Oh, That Community

There's an old bar con about going up to someone asking for a loan of $10.  "But," you say, "only give me $5.  That way, you keep $5, and we'll be even."  Sometimes people fall for it.

Fair or not, that's what some new research about the value of the tax exemption for non-profit hospitals made me think of.

The study, in Health Affairs, by Rosenbaum, et. alia, found that the value of the exemption virtually doubled between 2002 and 2011, increasing from $12.6b to $24.6b.  The tax breaks -- which typically apply at the federal, state, and local levels -- are supposed to be in return for "charity care and community benefit."

According to IRS filings submitted by hospitals for 2011, the researchers calculated that the charitable and community benefits claimed were $62.4b.   The AHA was quick to jump on the findings: "Today's report shows that what non-profit hospitals provide in terms of benefit to their communities far exceeds the value of the tax exemption hospitals receive," it said in a statement, "...hospitals of every size, type and general location are not only meeting, but are exceeding, the community benefit obligations conferred by their tax-exempt status."

Not so fast.

It turns out that most of the money is spent, in essence, "paying" themselves back, such as for indigent care (24%) or to cover Medicaid shortfalls (32%).  As lead author Sara Rosenbaum told MedPage News, "These are very good things, but very little is going to community health improvement."  Indeed, only about 8% actually went back to the community.

It's not entirely clear how hospitals are even calculating these benefits.  AHA insists they are based on actual costs, not charges, but the last time hospitals knew their actual costs was, well, never.  Certainly the IRS isn't auditing the filings, leading some critics to believe that hospitals use their wildly inflated charges to boost their apparent community benefit.

It's sort of, OK, I'm going to charge you $10 for an aspirin, but you just pay me $2 and I'll write off $8 in community benefit.  Call me cynical, but any organization that thinks it is good business to gouge uninsured patients is not an organization that I have much faith in how they're justifying their tax exemption.

ACA requires non-profit hospitals to conduct a community health needs assessment, or CHNA, every three years in order to maintain their tax exemption.  Ms. Rosenbaum hopes that the CHNA will lead to a new era of transparency and accountability.  She thinks hospitals could spend their community benefits in underserved areas in creative ways, such as cleaning up parks or helping to make fresh produce more available.  "It may have nothing to do with clinical care,” Ms. Rosenbaum pointed out. “These are things that improve community health."

ACA has been seen as a boon for hospitals, increasing the number of insured and decreasing uncompensated care (just look at what happened to for-profit hospitals' stocks following last week's SCOTUS decision on maintaining subsidies).  Ms. Rosenbaum told Dotmed News, "As hospitals have essentially realized a dividend from the Affordable Care Act, the question is, will city members be at the table more than they were before?"

I wouldn't hold my breath.

The tax-exempt/non-profit status for health organizations is under more scrutiny than ever.   A court ruling in New Jersey found that Morristown Medical Center so intermingled its for-profit and non-profit activities that it no longer qualified for a state tax exemption, potentially making it -- and other NJ hospitals -- liable for millions of dollars in property taxes.  

There is still an appeals process for MMC, and the NJ legislature may act to address the issue, but other states are also taking a harder look at their tax exemptions for non-profit health care organizations.  California is already trying to take away the non-profit status of Blue Shield, and is now taking a harder look at its non-profit hospitals.  Cash-strapped Kansas is looking at making non-profit hospitals pay sales tax, while North Carolina is considering ending its sales tax refund program to non-profit hospitals.  Advocates in Oregon are questioning the community benefits their non-profit hospitals are delivering.

Maybe some of these questions are arising because salaries for non-profit hospital leaders are looking a lot like for-profit salaries.  Last year Modern Healthcare found that non-profit hospital CEO compensation rose, on average, 24% from 2011 to 2012 for the 147 institutions it tracks, while compensation for average workers only rose 2%.  The average CEO cash compensation was $2.2 million.

UPMC's long-time CEO Jeff Romoff reportedly made $6.5 million in 2014, one of 30 -- count 'em, 30! -- UPMC executives making over $1 million.  Connecticut's Office of Health Care Access found 19 health care executives in the state making over $1 million.  The Columbus Business First found at least 11 Ohio hospital CEOs making over $1 million.

I could go on, but I think the point is made.  I'm not saying these hospital executives don't earn their money, I'm just saying that, at some point, non-profits start to look and act an awfully lot like for-profits...without having to pay taxes or be accountable to shareholders.

There are, no doubt, a number of non-profit hospitals struggling to survive, especially those in rural or inner city areas.  Suburban hospitals with significant privately insured patient populations are usually the ones going on the building binges and aggressively increasing their horizontal and vertical market reach, through a combination of non-profit and for-profit businesses.  Those are the ones whose non-profit status and community benefits especially deserve closer scrutiny.

Ms. Rosenbaum concluded, "Hospitals view themselves as caring for sick people, but the pressure is growing for them to improve the health of an entire population .... To the extent that it's burdensome, this underscores the major public investment that is the tax exemption."

That's a new way for them to act and a new way for us to think about our investment in them, but both need to happen.

It's not just hospitals.  Many of the above criticisms apply to other non-profit health care organizations as well.  E.g., many Blue plans remain nominally non-profit and thus reap a variety of tax exemptions and/or preferences.  They sometimes justified that at least in part by offering some guaranteed issue products, which are, of course, now required of all health plans.  So why isn't their associated community benefit/tax exemption less?

Every tax dollar that hospitals and other health organizations don't pay is a tax dollar that someone else -- that's you and me, in case you were wondering -- is paying.  Let's make sure they truly deserve their tax exemptions and that those community benefits are actually going back to the community, not just staying within their walls.