{"id":422,"main_image":"https:\/\/defendfairaccess.org\/wp-content\/uploads\/2019\/09\/hospitals-main-image.jpg","hero_image":null,"page_title_en":"The rise of not-for-profit hospitals","page_title_es":"El surgimiento de hospitales sin fines de lucro","page_title_fr":"La mont\u00e9e des h\u00f4pitaux \u00e0 but non lucratif","page_content_en":"

About two-thirds of all U.S. hospitals are tax-exempt,[i]<\/a> meaning these organizations have an obligation to their communities due to lost tax revenue \u2013 a formidable amount that tops an estimated $31 billion each year in local, state and federal taxes. In exchange for those exemptions, federal and some state laws require that communities receive from their hospitals certain benefits, appropriately called community benefit. These programs are generally meant as programs intended to increase access to care and boost the health of the community, with a focus on low-income populations.<\/p>\n

With the passage of the 2010 Patient Protection and Affordable Care Act[ii]<\/a> (ACA) came significant shifts in how lower income patients paid for care. Thirty-seven states have since expanded Medicaid, the state-federal public insurance program geared to poorer populations. Because of this, more folks in those states are insured, drastically reducing the number of uninsured patients needing hospital-sponsored financial assistance, which is generally the most significant benefit a hospital provides back to its community. For example, in California, indigent care has dropped significantly in the last three years. And even though Medicaid shortfalls \u2013 another community benefit \u2013 have increased, it\u2019s no match for what financial assistance once was.<\/p>\n

Because of this, many have called into consideration what these not-for-profit hospitals should do in exchange for their tax-exempt status. That\u2019s a complex question, and the answer likely varies from state to state. This is something we\u2019ll examine continually from a variety of perspectives. But first, let\u2019s understand how this structure even came to be.<\/p>\n

Humble origins<\/u><\/strong><\/p>\n

Hospitals have been a part of the U.S. for nearly 200 years, having first emerged as almshouses to provide to the poor a place for treatment at a time when most people received care in their homes.[iii]<\/a> These hospitals then relieved what was a governmental burden by establishing a mechanism for everyone to receive care \u2013 even those unable to barter or pay for services \u2013 that subsisted largely on donations. Because of this, in 1894, hospitals received tax-exempt status.<\/p>\n

Over the next three decades, the care delivery model began to change. Although house calls still existed, advances in medical practices and technology helped solidify the hospital as a major source of care. Payment models evolved and were generally direct fee for service between the patient and the hospital or provider.[iv]<\/a><\/p>\n

However, when insurance was born, the history of health care delivery was forever changed in the U.S.<\/p>\n

In 1929, the formation of Blue Cross at Baylor University Hospital in Dallas, Texas, brought the first form of insurance in the U.S. as prepayment to hospitals for future services.[v]<\/a> That same year the first employer-sponsored healthcare plan also emerged in Dallas, with local teachers paying $0.50 a month to receive two weeks of paid hospital care.[vi]<\/a> Both were conceived by the same man \u2013 Justin Ford Kimball \u2013 who created these groups as tax-exempt organizations with the sole purpose of providing tax-exempt hospitals with payment for care. These first versions paid full charges for the care, and the hospital set the rates that insurance then reimbursed.[vii]<\/a><\/p>\n

The 1930s and 1940s brought swift advances in technology, revolutionizing healthcare and molding almshouses into young versions of the modern hospitals we know today. Hospitals were now operating within the marketplace and, accordingly, continued to charge fees for most services.[viii]<\/a> Poorer patients received only the care that could be covered by donations, surplus revenue from care for insured populations and public sector contracts.[ix]<\/a><\/p>\n

Modern behemoths<\/u><\/strong><\/p>\n

Throughout the following years, hospitals continued to evolve. They are now the second largest private sector employer in the U.S., with nearly 5.5 million employed. In 2011, according to the American Hospital Associations, hospitals provided care for 129 million people in emergency departments and treated another 526 million throughout other areas of the hospitals.[x]<\/a> In aggregate, the hospital\u2019s estimated economic impact is estimated to be close to $2 trillion.[xi]<\/a><\/p>\n

Hospitals tend to be among a given community\u2019s top employers, usually coming in second only to school systems and local government. Hospitals also tend to be the most aggressive in merger and acquisition activities. In 2015 alone, healthcare comprised nearly two-thirds of all M&A deals, growing from just $53 billion in 2013 to more than $68 billion in 2015. Additionally, of the approximately 100 hospital mergers and acquisitions that year, 65 were of not-for-profit hospitals, a figure that does not include any purchases of physician practices or other community-based services \u2013 both of which have also seen rapid acquisitions by health systems in the last decade.<\/p>\n

