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Wednesday, December 18, 2013

NY Times: Tax-Exempt Hospitals Face Growing Backlash for Spending Only 7.5% of Income on Charity Care

HospitalNew York Times:  Benefits Questioned in Tax Breaks for Nonprofit Hospitals, by Elisabeth Rosenthal:

The billions of dollars in tax breaks granted to the nation’s nonprofit hospitals are being challenged by regulators and politicians as cities still reeling from the recession watch cash-rich medical centers expand.

Hospitals, among the largest landowners in many communities, are often designated as nonprofits, allowing them to benefit from state and federal tax breaks for providing “charity care and community benefit.” The exemptions collectively amount to more than $12 billion annually, health economists say.

Now, provisions of the Affordable Care Act, along with Internal Revenue Service reporting requirements imposed in recent years, are revealing how much medical centers give back to their communities. And many health experts have found them wanting.

“You should get close to the value of tax exemption in community benefit,” said Paula Song, professor of health services organization at Ohio State University. “I think you’ll find most hospitals aren’t providing that.”

A study this year in The New England Journal of Medicine [Provision of Community Benefits by Tax-Exempt U.S. Hospitals] found that hospitals spent an average of 7.5 percent of their operating costs on charity care and community benefit, based on filings the IRS has required only since 2009. Some spent under 1 percent and others about 20 percent.

What’s more, the IRS allows hospitals to use broad definitions of community service, including the value of traditional charity — care dispensed free or at a discount to those who cannot pay — and the money hospitals calculate they lose because Medicaid reimburses them less than their costs. Hospitals can also take credit for hosting health fairs, operating some research labs and “donating” their executives’ time to serve on local community boards.

“Nonprofit hospitals may have been founded on the basis of community need but that doesn’t mean they’re not very profitable,” said Gary Young, an author of the New England Journal of Medicine article and a professor at Northeastern University. “Towns are hurting and they see this affluent institution in their midst on lots of land and say, ‘Hey, cough up some money.” ...

The federal government has not specified the amount of benefit a hospital should provide to be exempt from federal taxes, though their status will now be subject to review every three years under the new health care law. But states and cities are already poised to make demands, said John D. Colombo, a professor of tax law at the University of Illinois Urbana-Champaign. ... “The standard nonprofit hospital doesn’t act like a charity any more than Microsoft does — they also give some stuff away for free,” Professor Colombo said. “Hospitals’ primary purpose is to deliver high quality health care for a fee, and they’re good at that. But don’t try to tell me that’s charity. They price like a business. They make acquisitions like a business. They are businesses.” ...

Many tax experts say that, at the very least, more stringent reporting standards are needed to ensure that tax-exempt hospitals fulfill their mandate.

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It is actually worse than it looks. The hospitals establish the cost of charitable care that they provide by their "charge master" pricing. The charge master is the "retail" price of hospital services that they provide discounts from for the insurance companies, medicare, and medicaid.

In other, words, if a charitable patient has a hip replacement, and the charge master says that it costs $100,000, that is how much the claim in charitable care. Even if no insured non-charitable patient is charged more than $60,000, a medicare patient is charged $50,000 and medicaid only pays $40,000.

The truth of the matter is that hospitals are big businesses and they should be taxed as such.

Posted by: Walter Sobchak | Dec 18, 2013 2:19:36 PM

There are no shareholders accruing profits, so it counts as a nonprofit. Any tax levied will fall on managers, doctors, nurses, and of course patients, since there are no shareholders to absorb the incidence.

It might also inhibit the growth of hospitals in areas of high property value, as the tenants will have to suffer expensive property taxes.

Posted by: nl7 | Dec 19, 2013 12:15:14 PM