[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
THE TAX-EXEMPT HOSPITAL SECTOR
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MAY 26, 2005
__________
Serial No. 109-17
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas
RON LEWIS, Kentucky EARL POMEROY, North Dakota
MARK FOLEY, Florida STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
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C O N T E N T S
__________
Page
Advisory of May 19, 2005 announcing the hearing.................. 2
WITNESSES
Internal Revenue Service, Hon. Mark Everson, Commissioner........ 8
U.S. Government Accountability Office, Hon. David M. Walker,
Comptroller General............................................ 19
Centers for Medicare and Medicaid Services, Hon. Mark McClellan,
Administrator.................................................. 36
______
University of Illinois College of Law, John Colombo.............. 85
Champaign County Board of Review, Stan Jenkins................... 92
Baylor Health Care System, John T. Thomas........................ 98
Sacred Heart Health System, and Catholic Health Association of
the United States, Sr. Carol Keehan............................ 102
University of Michigan Law School, and National Bureau of
Economic Research, Jill R. Horwitz............................. 110
Harvard School of Public Health, Department of Health Policy and
Management, Nancy M. Kane...................................... 116
SUBMISSIONS FOR THE RECORD
Alliance for Advancing Nonprofit Health Care, statement.......... 125
American Hospital Association, Mike Rock, statement.............. 129
Clarke, Richard L., Healthcare Financial Management Association,
letter......................................................... 132
Forbes, K.B., Consejo de Latinos Unidos, Los Angeles, CA,
statement...................................................... 135
Goodman, Edward, VHA Inc., statement............................. 136
Loftis, Paula, letter............................................ 140
Schaefer, Philip, Southern Illinois Healthcare, Carbondale, IL,
letter......................................................... 141
Schlesinger, Mark, Yale University, and Bradford H. Gray, Urban
Institute, joint statement..................................... 142
Wolfson, Jay, Tampa, FL, statement............................... 155
THE TAX-EXEMPT HOSPITAL SECTOR
----------
THURSDAY, MAY 26, 2005
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 10:18 a.m., in
room 1100, Longworth House Office Building, Hon. Bill Thomas
(Chairman of the Committee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: 202-225-1721
FOR IMMEDIATE RELEASE
May 19, 2005
FC-10
Thomas Announces Hearing on the Tax-Exempt Hospital Sector
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a hearing
titled, ``A Review of the Tax-Exempt Hospital Sector.'' The hearing
will take place on Thursday, May 26, 2005, in the main Committee
hearing room, 1100 Longworth House Office Building, beginning at 10:00
a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. Invited
witnesses will include the Honorable David Walker of the U.S.
Government Accountability Office, the Honorable Mark McClellan of the
Centers for Medicare and Medicaid Services, the Honorable Mark Everson
of the Internal Revenue Service (IRS), academic experts and other
interested parties. However, any individual or organization not
scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record
of the hearing.
BACKGROUND:
The Committee on Ways and Means held a hearing on April 20, 2005,
to examine the history of the tax-exempt sector, the legal rationale
for tax-exemption, and its economic impact. The Committee is continuing
its series of hearings to review the tax-exempt sector. These hearings
will examine particular components of the tax-exempt sector, such as
charitable institutions, cooperatives, and other exempt organizations,
to learn more about what they do, how they have evolved over time, if
the organizations have become increasingly commercial in their
operations, and the current rationale for their tax-exempt status.
According to the Joint Committee on Taxation, health-related
organizations make up the largest percentage of 501(c)(3) non-profit
organizations, accounting for almost 60 percent of total revenues of
501(c)(3)s. Of the health-related organizations, hospitals constitute
almost three-quarters of total revenues.
In 1956, the IRS first announced a formal position on what is
required for a hospital to be recognized as exempt under section
501(c)(3), since the law is silent as to ``health'' as a criteria for
exemption. The ruling had a number of criteria, including that the
facility must be operated to the extent of its financial ability for
those not able to pay, and not exclusively for those able and expected
to pay. In 1969, the IRS eliminated the requirement that hospitals
provide charity care as a condition to receive tax-exempt status.
Because this action was taken through an administrative revenue ruling,
it was made without public comment. The IRS believed that this change
was warranted, in part, by the enactment of the Medicaid and Medicare
programs. Moreover, the view was that taxable and tax-exempt hospitals
were dissimilar organizations, since taxable hospitals were commonly
organized as small physician-owned facilities. Since 1969, hospital
tax-exemption has been governed by the ``community-benefit'' standard.
Under this standard, an entity engaged in the promotion of health for
the benefit of the community is pursuing a charitable purpose, even
though not all members of the community, such as the indigent, directly
benefit from the services.
The hearing will examine the following issues:
How the standards for hospital tax-exemption evolved over
time;
What criteria are used to assess if hospitals meet the
tax-exempt standard;
If tax-exempt hospitals operate principally as businesses
selling their services in a competitive market.