In 2011, the aggregated value of tax-exempt hospitals\u2019 tax exemption was calculated at $24.6 billion,[xii]<\/a> a number up significantly from $12.6 billion in 2002.[xiii]<\/a> However, the value of a tax-exempt status stretches beyond the face value of the forgone tax dollars. Funders, foundations and individual donations to not-for-profit hospitals comprise about $6 billion annually,[xiv]<\/a> with the majority of contributions going towards new buildings, renovations and new services. In exchange for all this, the IRS estimated that, in 2015, approximately $62.4 billion was spent on community benefit, about 10 percent of collective tax-exempt hospital revenue.[xv]<\/a><\/p>\n

Generally, hospitals do not pay four types of taxes: property, state and local income, sales and use, and bond financing. Of these, property taxes make up the largest segment of a hospital\u2019s tax exemption \u2013 about one-quarter.[xvi]<\/a> Because of this, the local community feels the most impact from the hospital\u2019s tax exemption, as the forgone tax revenue might have instead been used to support government-funded services, such as public schools, fire departments and police. Additionally, the hospital\u2019s tax-exempt status opens up other areas for savings, including local tax-exempt bond financing and donations.<\/p>\n

Remember, there are two other types of hospitals \u2013 for-profit and government-owned. Together, these comprise only about 20 percent of all hospitals, meaning not-for-profit is the prevailing structure when it comes to hospitals. Government hospitals \u2013 such as the Veteran\u2019s Administration \u2013 tend to have a specific focus and treat the poorest of the poor, leading to a unique partnership with local and federal authorities.<\/p>\n

But there isn\u2019t a noticeable difference between for-profits and tax-exempt hospitals other than their structure. For-profit hospitals distribute earnings to shareholders, while not-for-profit hospitals are charged with investing any proceeds back into the hospital and patient care \u2013 \u00a0particularly care for those most vulnerable, bringing us back to community benefit.<\/p>\n

Multiple studies have shown that, generally speaking, there is no real difference between the amount of charity care and shortfalls incurred from Medicaid between for-profits and non-profits.[xvii]<\/a>\u00a0 As Steven T. Miller, Commissioner of Tax Exempt and Government Entities for the IRS, stated in January 2009:<\/p>\n

\u201cTo the man on the street, a tax-exempt hospital may look remarkably similar to one that pays tax. And that same man on the street might reasonably ask why the standard I described above \u2013 that the hospital benefits the community it serves through the promotion of health \u2013 would not also be met by a for-profit hospital. So the tax policy and tax administration question that needs to be addressed is: How does one meaningfully differentiate a taxpaying, for-profit hospital from a non-profit hospital that enjoys exemption from federal and state tax, exemption from property tax, and eligibility for favorable bond financing?\u201d[xviii]<\/a><\/p>\n

<\/a>This is a question many policymakers and leaders are considering. In March 2010, the Illinois Supreme Court stripped tax-exempt Chicago-based hospital system Provena of its property tax exemption. The Attorney General\u2019s office subsequently stated the hospital provided insufficient charity care to justify its tax status and did not let patients know assistance was available. Through this ruling, the Court reasoned that financial assistance programs are a key component of tax-exempt hospitals legal obligation.[xix]<\/a><\/p>\n

<\/a>In 2015, Senator Charles Grassley (R-IA) called out Mosaic Life Care,[xx]<\/a> a Missouri-based tax-exempt hospital that was found to aggressively pursue low-income patients for unpaid debts. As expressed in a 2016 letter by Grassley to fellow Congressional members:[xxi]<\/a><\/p>\n

\u201cAs Commissioner of the Internal Revenue Service (IRS), you should be made aware of problematic activity within the charitable hospital community. Granted, we can both agree that many charitable hospitals perform good work on behalf of the communities that they service. However, some charitable hospitals get as close to the line as possible, while others callously breach it. It is important that Congress, via its oversight role, and the IRS ensure that charitable hospitals are functioning as intended.\u201d[xxii]<\/a><\/p>\n

 <\/p>\n

<\/a>Conclusion<\/strong><\/p>\n

Without a doubt, not-for-profit hospitals provide vital services to communities. However policymakers should continue to examine tax-exempt hospitals and their community benefit expenditures to ensure there is justification for their status beyond the simple provision of care \u2013 particularly in states where Medicaid has been expanded. Tax-exempt hospitals owe this to their communities and their low-income patients.<\/p>\n

