Nonprofit hospitals under growing scrutiny over how they justify billions in tax breaks

Pottstown, Pennsylvania KFF Health News --

In 2018, the public school system in this area was forced to scramble when a newly-purchased local hospital was transformed into a nonprofit tax-exempt entity.

Tower Health took over the Pottstown Hospital, which has 219 beds. The hospital no longer pays federal or state taxes. The hospital also didn't have to pay any local property taxes. This saved the Pottstown school district, which is already underfunded, more than $900,000.

It was forced to cut costs because it is located only an hour away from Philadelphia. It eliminated foreign language classes in middle school and cut positions for teacher assistants.

Stephen Rodriguez, Superintendent, said: "We have a smaller curriculum, fewer coaches and less transportation."

Pottstown Hospital was granted nonprofit status by the school system. A state court ruled earlier this year that it could not receive a property tax exemption. The court cited the eye-popping' compensation of multiple Tower Health executives, as being contrary to Pennsylvania law's definition of a charity.

Tower Health has appealed the court ruling, which stunned the nonprofit hospitals industry. This includes approximately 3,000 tax-exempt nongovernment hospitals across America.

Ge Bai, an expert in health policy at Johns Hopkins University, said that the ruling was a warning to all nonprofit hospitals. It highlighted that state and municipal tax exemptions can be challenged, and are often higher than federal income tax exemptions.

Pottstown reflects the increasing scrutiny on how much nonprofit hospitals in the United States spend, and where they spend it to justify the billions of dollars in tax breaks from the federal and state governments. Hospitals are expected to give back community benefits in exchange for the savings. These include free health screenings and care for people who cannot afford it.

More than a dozen state legislatures have either considered or adopted legislation that aims to improve the definition of charity care, increase transparency regarding hospital benefits, or in some cases to set minimum financial thresholds to help their local communities.

Growing interest from legislators, the public and the media in the way tax-exempt hospital operate has coincided in a persistent increase in consumer medical debt. KFF Health News reported in 2013 that over 100 million Americans were saddled with medical debts they couldn't pay. They also documented aggressive billing practices by hospitals.

Oregon adopted legislation in 2019 to establish floor prices for community benefit spending, based largely on the hospital's previous expenditures and operating profit margin. Illinois and Utah set spending requirements for hospitals that were based on property taxes assessed to them as for-profit institutions.

In April, a committee of the Congress heard testimony about this issue.

Maureen Hensley Quinn, senior director of the National Academy for State Health Policy, said that states have an interest in knowing how much money is spent for community benefit and, increasingly, where those expenditures go. It's not just a red or blue state issue. We've seen inquiries about this across the board.

In addition to federal, state and local tax breaks and charitable contributions that donors can deduct, the nonprofit status allows hospitals to benefit from bond financing exempted of tax and also receive tax-exempt donations. KFF policy analysts estimated that nonprofit hospitals will receive exemptions worth $28 billion by 2020, which is much more than the $16 million in discounted or free services provided as part of their community benefits.

The federal law specifies the type of expenditure that qualifies as a benefit to the community, but it does not specify how much hospitals must spend. Hospitals report a wide range of activities that are community benefits on IRS forms. Spending on charity care is common. This includes free or reduced care for eligible patients. It can also include the underpayments of public health plans as well as costs for training medical professionals, research and other expenses.

The Medicaid shortfall, or the difference between the cost of providing a service versus what Medicaid pays the hospital, is also claimed by hospitals as a community benefit. Some states and policy experts say that this shouldn't be counted because the higher payments received from commercial insurers and cash-paying uninsured patients cover these costs.

Bai, from Johns Hopkins, worked on a study in 2021 that showed for every $100 spent, nonprofit hospitals gave $2.30 to charity, whereas for-profit hospitals gave $3.80.

Another study published in Health Affairs last month reported a substantial increase in the operating profits of nonprofit hospitals and their cash reserves between 2012 and 2019. However, there was no comparable rise in charitable care.

