(This article has been updated with a correction.)
Tax-exempt hospitals have until year-end to comply with Affordable Care Act rules to keep their tax breaks, but a group that includes tax-exempt health insurers and community health centers wants the ACA rules replaced.
They prefer using a test of what hospitals give back to communities, which could end up seeing hospitals pay some taxes, depending on their levels of community benefit.
The Alliance for Advancing Nonprofit Health Care, which includes Blues plans in seven states and the National Association of Community Health Centers, is contacting members of Congress and hospital CEOs with a plan to again revamp the oversight of tax-exempt hospitals, which account for roughly 60% of the nation's hospitals.
The alliance's proposal calls for Congress to eliminate the ACA requirements—mandating community needs assessments and financial aid policies while restricting aggressive bill collection—and replace them with a test of whether the dollar value of hospitals' benefit to local communities is enough to offset the lost federal revenue from tax breaks.
“How do you determine whether each and every hospital is doing enough to justify tax exemption?” said alliance CEO Bruce McPherson. The Affordable Care Act rules do not quantify what hospitals must spend to benefit their communities or address wide variation in that amount across hospitals, he said.
An analysis of tax-exempt hospitals published in the New England Journal of Medicine in 2013 found community aid and free care accounted for 7.5% of hospital expenses.
But when hospitals are ranked by community benefit spending, the bottom 10% spend an average of 1% of total expenses on community benefit while the top 10% spent an average of 20%.
“It doesn't take many nonprofit hospitals or systems lacking real commitment to community benefit to tarnish the image of the rest,” the alliance said in a letter to hospital CEOs with a copy of its proposal.
The American Hospital Association and Catholic Health Association, two powerful hospital trade groups, rejected the proposal in a letter to their members. “This approach is weighted only towards what something costs,” the letter said. “It cannot begin to capture the importance of the need that is met and the impact on the health of the community.”
The question of how to regulate tax exemption for private, not-for-profit hospitals—some of which are part of multibillion-dollar, multi-state health systems—has been a flashpoint for federal and state lawmakers, state attorneys general and consumer advocates. Rules require hospitals to give back to their communities but rarely prescribe how they do so, which has raised concerns among patient advocates about the amounts hospitals spend on free and discounted care for their poorest patients.
The Affordable Care Act regulations, finalized in late December last year, added to rules that have increased federal and state oversight in recent years. But the regulation so far has largely required public disclosure of hospital charitable activity; hospitals in Texas and Illinois must meet spending requirements.
The alliance proposal would require hospitals that spend less on community benefit than their estimated federal tax break to pay the difference in taxes.
Alliance members did not individually endorse the proposal but put it forward to encourage discussion, McPherson said.
“The alliance's current proposal regarding federal tax exemption is part of a process that will continue to evolve with input and analysis from a number of individuals and organizations,” said Laura Appel, senior vice president of strategic initiatives at the Michigan Health & Hospital Association and a member of the alliance board. The state hospital association “has not taken an official stance on this particular topic,” she said.
The AHA and CHA argued that replacing the ACA requirements with a dollar threshold would undermine greater public accountability and scrap the law even before it has been fully adopted. “Jettisoning those now would be premature, at best, and would usher in an entirely unsatisfactory way to measure the value a tax-exempt hospital brings to its community,” the groups' joint letter said.
The new regulations take effect at the end of the year, but hospitals have had to meet Affordable Care Act interim rules since April 2013.
Tax exemption and public health experts say the ACA regulations pioneered national standards that seek to protect consumers and increase hospitals' role in public health. Removing the regulation would be a loss, they said.
“The new statute and the guidance required the IRS to balance the interest of patient advocacy and public health and the rights of the poor with the interest of the hospital community,” said T.J. Sullivan, a healthcare tax attorney with Drinker Biddle & Reath. “I don't think we need a quantitative test. We have a lot of transparency, a lot of reporting. We're going to know what hospitals are doing going forward.”
Hospitals must consult public health departments and others in their communities to develop the community health needs assessment required by the Affordable Care Act. The law also requires hospitals to publicize the assessment and develop a plan to adopt strategies to address those needs. Hospitals that fail to do so face an excise tax of $50,000.
“I see this as an opportunity for collaboration,” said Cara Pennel, an assistant professor of public health at Penn State College of Medicine. Economic and other factors influence health across a community, and “medicine alone cannot fix those issues,” she said. The ACA created a new national requirement for hospitals to work more closely with communities to address those issues, she said.
“That's something we should not just toss out,” said Keith Hearle, president of Verité Health Consulting. The ACA rules set new standards for how much hospitals can charge those eligible for financial aid and restricts aggressive collection practices. The ACA policies “are leveling the playing field for patient interaction with the business office,” he said.
Follow Melanie Evans on Twitter: @MHmevans
(This article has been updated to indicate that the Alliance for Advancing Nonprofit Health Care is seeking a test based on community benefit, rather than charity care.)
