As Nonprofit Hospitals Reap Huge Tax Breaks, States Scrutinize Their Required Charity Spending


By Andy Miller, a healthcare journalist for 29 years, and Markian Hawryluk, senior Colorado correspondent for KFF Well being Information. Initially printed at KFF Well being Information.

POTTSTOWN, Pa. — The general public college system right here needed to scramble in 2018 when the native hospital, newly bought, was transformed to a tax-exempt nonprofit entity.

The takeover by Tower Well being meant the 219-bed Pottstown Hospital not needed to pay federal and state taxes. It additionally not needed to pay native property taxes, taking away greater than $900,000 a 12 months from the already underfunded Pottstown College District, college officers mentioned.

The district, about an hour’s drive from Philadelphia, had no alternative however to trim bills. It minimize trainer aide positions and eradicated center college overseas language lessons.

“We now have much less curriculum, much less coaches, much less transportation,” mentioned Superintendent Stephen Rodriguez.

The varsity system appealed Pottstown Hospital’s new nonprofit standing, and earlier this 12 months a state courtroom struck down the ability’s property tax break. It cited the “eye-popping” compensation for a number of Tower Well being executives as opposite to how Pennsylvania regulation defines a charity.

The courtroom choice, which Tower Well being is interesting, surprised the nonprofit hospital trade, which incorporates roughly 3,000 nongovernment tax-exempt hospitals nationwide.

“The ruling despatched a warning shot to all nonprofit hospitals, highlighting that their state and native tax exemptions, which are sometimes higher than their federal earnings tax exemptions, might be challenged by state and native courts,” mentioned Ge Bai, a well being coverage skilled at Johns Hopkins College.

The Pottstown case displays the rising scrutiny of how a lot the nation’s nonprofit hospitals spend — and on what — to justify billions in state and federal tax breaks. In alternate for these financial savings, hospitals are supposed to supply group advantages, like care for individuals who can’t afford it and free well being screenings.

Greater than a dozen states have thought-about or handed laws to higher outline charity care, to extend transparency about the advantages hospitals present, or, in some circumstances, to set minimal monetary thresholds for charitable assist to their communities.

The rising curiosity in how tax-exempt hospitals function — from lawmakers, the general public, and the media — has coincided with a cussed improve in shoppers’ medical debt. KFF Well being Information reported final 12 months that greater than 100 million Individuals are saddled with medical payments they will’t pay, and has documented aggressive bill-collection practices by hospitals, a lot of them nonprofits.

In 2019, Oregon handed laws to set flooring on group profit spending largely primarily based on every hospital’s previous expenditures in addition to its working revenue margin. Illinois and Utah created spending necessities for hospitals primarily based on the property taxes they’d have been assessed as for-profit organizations.

And a congressional committee in April heard testimony on the problem.

“States have a basic curiosity in understanding how a lot is being spent on group profit and, more and more, understanding what these expenditures are focused at,” mentioned Maureen Hensley-Quinn, a senior director on the Nationwide Academy for State Well being Coverage. “It’s not a blue or pink state challenge. It truly is throughout the board that we’ve been seeing inquiries on this.”

Moreover offering federal, state, and native tax breaks, nonprofit standing additionally lets hospitals profit from tax-exempt bond financing and obtain charitable contributions which are tax-deductible for the donors. Coverage analysts at KFF estimated the whole worth of nonprofit hospitals’ exemptions in 2020 at about $28 billion, a lot increased than the $16 billion in free or discounted providers they supplied via the charity care portion of their group advantages.

Federal regulation defines the form of spending that may qualify as a group profit however doesn’t stipulate how a lot hospitals must spend. The vary of group profit actions, reported by hospitals on IRS types, varies significantly by group. The spending sometimes consists of charity care — broadly outlined as free or discounted care to eligible sufferers. However it could possibly additionally embrace underpayments from public well being plans, in addition to the prices of coaching medical professionals and doing analysis.

Hospitals additionally declare as group advantages the distinction between what it prices to supply a service and what Medicaid pays them, referred to as the Medicaid shortfall. However some states and coverage consultants argue that shouldn’t rely as a result of increased funds from business insurance coverage firms and uninsured sufferers paying money cowl these prices.

Bai, of Johns Hopkins, collaborated on a 2021 research that discovered for each $100 in complete spending, nonprofit hospitals supplied $2.30 in charity care, whereas for-profit hospitals supplied $3.80.

Final month, one other research in Well being Affairs reported substantial development in nonprofit hospitals’ working earnings and money reserves from 2012 to 2019 “however no corresponding improve in charity care.”

