Lawmakers question nonprofit hospitals' status

Washington -- When Rep. Bill Thomas (R, Calif.) recently explained why he is investigating nonprofit hospitals, he borrowed a phrase from the late bank robber Willie Sutton: "That's where the money is."

The House Ways and Means Committee, which Thomas chairs, is looking into whether the societal benefit provided by nonprofit organizations is worth their significant tax breaks .

Many in the hospital community fear Congress will legislate changes that will squeeze revenues flowing to nonprofits or force them to change their tax status. Such moves would hurt facilities, doctors who work at them and patients, officials said.

Health care organizations make up roughly 60% of the entire nonprofit sector in terms of revenue, and hospitals account for about three-quarters of that portion. This makes the facilities a prime focus for any study of where federal dollars are going.

"Given the size of the federal benefit and the competitive advantages given to tax-exempt entities ... it is incumbent upon this committee to ensure that taxpayers are getting at least some commensurate relationship of benefit for tax-exemption amounts," Thomas said at a hearing last month.

His panel isn't the only one getting into the debate. Senate Finance Committee Chair Charles Grassley (R, Iowa) recently sent a letter to 10 major nonprofit hospitals and hospital systems demanding answers to questions about their business activities.

These hospitals have been put on the defensive in recent months over allegations that they too often overcharge the uninsured, provide insufficient charity care and violate their nonprofit status by establishing financial arrangements with for-profit entities. State and local governments, as well as the Internal Revenue Service, already have started to crack down on some of the perceived bad actors.

The hospital community warned that limits on the facilities' tax breaks or their status would have negative consequences.

"Especially for an organization that may be willing to and ready to advance new physician services, new technologies or new facilities that would be a positive benefit to the community, [paying] tax dollars will always eat away at that benefit," said Reg Wagle, vice president of Memorial Health System in South Bend, Ind.

The American Hospital Assn. said in a statement prepared for the hearing that continued favorable tax treatment is essential if nonprofit facilities are to maintain their assistance to the communities that need them.

"If society and government have deemed the provision of hospital care to be a fundamental good, and private markets fall short of meeting the needs of all members of society, the case for public assistance becomes compelling," the AHA said.

Just how nonprofit hospitals provide a community benefit in exchange for tens of billions of dollars in tax breaks each year remains a mystery.

The IRS applies a standard to the facilities that includes requirements for the hospitals to operate emergency departments that are open to all patients and to accept Medicare and Medicaid patients on a nondiscriminatory basis. They also face certain limits on compensating board members and establishing financial arrangements with other entities.

But the number of these requirements have steadily decreased over time, even as the amount of tax subsidies has greatly increased, Thomas said. Using data from several government witnesses at the hearing, he estimated that the amount of exemptions combined with federal reimbursements for uncompensated care could top $50 billion per year.

In addition, government investigators have been unable to discern a significant difference between for-profit and nonprofit hospitals in terms of their community benefit.

The Government Accountability Office prepared a report that looked at five states to measure average amounts of uncompensated care at the two types of facilities. In four of the states, nonprofits provided only a small percentage more of such care, which consists of charitable services and medical debt that has been written off. In one state, for-profits actually devoted a larger portion of their expenses to uncompensated care than their nonprofit counterparts.

"We really can't tell the difference all that much between for-profit and not-for-profit, and that is an insufficient answer to cover the tens of billions of dollars currently offered by taxpayers," Thomas said.

Uncertain path for Congress

The Ways and Means chief gave no indication what legislation, if any, is warranted once the panel concludes its investigation. Thomas agreed with several panel members and witnesses that more research would help lawmakers reach that decision.

Forcing a large number of nonprofit hospital systems to convert to for-profit status is an unworkable solution, said IRS Commissioner Mark Everson. The agency has mandated that a few hospitals make such a conversion when it determined that they were no longer conducting business in a nonprofit manner, but these actions are extremely rare due to the community upheaval that they can cause, he said.

Instead of looking at ways to eliminate certain tax subsidies across the board, lawmakers might want to follow the example of several states by requiring hospitals to submit yearly reports detailing their community benefit activities beyond just uncompensated care, said John Thomas, senior vice president of Baylor Health Care System in Dallas. Memorial Health System's Wagle said Indiana requires similar reports.

At least one Democratic lawmaker suggested that Thomas is avoiding the real problems in the nonprofit sector by focusing on hospitals rather than on the tax code itself. Ways and Means Ranking Democrat Charles Rangel (D, N.Y.) suggested that the committee chair could be trying to scare the hospital sector.

"We might as well get on with tax reform ... rather than frighten the heck out of people when clearly there's been no evidence of wrongdoing," Rangel said.