One sure lesson of history is that a lack of money leads to an inflammation of the body politic. When the nation is awash in easy money, as it was during the 1990s, extravagance in places where it shouldn't exist is a mere annoyance. When the public coffers are full, tax avoidance prompts little more than snickers. But when cash is scarce, people are out of work and the government is scrambling to find operating revenue, wasteful spending becomes an outrage. Tax dodging brings out the posse.
So it should come as no surprise to not-for-profit hospitals and other not-for-profit organizations that they are in the sights of a variety of federal, state and local government officials. As public treasuries are strained, people are starting to question why organizations that act like for-profit companies are exempt from taxes. Unfortunately, a lot of not-for-profit hospitals have tagged themselves with that label.
The latest heat comes from the folks at the Internal Revenue Service. As Mark Taylor reported in last week's cover story (May 31, p. 6), the IRS is unveiling a new enforcement program that will scrutinize not-for-profit organizations. The agency could impose intermediate sanctions against organizations that run afoul of tax laws. It will scrutinize organizations based on gross assets and receipts and compensation, either in aggregate or for a particular executive. One IRS official recently said investigators would look at, among other things, organizations that pay an executive more than $1 million. With chiefs of a few large urban hospitals pulling in that much compensation, you can figure a letter from their friends at the IRS will be arriving soon. Ditto for some healthcare association executives.
But for-profit pay in the not-for-profit world is not the only problem facing the industry. There's also the matter of community benefits. In 2002, the nation's hospitals spent only 5.4% of their overall expenses on uncompensated care. That was the lowest percentage in a decade. While the American Hospital Association argues that other expenses, such as higher labor and malpractice insurance costs, accounted for some of the dip, it's still not exactly a ringing endorsement of tax exemptions.
On top of that, there are headlines about hospitals billing indigent patients more than corporate payers and hospital collection arms going after poor patients like Inspector Javert pursuing Jean Valjean in Les Miserables. No wonder some people are skeptical about charitable missions.
Hospitals may soon get to explain all this. Montana Sen. Max Baucus, ranking Democrat on the Senate Finance Committee, and House Ways and Means Committee Chairman Bill Thomas (R-Calif.) have indicated their panels are examining the tax-exemption issue and may hold hearings in the near future.
Thomas notes that tax exemptions are "not a constitu-tional right." Hospital executives have grown so used to the practice that you might forgive them for thinking such breaks are somewhere in the Bill of Rights. But the exemptions are a tradition stemming from the days when hospitals were poorhouses. Today, they sell advanced medical techniques at high prices. They are businesses-often large businesses. Congress is unlikely to embrace the assertion made years ago by the former chief of Houston's Methodist Health Care System and ex-AHA Board Chairman Larry Mathis that the provision of medical care is inherently a charitable enterprise.
Perhaps all the controversy will be forgotten if the economy rebounds and tax collections soar or other events deflect attention. But if they don't, hospitals may someday have to contend with a system in which for- profits and not-for-profits get equal treatment and each organization will earn tax deductions based on the actual amount of charity care it provides.
What do you think?
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