And an April report by the Lown Institute, a well being care suppose tank, mentioned greater than 1,350 nonprofit hospitals have “fair proportion” deficits, that means the worth of their group investments fails to equal the worth of their tax breaks.

“With so many Individuals scuffling with medical debt and entry to care, the necessity for hospitals to provide again as a lot as they take grows stronger every single day,” mentioned Vikas Saini, president of the institute.

The Lown Institute doesn’t rely compensating for the Medicaid shortfall, spending on analysis, or coaching medical professionals as a part of hospitals’ “fair proportion.”

Hospitals have lengthy argued they should cost personal insurance policy increased charges to make up for the Medicaid shortfall. However a current state report from Colorado discovered that, even after accounting for low Medicaid and Medicare charges, hospitals get sufficient from personal medical insurance plans to supply extra charity care and group advantages than they do at the moment and nonetheless flip a revenue.

The American Hospital Affiliation strongly disagrees with the Lown and Johns Hopkins analyses.

For a lot of hospitals — after dozens of closures over the previous 20 years — “simply protecting your doorways open is a transparent group profit,” mentioned Melinda Reid Hatton, basic counsel for the AHA. “You possibly can’t focus totally on charity care” as a measure of group profit. Hospitals ship 9 instances the group profit for each greenback of federal tax averted, Hatton mentioned.

The 2010 Reasonably priced Care Act, she famous, imposed extra group profit mandates. Tax-exempt hospitals should conduct a group well being wants evaluation not less than as soon as each three years; set up a written monetary help coverage; and restrict what they cost people eligible for that assist. And so they should make an affordable try to find out if a affected person is eligible for monetary help earlier than they take “extraordinary assortment actions,” similar to reporting individuals to the credit score bureaus or inserting a lien on their property.

Nonetheless, the Authorities Accountability Workplace, a congressional watchdog company, argues that group profit is poorly outlined.

“They’re not necessities,” mentioned Jessica Lucas-Judy, a GAO director. “It’s not clear what a hospital has to do to justify a tax exemption. What’s a enough profit for one hospital will not be a enough profit for an additional.” The GAO, in a 2020 report, mentioned it discovered 30 nonprofit hospitals that acquired tax breaks in 2016 regardless of reporting no spending on group advantages.

The GAO then really useful Congress contemplate specifying the providers and actions that exhibit enough group profit.

The tax and profit query has change into a bipartisan challenge: Democrats criticize what they see as scant charity care, whereas Republicans marvel why nonprofit hospitals get a tax break.

In Georgia, Democratic lawmakers and the NAACP spearheaded the submitting of a criticism to the IRS about Wellstar Well being System’s nonprofit standing after it closed two Atlanta-area hospitals in 2022. The criticism famous the system’s proposed merger with Augusta College Well being, below which Wellstar would open a brand new hospital in an prosperous suburban county.

“I perceive you pledged over $800 million” within the cope with AU Well being, state Sen. Nan Orrock, an Atlanta Democrat, instructed Wellstar executives at a current legislative listening to, citing the system’s disinvestment in Atlanta. “Doesn’t sound like a nonprofit. It appears like a for-profit method.”

Wellstar mentioned it offers extra uncompensated well being care providers than another system in Georgia, and that its 2022 group profit totaled $1.2 billion. Wellstar attributed the closures to power monetary losses and an lack of ability to discover a associate or purchaser for the inner-city hospitals, which served a disproportionately massive African American inhabitants.

In North Carolina, a Republican candidate for governor, state Treasurer Dale Folwell, mentioned many hospitals “have disguised themselves as nonprofits.”

“They’re not doing the job. It needs to be sufferers over earnings. It’s all the time now earnings over sufferers,” he mentioned.

Concepts for reforms, although, have run up in opposition to highly effective hospital opposition.

Montana’s state well being division proposed creating requirements for group profit spending after a 2020 legislative audit discovered nonprofit hospitals’ reporting obscure and inconsistent. However the Montana Hospital Affiliation opposed the plan, and the thought was dropped from the invoice that handed.

Pennsylvania, although, has a singular however sturdy regulation, Bai mentioned, requiring hospitals to show they’re a “purely public charity” and go a five-pronged check. That will make the state a neater place to problem tax exemptions, Bai mentioned.

This 12 months, the Pittsburgh mayor challenged the College of Pittsburgh Medical Middle over the tax-exempt standing of a few of its properties.

Nationally, Bai mentioned, “I don’t suppose hospitals will lose tax exemptions within the quick run.”

However, she added, “there’ll possible be extra stress from the general public and policymakers for hospitals to supply extra group profit.”


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