In announcing the hearing, Chairman Thomas stated, ``This continues
the series of hearings examining the tax-exempt sector. Congress needs
a better understanding of the subsidy for tax-exempt hospitals. Tax-
exemption is an important benefit and the Congress has a responsibility
to assure the American taxpayer that the tax-exempt hospital sector is
living up to its community responsibilities.''
FOCUS OF THE HEARING:
The hearing will examine the legal history of the tax-exemption for
hospitals; IRS oversight of tax-exempt hospitals; the need for
congressional oversight of the standards for hospital tax-exemption;
and Federal policies that subsidize treatment of the indigent by
hospitals.
FURTHER EXAMINATION:
The Committee will be continuing this series of hearings throughout
the year, looking both at broad categories of exempt organizations and
at specific abusive practices involving tax-exempt organizations,
ranging from support of terrorism by tax-exempt organizations to
practices that misuse valuable taxpayer dollars. These hearings will
assess the impact of such abuses, whether current laws are adequate to
address them, and if not, what should be done to curtail them.
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Chairman THOMAS. Can we ask our guests to find seats,
please? Today the Committee is continuing a series of hearings
on the tax-exempt sector. Our last hearing provided a broad
overview of the history, law, and economics of the sector. We
plan to continue this series throughout the 109th Congress,
examining both the broad categories of tax exemption and
specific activities. The Committee will focus today on the tax
exemption standard for hospitals. Health-related organizations
account for almost 60 percent of the revenues of all charitable
organizations. I know some Members have said, Why are we
picking on hospitals? I think it is obvious if we begin an
examination in this area; the old Willy Sutton motto of why do
you rob banks? He said, That is where the money is. If we are
going to examine this area in terms of the not-for-profit
activities, it seems almost axiomatic that you look at the area
that accounts for almost 60 percent of the revenue in that
particular category. Of these, in terms of all charitable
organizations, hospitals account for three-quarters of the
revenue, making them by far the largest single type of
charitable organization.
In light of these statistics, the question that we started
with and that I believe is the responsibility of Congress and
its oversight function is to ask periodically, and the Chair
believes every 25 years is a reasonable timeframe for
periodicity, to say what is the taxpayer getting in return for
the tens of billions of dollars per year in tax subsidy.
History shows us that over time, less and less has been
required for hospitals to maintain tax-exempt status. In 1969,
the IRS eliminated the requirement that not-for-profit
hospitals provide charity care in order to maintain exempt
status. In 1983, the IRS dropped the requirement that nonprofit
hospitals operate an emergency room. Ironically, as less was
required, hospitals have received more help through Federal
policies in terms of health coverage both for the old under
Medicare and the poor under Medicaid. For example, Federal
subsidies were added for treating low-income patients, training
physicians, and for locating in rural areas. I think an
appropriate question to ask is what does the current standard
require of hospitals? Is there adequate oversight of the so-
called community benefit standard?
The Committee will hear testimony from a local taxation
official today from Illinois suggesting that at least in terms
of certain purviews, there are significant oversight duties
that fall into local tax officials and that what they have
discovered is of primary importance to this Committee. For
example, our nonprofit hospitals, primarily commercial
enterprises, that do not differ substantially from for-profits.
Data from the American Hospital Association showed in 2002, the
average percentage of uncompensated care was 4.4 percent for
nonprofit hospitals and 4.5 percent for for-profit hospitals.
If blindfolded and taken to a hospital, would a patient know
whether he or she was in a for-profit or not-for-profit? The
standards for tax exemption are not just an academic debate. My
hometown newspaper recently ran an article on how hospital
charges just don't make sense. All of us have examples and we
have read about them in terms of what kind of a nonsensical
pattern of who gets charged, how much, when, and how.
Similarly, the level of executive compensation and collection
practices of some nonprofit hospitals has been the subject of
increasing scrutiny. Given the size of the Federal benefit and
the competitive advantages given to tax-exempt entities--and we
may attempt to place a ballpark dollar figure on those--I
believe it is incumbent upon these Committees to ensure that
the taxpayers are given at least some commensurate relationship
of benefit for the tax exemption amounts. Fourteen years ago,
this Committee held a hearing on this same topic, and yet today
we still face many of the same questions because Congress has
failed to act. My hope is that through these series of
hearings, we will get sufficient information to be able to act.
With that, the Chair would recognize the gentleman from New
York, Mr. Rangel, for any statement he may wish to make.
