Nonprofit Hospitals Need to Earn Their Exemptions

If nonprofit hospitals spend far less money on providing charity
care for the poor and uninsured than the value of their federal, state
and local tax exemptions, do they deserve those exemptions? What about
if they turn away indigent patients or hound them with aggressive
collection practices?

In May, the Senate Finance Committee
chairman Max Baucus, and ranking Republican Charles Grassley seemed to
agree that nonprofit hospitals have to start acting more like
nonprofits or they could risk losing their benefits. The committee
introduced a bipartisan proposal that would have required nonprofit
hospitals to provide a minimum amount of charity care, limit how much
they charge the uninsured, and to scale back aggressive collection
processes or face an excise tax or even an end to their tax-exempt
status.

But when the Senate committee released its watered-down
version of health care reform earlier this month, these stringent new
standards emerged equally weakened. Gone was the requirement that
hospitals provide a minimum of uncompensated care. Gone was the threat
of an excise tax, and gone was the threat that hospitals could lose
their tax-exempt status if they didn’t comply.

It isn’t clear what happened to the bill on its way out of
committee; but the negative response to the proposal from the American
Hospital Association and its allies suggests that pressure from
lobbyists was a key influence. In May, the AHA sent a bulletin to hospital leaders around the country urging them to “ask your senators to oppose charity care proposals.” It seems that they did–and were heard.

What remains in the Senate Bill 
are the following new requirements: Nonprofit hospitals must conduct a
“community health needs assessment” every three years or face a fine of
up to $50,000. They have to “adopt, implement and widely publicize a
written financial assistance policy” and must not deny service to
patients that cannot pay. Patients who qualify for this financial
assistance cannot be charged rates higher than those charged insured
patients. Finally, hospitals have to make a good faith effort to
identify poor patients before resorting to aggressive collection
practices like liens and lawsuits.

These new requirements are
very good ones, but they don’t address the fundamental concern that
many nonprofit hospitals—especially those that operate in wealthy
neighborhoods and suburbs—are becoming indistinguishable from their
for-profit brethren. Instead of providing more care to the poor and
underserved, they are investing revenues into “community benefits” that
increasingly include shiny new facilities aimed at attracting insured
patients, research that leads to profitable new treatments and staff
salaries. The legislation also doesn’t change the fact that no federal
law actually defines what a hospital must do to obtain and retain
tax-exempt status.

First some background. Federal law used to
require nonprofit hospitals to provide charity care for the working
poor and indigent. But since 1969 when Medicare and Medicaid began
covering many of these patients, the hospitals convinced Congress that
few people would need this charity care any more.  Now, the IRS only
requires that nonprofit hospitals show that they provide “community
benefit,” a loose term that hospitals interpret to include a wide range
of activities like health fairs, free screening efforts, medical
research and in some cases, expansion of facilities and staff salaries.

Nonprofit hospitals account for about 60% of the more than 4,900
hospitals in the U.S. The rest are either for-profit or
government-owned. Nonprofit hospitals are exempt from paying federal
and state income taxes, state and local sales tax and most importantly,
they are not required to pay local property taxes. In Boston, for
example, property owned by nonprofit hospital companies is worth $2.4
billion. One study found that in 2007, the eight largest hospitals in Boston would have had to pay the city nearly $65 million in property taxes if they had not been exempt.

In a report issued in December 2006, the Congressional Budget Office estimated
that nonprofit hospitals received $12.6 billion in annual tax
exemptions–on top of the $32 billion in federal, state and local
subsidies the hospital industry as a whole receives each year.

This
same CBO report also found that there wasn’t a large difference between
how much uncompensated care nonprofit hospitals provided vs. those of
the for-profit ilk: the cost of uncompensated care as a share of
hospitals’ operating expenses was 4.7% for nonprofits and 4.2% at
for-profit facilities. Government hospitals, it turned out, were
providing the lion’s share at 13% of operating expenses.

Meanwhile, nonprofit hospitals were starting to resemble for-profit facilities in other ways. In 2008, the Wall Street Journal reported
that the “combined net income of the 50 largest nonprofit hospitals
jumped nearly eight-fold to $4.27 billion between 2001 and 2006.”

The
article also noted that nonprofits, were “faring even better than their
for-profit counterparts: 77% of the 2,033 U.S. nonprofit hospitals are
in the black, while just 61% of for-profit hospitals are profitable,
according to the AHD [American Hospital Directory] data.”

The Journal
goes on to report that despite claims by hospitals that they are
spending these considerable revenues on “community benefits,” they seem
to be using a very loose definition of the term:

“At some
nonprofits, the good times are reflected in new facilities and rich
executive pay. Flush with cash, Northwestern Memorial Hospital in
Chicago has rebuilt its entire campus since 1999 at a cost of more than
$1 billion. In October, it opened a new women's hospital that features
marble in the lobby, birthing rooms with flat-screen televisions, 1,000
works of art and a roof topped with 10,000 square feet of gardens. In
2006, Northwestern Memorial's former chief executive officer, Gary
Mecklenburg, received a $16.4 million payout.”

Meanwhile, the Journal reported;

“Northwestern
Memorial has been frugal in its spending on charity care, the free
treatment for poor patients that nonprofit hospitals are expected to
provide in return for the federal and state tax breaks they receive. In
2006, Northwestern Memorial spent $20.8 million on charity care — less
than 2% of its revenues and a fraction of what it received in tax
breaks. By comparison, the hospitals run by Cook County, where
Northwestern Memorial is located, spent 14% of revenues on charity
care.”

