportunity,” said Daniel Skinner, an Ohio University political scientist who studies how hospitals serve their communities. “The tax bill could have been a good place to begin to hold non-profit hospitals accountable.”

“The whole thing of how they define charity care is a joke,” added Laurel Prussing, who served 12 years as mayor of Urbana, Illinois, and battled with the local hospital over its tax savings. “Hospitals set an artificially high price and when an uninsured patient can’t pay, they lower the difference and call it charity.”

The new tax law hurts universities and local charities — but largely spares the nation’s 3,000 tax-exempt hospitals, which again avoided significant reforms to how they’re regulated. Under the final bill, Republicans dropped a plan that would have prevented hospitals from issuing tax-exempt bonds, provisions that alarmed the politically powerful hospital lobby and sparked a messaging campaign.

The GOP’s reversal will preserve billions of dollars in annual savings for hospitals, analysts say. The American Hospital Association’s own study found that tax-exempt bond financing was worth $2.5 billion to hospitals in 2013, annual savings that are likely higher today as more hospitals embark on major construction projects.

In another significant victory for hospitals, Republicans declined to touch the loose regulations governing how hospitals qualify for their tax exemptions, despite long-running questions about whether hospitals do enough charity to earn more than $25 billion in annual tax breaks.

While hospitals must document their free care and other charitable activities — known as community benefit — to be classified as tax-exempt, the IRS doesn’t require hospitals to perform a minimum amount. Hospitals also can self-define "community benefit," which critics say allows them to perform an accounting trick: Most “community benefit” isn’t free care or other activities that directly benefit patients, but related to Medicaid payments that hospitals say are too low to cover the cost of the care they provide.

Many advocates say that because of limited oversight, not-for-profit hospitals increasingly act like big businesses, employing strategies that are indistinguishable from Fortune 500 companies, save for their tax exemptions. For instance, as hospitals’ revenues have gone up, their charitable care has fallen and their community benefit spending has stayed flat.

“It’s indicative of this tax bill,” said Ray Madoff, a Boston College professor who studies nonprofits. “There was a failure to revise the rules in a way that would work better for the charitable sector and society in a whole.”

The bill does include some pain points for nonprofit hospitals. For instance, they’ll lose their ability to use what’s called "advanced refunding" of outstanding bonds, which essentially allows them to tap into lower interest rates. "There are ways to work around that," said Johnny Hutchinson, an attorney at Squire Patton Boggs who specializes in tax-exempt bonds. "The biggest issue that hospitals were concerned about was not being able to issue tax-exempt bonds of any kind … and the bigger bullet was dodged."

The package also repeals the Affordable Care Act’s individual mandate, which will have consequences across the health care sector and likely hurt hospital revenue by reducing the number of Americans with health insurance coverage. Not-for-profit organizations also would be required to pay a 21 percent excise tax on compensation for executives that exceeds $1 million, a provision opposed by hospital lobbyists because it would affect most health systems and many large hospitals. (A Modern Healthcare survey found that the average health system president or CEO is being paid $1.1 million in cash compensation this year.)

However, earlier versions of the bill would have given not-for-profit hospitals more political power by repealing the Johnson amendment, which restricts political activity by all organizations classified as 501(c)3. The planned repeal — backed by President Donald Trump and Republicans who wanted to empower churches to lobby on behalf of individual candidates — was struck by the Senate parliamentarian because it violated the Byrd rule on what’s permissible through budget reconciliation. Its original inclusion had alarmed experts on hospital spending, who saw the potential for abuse.

“The last thing we need to do is give hospitals the ability to engage directly in electoral politics,” added Yale University professor Zack Cooper, who’s studied how some tax-exempt hospitals used their political influence to win higher Medicare payments and, ultimately, higher executive compensation.

Republicans’ decision to protect hospitals’ tax treatment — and perhaps inadvertently seek to further empower them — is notable given years of congressional scrutiny about hospitals’ charitable practices, led by longtime Senate Finance Committee member Chuck Grassley. On the eve of tax reform in September, the Iowa Republican reiterated his long-running concerns in a Stat News editorial, citing a POLITICO investigation into hospitals’ declining charity spending and other examples of tax-exempt hospitals not behaving charitably.

“All of this is contrary to the philosophy behind tax exemption,” Grassley wrote. “In exchange for the taxes they’d have to pay if they were for-profit businesses, nonprofit hospitals are supposed to provide treatment for those who can’t pay or can’t pay enough toward the cost of their own care.”

However, Grassley didn’t push the issue in this round of tax reform. “Sen. Grassley's focus has been on enforcement of existing law as Congress intended,” a spokesperson told POLITICO.

Republicans also have searched for revenue sources to defray their planned tax cuts, another reason why it’s notable that hospitals’ current savings went untouched.

“It has surprised me that they’ve decided not to deal with the specific issue,” said Sara Rosenbaum, a George Washington University professor who found that the total value of hospitals’ tax exemptions — when including state and local savings — was worth nearly $25 billion in 2011 and projects it’s worth billions of dollars more today.

Seeking to head off congressional scrutiny, the American Hospital Association in October published a report, prepared by Ernst & Young, that concluded hospitals’ federal tax exemptions were worth $6 billion per year and found that hospitals spent 11 times as much on community benefit. “Hospitals of all kinds — urban and rural, large and small — are demonstrating the value they provide,” Rick Pollack, the CEO, said in a statement accompanying the report.

The AHA did not respond to repeated requests for comment about its lobbying activity and efforts to protect hospitals’ tax-exempt status. The organization spent more than $12.9 million on lobbying through the third quarter of 2017, nearly three times as much as America's Health Insurance Plans — the nation's top health insurance lobbyist — spent in the same period.

Grassley’s office also said that Republicans’ decision to pursue through tax reform through budget reconciliation, which only requires a simple majority but forces legislation to comply with the so-called Byrd rule, limited the options. “Rules governing the reconciliation process in the Senate make enacting modifications to current non-profit hospital requirements a challenge as part of tax reform,” a Grassley spokesperson said.

However, many experts didn’t agree, noting that there were likely multiple opportunities to tighten the rules around hospital tax exemption.

“If the Joint Committee on Taxation estimated that establishing new or increased requirements for tax exemption would cause some hospitals to lose tax exemption — and therefore raise revenues — it would probably survive a Byrd bath,” said Ed Lorenzen of the Center for a Responsible Federal Budget.

For instance, “it would’ve been pretty easy to build in something for 501(c) bonds for hospitals” to require that hospitals must satisfy certain community benefits, said Hutchinson, the attorney who specializes in tax-exempt bonds.

Prussing, the former Urbana mayor who’s still involved in her city's lawsuit with the local Carle Foundation Hospital over millions of dollars in tax exemptions, says lawmakers should be able to craft nuanced rules around which hospitals are taxed. “Give a tax break to poor hospitals to in a rural area, but not hospitals making more profits than the average business,” she said.

Prussing said that her 42,000-person city suffered as millions of tax dollars were steered away from schools and other civic initiatives — even as Carle Foundation Hospital was identified as one of the top 10 most profitable hospitals in the nation. According to a Health Affairs study, the hospital earned profits of $163.5 million in 2013 or more than $2,000 per patient.

“Congress should be looking at nonprofit hospitals,” Prussing said. “They shouldn’t be getting away with huge amounts of money.”