 <\/p>\n

The issues policymakers have attempted to address through various laws and initiatives aimed at increasing access to care for lower-income patients seem to have limited impact, even with the partial expansion of a program meant to help provide health coverage to low-income patients. This could be for several reasons, including a lack of clear and measurable requirements for tax-exempt hospitals, a lack of knowledge of the value of a tax exemption and limited data regarding tax-exempt hospital community benefit.<\/p>\n

 <\/p>\n

With this in mind, there are a few policy items to consider:<\/p>\n

 <\/p>\n

Set concrete thresholds for federal tax exemptions.<\/u> Minimum community benefit financial thresholds would provide both policymakers and hospitals an absolute standard. However, it\u2019s important to note commonly cited arguments to this, which is that high-performing hospitals may reduce activities and\/or hospitals might only undertake the activities that count to a community benefit. Additionally, such thresholds should account for the difference between hospitals, such as urban research facilities, children\u2019s hospitals and critical access hospitals, as they have varying patient characteristics and other factors that impact their community benefit expenditures.<\/p>\n

 <\/p>\n

Publish the value of individual hospital\u2019s tax exemption to further this discussion.<\/u> An overwhelming majority of hospitals provide no direct information on their tax exemption, making it difficult to have a real sense of what the local impact could be. Hospitals could be required to provide an annual assessment of their exemption to provide specific detail about its value. This information could be made available to the public, reported to the IRS, and be used for increased transparency and accountability as well as inform any imposed minimum thresholds.<\/p>\n

\u00a0<\/u><\/p>\n

Create mechanisms for increased transparency and accountability.<\/u> Most tax-exempt hospitals do not readily provide a copy of their IRS Form 990, nor do all publish information about their community benefit expenditures. Those that do often complicate that information with figures that do not correspond with the IRS\u2019s definition of community benefit, such as bad debt at charge. States vary in their laws governing community benefit reporting, and even for states that do provide this information, it is difficult to find. To add to this, most hospitals[xxiii]<\/a> exist within a hospital system, which can create a complex picture of overall financials. Increased transparency would allow for communities to work more effectively with their local hospitals to create local standards for the tax exemption, a particularly important point considering the biggest impact of an exemption is within the local community.<\/p>\n

 <\/p>\n

Tie exemptions to outcomes<\/u>. By establishing mechanisms to better capture community-based care outcomes, hospitals could align those activities with others that are part of the general trend towards value-based medicine.[xxiv]<\/a> This, however, could create an administrative burden in ensuring these outcomes were met, especially if the hospital has the discretion to determine their own targeted outcomes.<\/p>\n

[i]<\/a> \u201cFast Facts on US Hospitals.\u201d\u00a0Fast Facts<\/em>, American Hospital Association, 1 Dec. 2016, www.aha.org\/research\/rc\/stat-studies\/fast-facts.shtml. Accessed 4 Aug. 2017.<\/p>\n

[ii]<\/a> Patient Protection and Affordable Care Act, 43 U.S.C. \u00a718001 et seq. (2010).<\/p>\n

[iii]<\/a> Young, Gary J., et al. \u201cProvision of Community Benefits by Tax-Exempt U.S. Hospitals.\u201d\u00a0The New England Journal of Medicine<\/em>, vol. 368, no. 16, 2013, pp. 1519\u20131527.<\/p>\n

[iv]<\/a> Cohn, Jonathan. Sick: The Untold Story of America\u2019s Health Care Crisis \u2013 And the People Who Paid the Price.<\/em> Harper Perennial. 2008.<\/p>\n

[v]<\/a> Scofea, Laura A. \u201cThe Development and Growth of Employer-Provided Health Insurance.\u201d\u00a0Monthly Labor Review<\/em>, vol. 117, no. 3, 1994, pp. 3\u201310.<\/p>\n

[vi]<\/a> The structure Kimball created was that, for $0.50 cents a month, teachers would receive two weeks of paid hospital care.<\/p>\n

[vii]<\/a> Scofea, Laura A. \u201cThe Development and Growth of Employer-Provided Health Insurance.\u201d\u00a0Monthly Labor Review<\/em>, vol. 117, no. 3, 1994, pp. 3\u201310.<\/p>\n

[viii]<\/a> Cohn, Jonathan. Sick: The Untold Story of America\u2019s Health Care Crisis \u2013 And the People Who Paid the Price.<\/em> Harper Perennial. 2008.<\/p>\n

[ix]<\/a> Stevens, Rosemary. \u201cA Poor Sort of Memory: Voluntary Hospitals and Government before the Depression.\u201d\u00a0The Milbank Memorial Fund Quarterly. Health and Society<\/em>, vol. 60, no. 4, 1982, pp. 551\u2013584.<\/p>\n

