Reuters

Some of the most profitable hospitals in the nation are nonprofits, but they still receive tons of tax breaks

For years, nonprofit hospitals have shied away from quantifying the amount of charitable care they provide communities.

Hospital officials argue that it’s almost impossible to put a dollar value on charity and that doing so would take valuable time and resources away from actually serving the needy.

The charity question is significant because nonprofit hospitals get major tax breaks. Also, because of loopholes in state laws, nonprofit hospitals are often permitted to make huge profits. (Have a look at Forbes’ recent list of the most profitable hospitals in the United States and you’ll notice that three of the top five are owned by nonprofit organizations. The most profitable of these nonprofits, Rochester Methodist Hospital in Rochester, Minn., takes in $446 million in net patient revenue and has a 37 percent operating margin.)

To complicate things further, a 2005 Government Accountability Office study concluded that, when it comes to charity care, the "[d]ifferences between nonprofit and for-profit groups were often small." 

To make up for this, nonprofit hospitals tend to arrange deals with city and state governments to provide "payment in lieu of taxes" (also known as PILOT programs). But these payments often don’t equal the hospitals’ overall tax benefit and are perceived as acts of good faith to show that hospitals are playing nice with their communities.

Recent economic downturns, however, have shined a detective’s spotlight on the amount of charity care hospitals provide. Investigative reports have shown up in Atlanta, East Bay and Boston newspapers questioning charity care policies. The Boston Globe report calculated that Boston’s "10 leading hospital companies benefited from an estimated $638 million in federal, state, and local tax breaks as well as state discounts on borrowing in 2007, [which amounts to] $264 million more than the value of … care for the poor and other charity work."

The thinking goes: if nonprofit hospitals are making money and unwilling to prove how much charity care they provide, why do they deserve nonprofit tax breaks?

The state of Illinois has come closer than any state in recent memory to revoking nonprofit status from some of its hospitals. The Illinois Department of Revenue did, in fact, vote to revoke the nonprofit status of three hospitals based on low levels of charity care. But Gov. Pat Quinn halted that decision in September until the state’s legislature—with the help of the Illinois Hospital Association— could come up with a baseline requirement for charity care.

A provision in the Affordable Care Act attempted to set this on a federal level.

But as the New York Times reported last week, the Internal Revenue Service is not ready to make that provision mandatory.  "[C]omplaints from the American Hospital Association and aspects of the new health care law have prompted the IRS to delay requiring hospitals to fill out the portion of the form on charity care. Hospitals may not have to fill it out this year, either, because the agency has yet to make a decision," the paper reported.

So what’s the hold up?

An IRS representative told the New York Times that the charitable care requirements are "muddy." You can feel free to wade through the ACA itself (PDF here; the charity care requirements are toward the end of page 804) but this synopsis from Cynthia S. Marietta spells it out as coherently as possible.

As the IRS understands it, if nonprofit hospitals begin reporting charity care today, they’ll be required to:

  • "adopt and implement written financial assistance and emergency medical care policies"
  • "limit charges for emergency or other medically necessary care"
  • "comply with new billing and collection restrictions"
  • "conduct a community health needs assessment at least once every three years"

Notice it doesn’t mention that a percentage of revenue, for example, must be devoted to charity care. As Martin Gaynor, Carnegie Mellon University professor of economics and public policy, told me recently, "there is no bright line."

John D. Colombo, a tax law professor at the University of Illinois and co-author of The Charitable Tax Exemption, said the feds won’t set a baseline requirement because it’s “extremely hard to define what charitable care actually is.”

It’s more complicated than picking a number, he said. Ideally, nonprofit hospitals should "operate in the space between what governments provide and what private entities provide." That goes beyond charity care for the poor, he said, and that should probably extend to services such as trauma wards and burn units. He cites those as examples of services that are almost exclusively provided by nonprofit hospitals despite their tendency to lose money.

"But no one wants to bring that into the charitable care discussion," he said. "So if we choose a number, a percentage of net patient revenues, for example, for charity care and it doesn’t include burn units or trauma wards, are cities going to lose those services?"

Colombo said Illinois is going to be at the forefront of discussion for states and the federal government. Governor Quinn wants a baseline requirement for charity care by March 1, 2012.

"When it comes down to it," Colombo said, "that’s going to be way more difficult to do than people think."

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