Healthcare Business News

Time for a new test on hospitals' tax exemptions

By Bruce McPherson
Posted: April 5, 2014 - 12:01 am ET

As of last year, not-for-profit hospitals are required under the Patient Protection and Affordable Care Act to meet new tax-exemption reporting requirements on their policies and practices in four areas: community health needs assessment; patient financial assistance; billing and collections; and emergency-care pricing.

Unfortunately, this is the wrong way for tax-exempt hospitals to demonstrate their performance in providing special benefits to their communities.

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First, these four areas are far from the only important community-benefit considerations for a hospital's board and management. Other critical issues include defining the roles of the board and CEO in planning, budgeting, implementing, evaluating and reporting on community-benefit programs and activities; determining the qualifications and organizational placement of one person responsible for day-to-day coordination of community-benefit programs across the organization; and incorporating community-benefit objectives into executive incentive pay arrangements—just to name a few.

Second, and more important, the current reporting requirements represent a form of micromanagement by the federal government, focusing on process rather than results. They fail to address the fundamental public policy question: Is each not-for-profit hospital doing enough to justify its tax exemption?

In June 2013, the New England Journal of Medicine reported on a study that begins to address this question. The data were derived from the Internal Revenue Service Form 990s for tax year 2009 from 1,800 of the 2,900 not-for-profit hospitals in the U.S. (The other 1,100 not-for-profit hospitals were part of systems not required to report their individual facility information). While the study found that the hospitals on average devoted 7.5% of their total operating expenses to community benefits (excluding bad debt and any Medicare payment shortfalls), on the high end, hospitals averaged 20% of total operating expenses, and the lowest averaged only 1%. These variations can be explained only in part by differences in these hospitals' earnings, as determined in a more recent study conducted by the same primary researchers.

Rather than ignoring these unexplained variations, Congress and not-for-profit hospital leaders should work together to establish a fair and simple financial test comparing each hospital's community-benefit investments to the estimated value of its federal income tax exemption. Such an approach would take into consideration each organization's financial status while getting at the right public policy question.

Bruce McPherson is president and CEO of the Alliance for Advancing Nonprofit Health Care, Washington.

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