[x]<\/a> AHAhospitals. \u201cEconomic Contribution of Hospitals Often Overlooked.\u201d\u00a0American Hospital Association, 2013, http:\/\/www.aha.org\/content\/13\/13brief-econcontrib.pdf. Accessed 6 Aug. 2017.<\/p>\n

[xi]<\/a> AHAhospitals. \u201cEconomic Contribution of Hospitals Often Overlooked.\u201d\u00a0American Hospital Association, 2013, http:\/\/www.aha.org\/content\/13\/13brief-econcontrib.pdf. Accessed 6 Aug. 2017.<\/p>\n

[xii]<\/a> Rosenbaum, Sara, et al. \u201cThe Value of The Nonprofit Hospital Tax Exemption Was $24.6 Billion In 2011.\u201d\u00a0Health Affairs (Project Hope)<\/em>, vol. 34, no. 7, 2015, pp. 1225\u201333.<\/p>\n

[xiii]<\/a> General Accounting Office (US).\u00a0\u201cNonprofit hospitals: variation in standards and guidance limits comparison of how hospitals meet community benefit requirements.\u201d GAO-08-880.\u00a02008.<\/p>\n

[xiv]<\/a> Subsidyscope, Pew Charitable Trusts.\u00a0Congressional Research Service estimates, 2008.\u00a0[cited 2010 Sep 28]. Available from: http:\/\/subsidyscope.com\/nonprofits\/tax-expenditures\/health-charitable-contributions.<\/p>\n

[xv]<\/a> Rosenbaum, Sara, et al. \u201cThe Value of The Nonprofit Hospital Tax Exemption Was $24.6 Billion In 2011.\u201d\u00a0Health Affairs (Project Hope)<\/em>, vol. 34, no. 7, 2015, pp. 1225\u201333.<\/p>\n

[xvi]<\/a> Santos, Eric J. \u201cProperty Tax Exemptions for Hospitals: A Blunt Instrument Where a Scapel is Needed.\u201d Columbia Journal of Tax Law, vol. 8, no 1, 2016.<\/p>\n

[xvii]<\/a> Valdovinos, Erica, et al. \u201cIn California, Not-for-Profit Hospitals Spent More Operating Expenses on Charity Care than for-Profit Hospitals Spent.\u201d\u00a0Health Affairs (Project Hope)<\/em>, vol. 34, no. 8, 2015, pp. 1296\u2013303.<\/p>\n

[xviii]<\/a> Accessed via the web at: https:\/\/www.irs.gov\/pub\/irs-tege\/miller_speech_011209.pdf<\/p>\n

[xix]<\/a> Provena Covenant Med. Ctr. v. Dep\u2019t of Revenue, 925 N.E.2d 1131, 236 Ill. 2d 368, 2010 Ill. LEXIS 289, 339 Ill. Dec. 10 (Ill. Mar. 18, 2010). At the time of the lawsuit\u2019s filling in 2002,<\/p>\n

only 0.3 percent of patients received free or discounted care at a cost to the hospital of 0.7 percent of its $113 million revenue.<\/p>\n

[xx]<\/a> At the initial filing of the case, Mosiac was named Heartland Health. The hospital later changed its name.<\/p>\n

[xxi]<\/a> Sen. Grassely\u2019s letter was accessed at: https:\/\/www.judiciary.senate.gov\/imo\/media\/doc\/2016-06-09%20CEG%20to%20IRS%20(Mosaic%20Non-Profit).pdf<\/p>\n

[xxii]<\/a> Sen. Grassely\u2019s letter was accessed at: https:\/\/www.judiciary.senate.gov\/imo\/media\/doc\/2016-06-09%20CEG%20to%20IRS%20(Mosaic%20Non-Profit).pdf<\/p>\n

[xxiii]<\/a> AHAhospitals. \u201cFast Facts on US Hospitals.\u201d\u00a0American Hospital Association, 1 Dec. 2016, www.aha.org\/research\/rc\/stat-studies\/fast-facts.shtml. Accessed 6 Aug. 2017.<\/p>\n

[xxiv]<\/a> Rubin, Daniel B, et al. \u201cEvaluating Hospitals&Apos; Provision of Community Benefit: an Argument for an Outcome-Based Approach to Nonprofit Hospital Tax Exemption.\u201d\u00a0American Journal of Public Health<\/em>, vol. 103, no. 4, 2013, pp. 612\u20136.<\/p>\n

 <\/p>\n

 <\/p>\n