Report says tax breaks for Minnesota hospitals, including Mayo, outweigh community benefit

A national report finds Mayo Clinic was one of the 10 worst-performing nonprofit U.S. health systems in 2021 when it comes to “fair share” deficit, a measure comparing charity care and community spending against the value of tax breaks it received.

The study, published late Monday night by Boston-based Lown Institute, also found three other large Minnesota nonprofit health care providers — Allina, Fairview and HealthPartners — had fair share deficits that exceeded $100 million each that year.

Mayo Clinic called the report’s methodology “deeply flawed” and the Minnesota Hospital Association said its conclusions were false, sensational and based on “cherry-picked categories.”

Dr. Vikas Saini, president of the Lown Institute, argues the results in Minnesota and across the country show the need for more transparency in how hospitals report data on community benefits. He is calling for an update to rules for how medical centers win tax exemption.

“If nonprofit hospitals want to enjoy those tax breaks, they need to do more to justify them,” Saini said in an interview. “What we’re trying to encourage is more community leaders to ask questions about that, because simply saying ‘we train doctors, we do research and we lose money on Medicaid’ is not sufficient any more. These are big, big businesses.”

As charitable entities, nonprofit hospitals are exempt from certain federal, state and local taxes. Each year, they’re required to report to the IRS the cost of community benefits they provide, such as financial assistance for patients and community health improvement programs.

The Lown Institute analysis looked at filings from more than 2,400 nonprofits hospitals for 2021.

Rochester-based Mayo spent about $478 million less on certain community benefit programs than the clinic saw in savings through tax exemptions, according to the report. The calculation factors Mayo’s hospital operations across four states, not just those in Minnesota.

Among health systems nationwide, Mayo ranked No. 9 among those with the largest fair share deficits. Mayo’s flagship hospital in Rochester had the seventh-largest fair share deficit among individual hospitals.

Saini, noting recent profitability at Mayo Clinic, said, “You’re saying you couldn’t close that gap even a little bit?”

The Lown Institute is at odds with hospitals over what is considered a community benefit.

Mayo Clinic slammed the group’s methodology for excluding several expense categories that are allowed in IRS filings, including spending on research, as well as training of health care professionals. As a result, Mayo says, the study tends to penalize large, high-quality hospitals.

“Notably, 9 out of 10 hospitals identified as having the ‘Largest Fair Share Deficit’ on the Lown Index are also hospitals listed on the U.S. News Honor Roll,” the clinic said in a statement to the Star Tribune. “As a nonprofit medical center focused on patient care, research and education, Mayo Clinic provides substantial community benefit.”

Another big miss, hospitals say, is that the Lown Institute excludes what’s known as the “Medicaid shortfall.” This is the extra cost health systems absorb when caring for patients in the state-federal Medicaid program. Medicaid generally pays less than commercial health insurers for the same health care service.

“The report’s findings hinge on outrageously narrow criteria that arbitrarily dismiss over $1.8 billion in unreimbursed care to Minnesotans on public health plans like Medicaid,” the Minnesota Hospital Association said in a statement to the Star Tribune.

Even though the IRS does not automatically recognize Medicare shortfall as community benefit spending, the trade group’s tally includes costs from Medicare patients.

Lown Institute says hospitals don’t factor large supplemental Medicaid funding they receive when reporting shortfall amounts. Furthermore, Lown says, health systems don’t specify their margins on higher payments from commercial health insurers that can compensate for Medicaid rates.

As for spending on research and training, hospitals’ reported figures don’t always factor in federal money received for running those programs, Lown says. And, Saini said, hospitals don’t have to show how spending on research and teaching fits with community needs, such as training more primary care doctors vs. specialty physicians.

“Federal regulation of community benefit spending is woefully ineffective and in need of reform,” he said in a statement. “Though hospitals are required to report their community contributions to the IRS, there is no minimum spend, there are many loopholes and enforcement is practically nonexistent.”

In its IRS filing, Mayo Clinic says it spent about $764.5 million on a variety of community benefits in 2021. After removing expenses related to research, training and the Medicaid shortfall, Lown Institute put the value of the clinic’s community benefit spending much lower at about $248 million.

This spending was about $478 million less, the report said, than the estimated $726 million in tax breaks Mayo received during the year.

Mayo did not comment on particulars of the calculation. The Minnesota Hospital Association faulted the Lown Institute’s estimates for tax breaks, saying they don’t account for state and local variations.

That’s just one of many problems with the report, said Joe Schindler, vice president for finance policy and analytics at the Minnesota Hospital Association.

“They basically cherry-picked information that’s part of community benefits,” Schindler said, “but not the entire picture.”

He pointed to the most recent Minnesota Department of Health report on community benefit spending, showing how expenses grew by 13% between 2016 and 2019, driven by underpayments from Medicaid and related state programs.

Saini argued, however, that the calculation of Medicaid underpayments — while relevant to hospital financing — isn’t always relevant to the question of whether a hospital should be tax-exempt.

“Hospitals use their Medicaid shortfall ... as a community benefit, despite the fact that nonprofit hospitals have similar unreimbursed Medicaid costs as for-profit hospitals,” Lown Institute said in a statement.