Are nonprofit hospitals a fairy tale?

Nonprofit hospitals have higher profit margins than most for-profit hospitals after accounting for their tax obligations. 3900 (62 percent) of U.S. Hospitals are nonprofit and therefore tax-exempt — they pay no property tax, no federal or state income tax and no sales tax. An article published in Health Affairs found seven of the nation’s 10 most profitable hospitals were of the nonprofit variety, each earning more than $163 million from patient care services. Revoking their property tax-exempt status for not functioning as a charitable entity could return billions in healthcare dollars to local government, communities and citizens, struggling to afford quality health care.

The idea of exempting nonprofits from paying taxes in the first place is based on the belief these entities provide charity for the underserved and underinsured who would otherwise require the government to lend a helping hand. As the percentage of uninsured declines as a result of the ACA, the justification for tax exempt status is being called into question.

Many nonprofit hospitals calculate their charitable care by using something known as “chargemaster” pricing — exorbitant, non-negotiated prices which are inflated many times higher than what private insurance or Medicare would pay. This allows facilities to overstate their provision of “charity care,” calculated as revenue loss by the hospital in exchange for their lucrative tax exemptions. In a patient evaluated with chest pain, the allowable for Medicare is $3600; however, in an uninsured patient, the hospital may “write-off” an inflated $25,600 in uncompensated costs, which is eight times higher than the actual cost of care provided. Nonprofit hospitals should be required to meet a higher standard by providing true (non-inflated) charity care.

A study, conducted by Zack Cooper (Yale), Stuart Craig (University of Pennsylvania), Martin Gaynor (Carnegie Mellon) and John Van Reenen (London School of Economics), evaluated the way nonprofit hospitals charge.

Co-author Cooper states this of the study:

“Not-for-profit hospitals don’t price any less aggressively than for-profits. We subsidize not-for-profits to the tune of $30 billion annually, in the form of tax exemptions, and we have to ask what that money is getting us.”

So what is the tax exemption getting us if not to “real” charity care for those in need? A significant amount of nonprofit hospital revenue is being spent on executive salaries and benefit packages, reinvestment in new state-of-the-art facilities and expanded health care services for those who can afford it.

According to Becker’s Hospital Review in 2012, the combined compensation of the top executives at the 25 most profitable non-profit hospitals totaled almost $58 million. The highest paid nonprofit hospital CEO in the nation is Jeffrey Romoff, at the University of Pittsburgh Medical Center (UPMC.) An article in The Pittsburgh Post-Gazette found his 2015 compensation was $6.43 million dollars; he has topped $6 million for the last four years, plus notable perks, such as access to a private chef, chauffeur and a jet. Additionally, the Gazette found 31UPMC executives and physicians earned at least $1 million in 2015, six of whom received more than $2 million each.

In 2013, Pittsburgh Mayor Luke Ravenstahl unsuccessfully sued UPMC to collect more taxes on the grounds his city was losing $20 million annually as a result of the tax exemptions. CBS News aired a segment after investigating the financial details. UPMC brought in $948 million in profit over the two year period 2011-2012, while providing a mere 2% of its budget in charity care, and yet was saving $200 million after tax exemption. Imagine what that could pay for in the way of health care for the poor, disabled and elderly, not to mention the funding for teachers, police officers and firefighters?

The idea nonprofit hospitals should be paying property taxes has been gaining traction ever since. In 2015, a New Jersey judge ruled that Morristown Medical Center should be responsible for paying property taxes because it acted more like a for-profit organization than one devoted to the provision of charity care. He said, “Modern nonprofit hospitals are essentially legal fictions.” Kind of like a modern day fairy tale. Ultimately, Morristown Medical Center reached an amicable agreement with the city to pay $1 million in the way of taxes. And multiple cities have followed suit, challenging the tax-exempt status of nonprofit hospitals in the state.

Illinois is the latest battleground for the property tax exemption controversy. A 2009 report by the Center for Tax and Budget Accountability found the property tax exemptions for 47 Chicago-area nonprofit hospitals were worth $279 million. In Illinois, a charity was originally defined as an organization generating revenue from donations and providing services to those in need. In 2010, the Illinois Supreme Court ruled Provena Covenant Medical Center was not entitled to a property tax exemption because they were not a charity, as most of their revenue was generated from fees for service.

In 2012, the Illinois Hospital Association lobbied hard to expand the definition of charity in state law. The state legislature passed a provision — buried in the Medicaid Reform Bill 2194 — allowing property tax exemptions for hospitals providing charity care in the equivalent amount to their tax liability. Medicaid reimbursements, considerably lower than private insurance payments, were allowed to count toward the “charity care” tabulation.

The Carle Foundation Hospital is the 10th most profitable hospital in the nation, according to the May 2013 article in Health Affairs. They filed a request to have a property tax exemption after the controversial 2012 law was enacted. The City of Urbana argued Carle had revenues approaching $2 billion annually, functioned more like a for-profit organization than nonprofit, and caused the city to lose $6.3 million in property taxes necessitating a rate increase for other city properties as a result. Last year, the 4th District Appellate Court ruled the 2012 state law unconstitutional.

Dissatisfied with the outcome, Carle Foundation Hospital appealed to the Illinois Supreme Court. On March 23, 2017, the Supreme Court of Illinois vacated the ruling of the Appellate Court, but would not consider the constitutionality of the 2012 law. Carle will be entitled to the property tax exemption for now. The Supreme Court recommended reconsideration in the lower courts as to the question of constitutionality, so the debate remains ongoing.

The days of charitable establishments singularly devoted to comforting and caring for the poor and suffering are long gone. Most nonprofit hospitals are profit machines bearing little resemblance to the charitable organizations of the past. By reinvesting in state-of-the-art facilities with unnecessary “bells and whistles,” nonprofits are currently dominating city landscapes, becoming the largest local employers, and bringing in more revenue than the cities in which they are located.

By sidestepping property tax payments to the county or city in which nonprofit hospitals reside, they are shifting the financial burden for essential services and infrastructure onto the backs of individual citizens and small business owners, who should not bear the costs alone. Stricter criteria should be applied to determine whether a hospital meets a “charity care threshold” to retain the lucrative nonprofit designation. This is a vital step toward ensuring cities and counties collect adequate revenue for developed land while ensuring vulnerable populations have somewhere to go when in need of health care, which is rapidly becoming unaffordable for us all.

Niran S. Al-Agba is a pediatrician who blogs at MommyDoc.  This article originally appeared in the Health Care Blog.

Image credit: Shutterstock.com 

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