A report released in April by the Lown Institute (a health care think-tank) revealed that more than 1,350 non-profit hospitals had 'fair share deficits', which means the value they invest in the community does not equal the value their tax incentives.

Vikas Sains, president of the Institute, said: 'With the number of Americans who are struggling to pay medical debts and to access care, it is more important than ever that hospitals give as much back as they receive.

Lown Institute doesn't count hospitals' "fair share" for compensating for Medicaid shortfalls, research or training medical professionals.

Long have hospitals argued that they must charge higher rates for private insurance to compensate for Medicaid's shortfall. A recent Colorado state report found that even after accounting low Medicaid and Medicare rates hospitals still make enough profit to provide more charity and community benefits.

The American Hospital Association disagrees strongly with Lown and Johns Hopkins' analyses.

Melinda Reid Hatton is the general counsel of the AHA. She said that for many hospitals, after dozens closures in the last 20 years, 'just keeping the doors open' was a clear benefit to the community. As a way to measure community benefit, 'you can't just focus on charity care.' Hatton stated that hospitals deliver nine times more community benefit per dollar of avoided federal taxes.

She noted that the 2010 Affordable Care Act imposed new community benefit mandates. Tax-exempt hospital must perform a community needs assessment every three years, establish a financial assistance policy and limit the amount they charge those who qualify for this help. They must also make a reasonable effort to determine whether a patient qualifies for financial assistance, before taking 'extraordinary actions' like reporting them to credit bureaus or placing lien on their property.

The Government Accountability Office (GAO), a congressional watchdog, still argues that the community benefit is not well defined.

Jessica Lucas-Judy is a GAO Director. It's unclear what a hospital must do to qualify for a tax exclusion. What is a good benefit for one hospital might not be the same as a good benefit for another. In a report for 2020, the GAO found that 30 nonprofit hospitals received tax breaks in 2016, despite not reporting any spending on community benefit.

The GAO recommended that Congress specify the services and activities which demonstrate sufficient community benefits.

The question of tax benefits and tax breaks has become a bipartisan one. Democrats are critical of what they perceive as a lack of charity care while Republicans wonder how nonprofit hospitals can get a tax benefit.

In Georgia, Democratic legislators and the NAACP led the filing of a tax complaint against Wellstar Health System after the system closed two Atlanta area hospitals in 2022. The complaint mentioned the proposed merger between Augusta University Health and Wellstar Health System, which would see Wellstar open a new facility in a wealthy suburban county.

'I believe you pledged more than $800 million in the deal with AU Health', said state senator Nan Orrock of Atlanta, a Democrat at a legislative hearing. She cited the system's lack of investment in Atlanta. It doesn't sound nonprofit. It sounds like an approach that is for profit.

Wellstar stated that it provided more uncompensated healthcare services than any other Georgia system, and its community benefit for 2022 totaled $1.2 Billion. Wellstar blamed the closures on chronic financial losses, and the inability to find partners or buyers for inner-city hospitals that served a disproportionately high African American population.

In North Carolina, Republican candidate for Governor, State Treasurer Dale Folwell said that many hospitals "have disguised themselves" as nonprofits.

They're not doing their job. Patients should come before profits. He said that profits always come before patients.

Despite the need for reform, hospital officials have been unable to overcome strong opposition.

Montana's health department has proposed standards for reporting community benefits after an audit of 2020 found that nonprofit hospitals were not being transparent and consistent with their reports. The Montana Hospital Association was against the plan and it was removed from the final bill.

Pennsylvania has a strong but unique law, Bai explained, which requires hospitals to prove that they are a "purely public charity" and pass a 5-pronged test. Bai says that this could make it easier to challenge tax exemptions in the state.

The Pittsburgh Mayor challenged the University of Pittsburgh's Medical Center this year over some of its tax-exempt properties.

Bai, speaking nationally, said: 'I do not think hospitals will lose their tax exemptions within the next few years.'

She added that 'the public and policymakers will probably put more pressure on hospitals to do more for the community.'

Mountain States Editor Matt Volz contributed this report.