Nonprofit hospitals have higher profit margins than most
for-profit hospitals after accounting for their tax obligations. 3900 (62%) of U.S. Hospitals are non-profit
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 non-profit 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 8 times
higher than 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.
“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,” says Cooper, co-author of the study.
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 healthcare 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 31 UPMC 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 2 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 healthcare 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, but
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 as 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 Distric
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 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 vast 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” in order 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 healthcare, which is rapidly becoming
unaffordable for us all.
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