Article Archives >> Lead Stories >> June 1-15, 2005

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House Committee Holds Hearings
On Charitable Hospital Exemption
Thomas looks at healthcare revenues
because “that’s where the money is”

The House Ways and Means Committee held another hearing May 26 on whether to revise the tax status of charitable hospitals, which enjoy federal income tax exemptions, according to testimony, worth more than $5.4 billion a year. Committee Chairman William Thomas (R-CA) said it is increasingly difficult to tell the difference between nonprofit and for-profit hospitals.

He said that if Congress is going to look closely at nonprofit activity, it makes sense to look at a group of institutions that account for almost 60% of the revenue of the sector. “That’s where the money is,” he said.

A series of witnesses testified to various aspects of the issue, including Internal Revenue Service Commissioner Mark Everson, Controller General David M. Walker, Administrator of the Centers for Medicare and Medicaid Services Mark McClellan, a local tax official, and a number of law professors and hospital administrators.

Everson said there are now approximately 7,000 hospitals, clinics, medical research organizations and other healthcare providers on the IRS roles that control approximately $490 billion in assets and receive over $500 billion in gross revenues a year. “It is increasingly difficult to differentiate for-profit from nonprofit health care providers,” he said. While the “overwhelming majority of charitable organizations do their utmost to comply with the letter and spirit of the tax law,” he said, “there are increasing indications that the twin cancers of technical manipulation and outright abuse that we saw develop in the profit-making segments of the economy are now spreading to pockets of the nonprofit sector.”

He traced the history of the “community benefit” standard for hospital tax exemption and discussed the Service’s capacity to examine hospitals and enforce proper conduct.

Walker reported on a new analysis of nonprofit and for-profit hospital activity in five states, California, Florida, Georgia, Indiana and Texas. About 62% of the facilities in those stats are nonprofit, 20% governmental, and 18% for-profit. On average, nonprofit hospitals are larger than for-profit hospitals. Government hospitals generally provide more uncompensated care than nonprofits, and nonprofits generally provide more than for-profits, both in absolute dollars and in percentage of patient operating expenses. The uncompensated care was generally concentrated in the top quarter of hospitals and not spread equally throughout the sector.

As for other community benefits, Walker said they were unable to discern a clear distinction among the government, nonprofit and for-profit hospital groups because data was not reported consistently.

McClellan reported on current research projects that he said have found “little difference” in treatment of patients by nonprofit and for-profit hospitals and discussed the administration of the federal payer programs.

Professor John Colombo of the University of Illinois Law School called the community benefit standard for exemption “an unmitigated disaster both as tax law and as health care policy.” He offered three alternatives, a strict charity care standard for exemption, creating more specific behavioral guidelines for exemption, or repealing the community benefit standard and forcing hospitals to rely on the general definition of “charitable” to obtain exemption. “The reasons that justified exemption for hospitals in 1928 simply don’t exist any more, and I think that this Committee should carefully reconsider whether multi-billion-dollar-fee-for-service businesses should be eligible for tax exemption at all,” he concluded.

Professor Jill Horwitz of the University of Michigan Law School reported that differences between nonprofit and for-profit hospitals depend “on where you look.” Her research has found “large, systematic and long-standing differences among hospital types,” primarily because for-profit hospitals are more likely to offer the most profitable services and less likely to offer services that are unprofitable but valuable or essential. She also found that for-profit hospitals react much more strongly and quickly to changes in financial incentives, illustrating with a particularly big switch in offering of home health care services when reimbursements changed in the mid-1990s.

“If you look at financial behavior, you will find few differences that justify tax exemption,” she concluded. “If you look at medical treatment, you will find some striking differences of the sort that need to be included in any thorough discussion of nonprofit benefits.”

Chairman of the Champaign County (IL) Board of Review Stan Jenkins reported on that county’s revocation of state real estate tax exemption from Provena Covenant Hospital and Carle Foundation Hospital, two hospitals that made the front page of the Wall Street Journal for their aggressive collection policies and helped launch an adverse public reaction to charitable exemption.

Other testimony was offered by Nancy Kane, professor at the Harvard School of Public Health, John T. Thomas of the Baylor Health Care System, and Sr. Carol Keehan of Sacred Hearth Health Systems in Florida and Chair of the Catholic Health Association of the U.S.

YOU NEED TO KNOW

Although it seems unlikely that Congress will make major changes in the requirements for exemption for hospitals in the near future, as Chairman Thomas says, “that’s where the money is.” Pressure may continue to build.

Article Archives >> Lead Stories >> June 1-15, 2005