I have long had reservations about the tax breaks accorded to hospitals in the form of their non-profit status (see: Non-Profit Hospitals Drift from Their Mission Despite Subsidies; Why Are Many Hospital CEOs Paid So Handsomely?). From where I sit, many behave more like vigorous for-profit enterprises. A recent article in the NYT raised this topic in an informed way (see: Benefits Questioned in Tax Breaks for Nonprofit Hospitals). Below is an excerpt from it:
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...A study this year in The New England Journal of Medicine found that hospitals spent an average of 7.5 percent of their operating costs on charity care and community benefit, based on filings the I.R.S. has required only since 2009. Some spent under 1 percent and others about 20 percent. What’s more, the I.R.S. allows hospitals to use broad definitions of community service, including the value of traditional charity... 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....
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....In a case that is being closely watched, Pittsburgh this year filed suit challenging the University of Pittsburgh Medical Center’s tax-exempt status, saying that the medical center should pay some payroll taxes and more property taxes, estimated to total about $20 million annually....[The city's lead lawyer] said that the hospital failed most, if not all, of Pennsylvania’s criteria for a tax-exempt charity, and that its annual report described it as a “$10 billion global health enterprise,” with excess operating revenue of nearly $1 billion and reserves of more than $3 billion. The institution paid 20 executives more than $1 million annually, he said. Despite a charity policy, the hospital made little effort to take care of poor people except in emergencies, he asserted, spending only about 2 percent of its net patient revenues on charity care.
The solution to this problem seems rather simple to me but I am sure that it would be very hard to implement. The reason for this is that hospitals can command a powerful lobbying force on their behalf, particularly in small towns where they may be the major employer. If their non-profit status is threatened, they would threaten to lay off employees and the local and state politicians would rise in their defense. However, look at the example above where the city of Pittsburgh is suing the UPMC regarding its tax-exempt status. The cities are so hungry for tax revenue that they are willing to challenge such a large and powerful an institution as UPMC.
How about requiring hospitals, in order to retain their tax exempt status, to deliver “charity care and community benefit" at a certain percentage of their operating budget? This percentage should be pegged somewhere around 10 to 20%. Hospitals should not be allowed to "game" this requirement. For example, everyone knows that the hospital billing rates are a fiction; no insurance company or Medicare reimburses these amounts. The hospitals should thus not be allowed to calculate their contributions to charity care at the level of these posted charges. Such an approach would not satisfy the cities in which these hospital are located who are seeking more tax revenue but it would definitely even the playing field to some degree.