Property Tax Exemptions for Nonprofit Hospitals and Cancer Clinics

This report reviews two property tax exemptions for health care facilities: one for nonprofit hospitals (RCW 84.36.040(1)(e)), and one for nonprofit cancer clinics (RCW 84.36.046). Both preferences exempt eligible beneficiaries from tax on real and personal propertyReal property generally includes hospital land, buildings, and other structures. Personal property includes medical equipment, hospital beds, and office equipment. . Nonprofit cancer clinicsNonprofit cancer clinics are outpatient medical facilities that provide cancer prevention, detection, and treatment services. are only eligible for the preference if they are affiliated with a nonprofit hospital or formed by a municipal hospital corporation. Both preferences are reviewed in this report. JLARC previously reviewed the nonprofit hospital property tax exemption in 2007. In May 2021, the Citizen Commission directed JLARC staff to review nonprofit hospitals along with nonprofit cancer clinics because of the formal relationship that often exists between these entities.

Private nonprofit hospitals, public hospitals, and cancer clinics are exempt from property tax

A property tax exemption for all hospitals existed in Washington prior to statehood. In 1973, the Legislature limited the preference to only nonprofit hospitals as defined in RCW 84.36.800.

Nonprofit hospitals provided over 94% of the state's available hospital beds in fiscal year 2019. There are two types of nonprofit hospitals: private nonprofit hospitalsPrivate nonprofit hospitals are owned and operated by a domestic nonprofit corporation. and public hospitalsPublic hospitals are hospitals built or owned by a county authority or a public hospital district established by ballot referendum.. The property tax exemption in RCW 84.36.040 treats these two types of hospitals differently:

• For private nonprofit hospitals, real and personal property used to provide hospital services is exempt from property taxation.
• For public hospitals, the exemption only applies to leased property. Property owned directly by the public hospital is already exempt from property taxes under a different preference (RCW 84.36.010).

Nonprofit cancer clinics affiliated with 501(c)(3) nonprofit hospitals or formed by a municipal hospital corporation are eligible for a tax exemption on real and personal property under RCW 84.36.046.

Preferences have no expiration date

The Legislature did not state public policy objectives for these preferences. Both were enacted before the Legislature required performance statements for tax preferences. JLARC staff infer a shared intent to support the provision of charity care and other community benefits. See Section 3 for more details.

The hospital property tax exemption predates statehood, and was later limited to nonprofit hospitals in 1973. The nonprofit cancer clinic preference took effect in 1997. Neither preference has an expiration date.

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The tax preferences exempt private nonprofit hospitals and cancer clinics from paying property tax on real and personal propertyReal property generally includes hospital land, buildings, and other structures. Personal property includes medical equipment, hospital beds, and office equipment.. Public hospitals are exempt from paying property tax on leased property.

Beneficiary savings estimates are based on data from the Centers for Medicare and Medicaid Services and the Department of Health

County assessors determine the value of property subject to taxation. State lawRCW 84.36.005 does not require county assessors to value exempt personal property or exempt publicly-owned real property every year. As a result, some hospitals have outdated property tax assessments.

In the absence of current property valuations from county assessors, JLARC staff used hospital-level data reported to the Centers for Medicare and Medicaid Services (CMS) and the Department of Health (DOH) to determine the value of each hospital's real and personal property:

• For private nonprofit hospitals and cancer clinics, staff used CMS's Medicare Cost Reports to determine the value of the property exempt from taxation.

• For public hospitals, staff used lease expenses from annual reports submitted to DOH.

Using local tax levy rates, JLARC staff determined the effective property tax rate for each beneficiary hospital. The beneficiary savings is the amount hospitals would have paid if their real and personal property were subject to property tax.

Collectively, 94 beneficiaries saved $93.1 million in fiscal year 2019, the most recent year for which data is available. Staff estimate beneficiary savings of $259.4 million in the 2023-2025 biennium. Because of the state's budget-based property tax system, elimination of the preferences would result in a shift of tax burden between property owners, but would not increase revenues.

Exhibit 2.1: Beneficiaries estimated to save $259.4 million in the 2023-2025 biennium

Biennium	Fiscal Year	Estimated Beneficiary Savings
2017-2019	2019	$93,056,000
2019-2021	2020	$105,983,000
2019-2021	2021	$112,328,000
2021-2023	2022	$117,133,000
2021-2023	2023	$121,945,000
2023-2025	2024	$127,058,000
2023-2025	2025	$132,385,000
2023-2025 Biennium		$259,443,000

Source: JLARC staff analysis of 2019 data from the Centers for Medicare and Medicaid Services and county assessors. Future beneficiary savings use Department of Revenue data.

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Neither tax preference has a stated public policy objective.

Over time, the Legislature modified tax treatment and added charity care requirements for all hospitals

Hospitals were exempt from property taxation prior to statehood. At the time of the state's founding, hospitals typically served lower-income patients, while wealthier patients received treatment at home. Today, hospitals serve patients of all economic status.

IRS required provision of community benefits in 1969

The Internal Revenue Service (IRS) adopted a "community benefit standard" for nonprofit hospitals in 1969. This requires each hospital to "demonstrate that it operates to promote the health of a class of persons that is broad enough to benefit the community."

In 1973, the Legislature restricted the hospital property tax preference to only nonprofit hospitals. In 1991, the Legislature required all hospitals (nonprofit and for profit) to provide charity careMedical care for which payment is not expected and patients are not billed.. JLARC staff infer that these changes were intended to encourage beneficiaries to provide community benefits, including charity care.

