Every once in a while, a study comes along that reminds us that a majority of the institutions we cover at Modern Healthcare are not-for-profits operating under government charters that absolve them from paying federal, state and local taxes.
More than three-quarters of the hospitals beds in the U.S. are housed in religiously affiliated or secular not-for-profits. While a majority of U.S. physicians are still in private practice, the growth of direct physician employment by hospital systems (See reporter Beth Kutscher's story, p. 9) suggests a growing share of those services are also falling under the not-for-profit umbrella.
That may help account for the study's core finding that the value of tax breaks for tax-exempt hospitals grew from $12.6 billion in 2002 to $24.6 billion in 2011, which averages out to a 7.7% annual increase. Forgone state and local taxes ($11.6 billion) were nearly as large as the value of forgone federal income taxes ($13 billion).
These tax breaks are not evenly distributed. Half the nearly 3,000 hospitals reviewed for the study posted operational losses in 2011. They received no benefit from their federal tax exemption. On the other hand, some hospitals racked up large surpluses and benefited disproportionately.
The authors of that Health Affairs study (See p. 14) pointed to the community needs assessments that the Internal Revenue Service now requires not-for-profit hospital systems to file every three years. They argued that substantial and growing taxpayer support for not-for-profit healthcare institutions justifies rethinking how hospitals invest in their communities.
As the study documented, not-for-profits' current charitable investment patterns are overwhelmingly focused inward. Fully one-third of the $62.4 billion in community benefits reported by hospitals came from offsetting losses associated with treating patients in means-tested government programs, mostly Medicaid.
Another quarter of the benefits came from offering financial assistance to poor patients, either through discounts or writing off uncollectable debts. Another 36% of community benefits came from spending on training health professionals, research and other subsidized services.
Shockingly, less than 8% of the total, or just $4.7 billion, was spent on activities that helped improve the overall health of the community or on contributions to community groups working on health-related issues.
If the not-for-profit hospitals that dominate the healthcare system really want to become health stewards of the populations in their catchment areas—and not just “sick care” institutions—their community benefit priorities need to change.
The shifting dynamics of the insurance marketplace could be the impetus that system trustees and top executives need to make that change. While the Supreme Court may still upend the Affordable Care Act's premium subsidies, the downward trajectory of the uninsured rate is likely to continue over the next few years. Write-offs for indigent care and uncollectable debts should decline.
That doesn't mean opportunities for hospitals to claim inwardly focused community benefits will disappear. More states will eventually come around to expanding Medicaid, and more people who were already eligible but never signed up will join the Medicaid program. That will allow hospitals to continue to claim the difference between their costs and Medicaid rates as a community benefit.
But there's fuzzy math behind those Medicaid claims, at least at systems that report positive margins. Those systems say they subsidize their Medicaid and uninsured patients by negotiating higher rates on the privately insured—so-called cost-shifting. Is it fair to simultaneously claim Medicaid subsidies as a community benefit when it is really insurance premium payers who are picking up the tab? You can't have it both ways.
While a few zealous state regulators are beginning to call health-related not-for-profits' charitable claims into question, it's unlikely external prods will force hospital systems to act. Nor will the IRS or this Congress replace the current community needs assessment approach with a simple test that matches community benefit to lost tax revenue and pulls tax-exempt status when the latter exceeds the former.
That leaves the next moves up to the trustees and executives at not-for-profit healthcare institutions. To maintain their not-for-profit status long term, they will need to find new ways of making community investments that promote better health.