Hospitals like Northwestern Memorial argue that they are
meeting their “community benefit” requirement in ways other than
providing charity care. They point to medical education, research and
health fairs as examples. But the vagueness of “community benefit” also
means that hospitals can count shortfalls in Medicaid and Medicare
payments, bad debt and staff salaries as contributing to this
“benefit.”

The vagueness problem is made worse by a lack of
national, or even state, standards for what constitutes “benefit” and
what should be excluded from consideration. At the request of Senator
Grassley, in September 2008, the Government Accounting Office issued a
report called “Nonprofit
Hospitals: Variation in Standards and Guidance Limits Comparison of How
Hospitals Meet Community Benefit Requirements.” This
report found that only 15 states have any requirement for community
benefit in their statutes or regulation; only 10 of these lay out
specific levels of charity care or other good works that must be met.

There
have been some attempts by advocates to impose standards for nonprofit
hospitals at the state level, but so far efforts have focused mostly on
just getting hospitals to inform patients that financial assistance
programs are available—and that they might be eligible for reduced-cost
or free care.  “This lack of notification is huge,” says Jessica
Curtis, director of the Hospital Accountability Project at Community
Catalyst, a Boston-based advocacy group. “It happens even in states
that require hospitals to post their policies. They don’t tell patients
what the eligibility requirements are or how they can apply. Forget
about finding out about these programs if you don’t speak English.”

Meanwhile
some cash-strapped states are beginning to question the huge tax
exemptions granted to some of the more affluent nonprofit hospitals in
their area. That’s the case in Massachusetts, where the state’s health
reform plan has made insurance available to many more low-income
people. Nonprofit hospitals “typically spend about 1 percent of
expenses on free medical care, as measured by the attorney general,
half of what they spent before reform,” according to a report this year in the Boston Globe.

Meanwhile,
“The 10 leading hospital companies benefited from an estimated $638
million in federal, state, and local tax breaks as well as state
discounts on borrowing in 2007, the latest year for which complete data
are available. More than half of that goes to two large and growing
companies, Partners and Children's Hospital. Overall, the 10 hospital
companies' tax breaks and other benefits were worth $264 million more
than the value of the "community benefits" – care for the poor and
other charity work – they reported to the state attorney general that
year.”

In Wisconsin, where some 92% of hospitals are non-profit, the Institute for Wisconsin’s Future
found that the state’s 124 nonprofit hospitals own at least $6 billion
worth of property—all of which is exempted from property taxes. If
taxed, that property would generate at least $117 million for local
governments each year. According to the report, while the hospitals do
not pay property taxes, they benefit from services provided by local
governments, including police and fire protection, sewers and snow
removal.

In Illinois, the Supreme Court is now hearing the case of  Provena Covenant Medical Center,
a Catholic hospital in Urbana, Illinois that had its state and local
property tax exemption revoked because it was not providing enough free
or reduced care for the poor. At issue is the charge that in 2002, the
hospital, now part of Covenant Medical Center, provided less than 1% of
its $113 million income for charity care. The hospital also employed an
aggressive debt collection service that targeted poor people.  It could
be months before a decision is made, but one possible outcome (being
watched nationwide) is that the Court could decide to set minimum
charity care standards that all Illinois hospitals have to meet to
receive valuable property tax exemptions.

In the end, the
definition of what distinguishes a nonprofit hospital is continuing to
evolve. If health reform passes—and includes meaningful subsidies that
will allow the uninsured to purchase coverage, a public plan, and
disincentives for insurers to refuse coverage—hospitals will presumably
be providing a lot less charity care. Hospitals will have to instead
look at providing their “community benefit” in terms of improving
public health, addressing health care disparities and focusing on
specific needs identified by community representatives.

The new
regulations proposed by the Senate’s health reform bill will help start
the process by requiring community needs assessments and also by
mandating that hospitals be more upfront about their financial
assistance policies. And this year, the IRS finally began requiring
nonprofit hospitals seeking federal tax exemptions to file new claim
forms that provide itemized details of their community benefit
activities.

But we need to go further—maybe on a state-by-state
level if the federal government is wary of getting involved. The first
step is to provide clear guidelines about which activities—besides
charity care—can be included in a hospital’s accounting of “community
benefit” and which cannot. For example, the Globe article says
that the new IRS reporting system is  “a broad survey of hospitals'
activities rather than a rigorous accounting of how hospitals justify
their tax exemption.”  The article goes on to say;

“The IRS
allows hospitals to count some big-ticket categories of ‘charity’
without taking into consideration the financial benefit they get in
return.

Partners, [Mass General’s parent] for example, contends
that it lost $135 million on scientific research in 2007 under the IRS
reporting system. But that does not take into account a $207 million
royalty payment the company received for research that led to the
development of an arthritis drug, Enbrel.”

No one wants to
suggest that all hospitals should be stripped of their nonprofit
status—they perform a vital role in caring for the poor and providing
community health benefits. But it is clear that some of them can do a
lot more—and must be held accountable. The final health care bill
should include all of the Finance Committee’s proposals to create new
standards for nonprofit hospitals that want to remain tax-exempt. Even
better—but not likely in this bill—these new requirements should be
backed up with the real threat of an excise tax if hospitals fail to
meet these basic standards. Further down the road, the government
should better define “community benefits” and then set minimum levels
for hospitals to meet–at the risk of losing tax-exempt status.