Legislature established nonprofit cancer clinic preference in 1997

In 1997, the Legislature enacted the property tax exemption for nonprofit cancer clinics. Beneficiaries must be affiliated with a 501(c)(3) nonprofit hospital or formed by a municipal hospital corporation. Due to this requirement, JLARC staff infer that this preference is also intended to encourage those beneficiaries to provide community benefits and charity care.

Exhibit 3.1: The Legislature modified tax treatment and added requirements for hospitals

Source: JLARC staff analysis of statutory history.

Beneficiary hospitals provide different services than non-beneficiary hospitals

Beneficiaries are nonprofit hospitals that typically provide general and primary medical care. Non-beneficiaries include private, for-profit hospitals, which typically provide specific services. For example, non-beneficiaries include most of the state's psychiatric hospitals.

Non-beneficiary hospitals represent the minority of hospitals in the state and provided less than 6% of available beds in fiscal year 2019.

Exhibit 3.2: Washington's beneficiary and non-beneficiary hospitals provide different medical services

CMS Hospital Category	Beneficiaries	Non-beneficiaries
Children's hospitals	3	0
Long-term hospitals	1	1
Psychiatric hospitals	2	8
Rehabilitation hospitals	1	1
Critical access hospitals (CAH), or rural primary care hospitals (RCPH)	39	0
Short-term (general and specialty) hospitals	48	1
Total	94	11

Source: JLARC staff analysis of Centers for Medicare and Medicaid Services (CMS) Medicare Cost Report data.

Beneficiaries receive other preferential tax treatment

Beneficiaries receive other preferential treatment at the state and federal level. For example:

• Washington has a B&O tax preference for Medicare payments to public and nonprofit hospitals. The Department of Revenue estimates that beneficiaries saved $166 million with this preference in fiscal year 2020.
• At the federal level, nonprofit hospitals are exempt from corporate income tax, issue tax-exempt bonds, and receive tax-deductible charitable contributions.

These additional preferences for nonprofit hospitals may also contribute to encouraging beneficiaries' provision of charity care and community benefits.

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RCW 70.170.020 defines charity care as “medically necessary hospital health care rendered to indigent persons when third-party coverage, if any, has been exhausted, to the extent that the persons are unable to pay for the care or to pay deductibles or coinsurance amounts required by a third-party payer, as determined by the departmentDepartment of Health.” Consequently, charity care is medical care for which payment is not expected and patients are not billed.

JLARC staff reviewed data from the Centers for Medicare and Medicaid Services (CMS) and the Department of Health (DOH) and found that the value of charity care that beneficiaries provide is more than three times the amount of their tax savings.

Hospitals are required to provide charity care and community benefits

Nonprofit hospitals are required to provide charity care and other community benefits.

• Washington required all hospitals, regardless of ownership type, to provide charity care to patients meeting certain income-based federal povertyBeginning June 2022, hospitals must meet charity care standards that depend upon the characteristics of the hospital. Larger hospitals must provide charity care for the full amount for patients at or under 300% of the federal poverty line, and discounted charity care for patients between 301% and 400% of the federal poverty line. Smaller hospitals must provide charity care for the full amount for patients at or under 200% of the federal poverty line, and discounted charity care for patients between 201% and 300% of the federal poverty line. criteria beginning in 1991.
• The Internal Revenue Service (IRS) required nonprofit hospitals to provide community benefits, including charity care, in 1969.

The IRS does not define community benefits, but identifies multiple examples, including:

• Operating an emergency room open to all, regardless of ability to pay.
• Maintaining a board of directors drawn from the community.
• Providing hospital care for all patients able to pay, including those who pay their bills through public programs such as Medicaid and Medicare.
• Using surplus funds to improve facilities, equipment, and patient care.
• Using surplus funds to advance medical training, education, and research.

In 2019, 91% of beneficiaries provided charity care worth more than their tax savings

JLARC staff compared the value of beneficiary tax savings and the value of charity care provided in 2019, the most recent year for which data is available.

Hospital data reported to DOH and CMS indicates that beneficiary hospitals provided approximately $336 million in charity care in 2019. This accounts for 99.5% of charity care provided by all Washington hospitals. Of the 94 beneficiary hospitals and cancer clinics, 86 (91%) reported providing charity care worth more than their estimated beneficiary savings. For comparison, the savings for all beneficiaries in 2019 were $93.1 million.

New reporting requirement may provide more information about community benefits

JLARC staff reviewed data reported to DOH and CMS to try to estimate the value of community benefits beyond charity care. However, information in those reports was not sufficient to allow JLARC staff to determine the full value of all community benefits that beneficiaries provide.

While the full amount of community benefits could not be quantified, reports to DOH and CMS included insight into some areas, such as:

• Services to Medicaid patients. The Medicaid shortfall is the difference between a state's Medicaid payment rates and hospitals' costs for serving Medicaid patients. An August 2020 report by the Office of Financial Management found that after passage and implementation of the Affordable Care Act (including Medicaid expansion), the total amount of charity care provided by Washington hospitals decreased, while the amount of the Medicaid shortfall increased. In fiscal year 2019, the estimated Medicaid shortfall among beneficiaries was $1.4 billion.

• Services to patients under other programs with income eligibility requirements, such as the Children’s Health Insurance Program (CHIP). The estimated value of unreimbursed costs under these programs is $484,000.

• Medical training, education, and research programs. The total estimated cost of interns and research in fiscal year 2019 is $276 million.

The 2021 Legislature required most private nonprofit hospitals to report information about community benefits (E2SHB 1272). Beginning in 2023, hospitals will describe how their activities address community needs and identify outcome metrics. This future information may provide greater insight into the full value of community benefits outside of charity care.

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