Mr. RANGEL. My question is why are you picking on
hospitals, which I understand you said that many people ask
you; but there is no answer here, because if we were to get
involved with why do we give tax exemptions in the first place,
I think I could better understand it. We have the President
saying he wants to change the Tax Code altogether. I think
these are legitimate questions. But when the Chair starts
picking certain people out just because they are the
beneficiary of tax exemption, I would want to know do they
deserve the exemption, what is the policy for the exemption and
where do we go from here? Do we go to the universities as
opposed to those for-profits, churches, our synagogues, our
mosques, our YMCAs? We have so many institutions that don't pay
taxes that I just don't know why you won't give us a list or
give us reasons other than this is where the money is. This may
be where the service is, this may be where the health benefits
are, this may be the best thing. Maybe we should give them more
money to do good. It seems, Mr. Chairman, that you have had
three hearings now on this tax exemption, hospitals, credit
unions, and now the full Committee is revisiting this and we
might as well get on with tax reform and get the reasons for
the policy rather than frighten the heck out of people that
clearly there has been no evidence--and maybe we will get it
from the panels--of wrongdoing. All of us want to rout out
wrongdoing wherever it is. I would like to recognize Mr.
McNulty for the purposes of introducing a statement for the
record, and then the balance of the time I would like to turn
over to Mr. Stark, the senior Member of the Subcommittee on
Health.
Chairman THOMAS. Without objection. Any Member who wishes
to submit a statement for the record, without objection.
Mr. STARK. Mr. Chairman, if I could continue, it shouldn't
surprise you that I am on oversight of the entire hospital
sector, but I am a little curious as to where this is leading
us and whether, indeed, we have done our homework. No one has
provided us with a concrete example of what might happen if
this exemption was eliminated. Now I was able to get data on
one State, and they have asked to remain anonymous and I would
be glad to show the Members the letter I have; but basically
what would happen to that State if suddenly--all but one of the
hospitals is not for profit--if you suddenly changed and made
them all for profit, we would pick up--well, 242 million of
revenue would be picked up, 117 to the Feds, sales tax of 35,
real estate taxes are 90. They have 525 million of
uncompensated care, but that comes out of their margins, and
that would be about 90 percent of their margin. Then on top of
that, they have 4.3 billion of tax-exempt bonds which would
come due the minute you made them for-profit, and they
questioned whether they could refinance that in today's market
and it would certainly be at a higher rate.
I just suggest that to say within 2 days I have been able
to get that information, and for us to be going at this in the
blind--and none of us have exact numbers as to what is out
there--it would be easy for Joint Tax to do it and then we
could regroup and look at what we ought to know, rather than
this kind of smearing around here, getting a bunch of opinions
as to what is happening. The other question that will come up,
gee whiz, won't for-profit hospitals do a better job? The fact
is in--and while this is not a peer-review journal, the only
thing that is available to me that I can understand is U.S.
News and World Reports, and out of that, there is 675
individual rankings in U.S. News and World Reports. Only 17 of
those went to for-profit hospitals; in other words, two for-
profit hospitals, U.S.C. and St. Louis, were formally not for
profit and they converted. So, you don't find a first-quality
hospital in the United States that is for profit. So, the idea
that converting it to for-profit would improve medical care I
think we could debunk rather quickly.
I am suggesting we go back and get data that is reliable on
every hospital that is available to us and figure out what to
do. The other thing to remember is that if we get Federal tax
revenue, my colleagues, it doesn't go to health care. It goes
into the general revenues to Iraq, to pay hospitals or whatever
we want to do with it, and therefore, I think we ought to
proceed with some kind of good data and determine where we
think we ought to be. The biggest problem--and I will quit, Mr.
Chairman--is how we define charitable care. That has been
before us for 30 years that I am aware of, and it is elusive.
Every hospital will tell you, we give to the public good. Well,
this giving to the public good, running an ad that says you
might have a heart attack, or is it going out and grabbing
people off the street and saying let us give you a blood test?
It is in the eye of the beholder; and is it charitable care at
sticker price or what they actually collect from insurance
companies? Those things we are unsure of, and that might be
another topic of how we define it. But it is our job to do it
and I hope we proceed with more data than we have before us
today. I thank you, Mr. Chairman.
Chairman THOMAS. I thank the gentleman. I guess I should
have realized that in reading previous hearings and doing
historical analysis that I came across a quote from the
gentleman from California as a statement for the hearing in
front of this Committee some years ago in which the gentleman
from California began his statement by saying, ``Mr. Chairman,
exemption from taxes is a privilege for which communities have
a right to expect a measurable definable benefit. Given the
value of the exemption and the cost of it to every level of
government, it makes sense that we scrutinize the extent to
which communities are receiving a return on their investment in
not-for-profit hospitals.'' Apparently the gentleman was able
to make that statement without that significant research
necessary to reach the conclusion which I think, as the
gentleman said on its face is obvious, that periodically we
have every right to ask the question. What I am hearing
primarily from my colleagues is the concern about the
conclusion. The Chair has no conclusion, but believes that
beginning the process of examining might lead us to discuss
options, as was apparent in the first hearing, where people
were beginning to give us some definitions that might be
useful. This is an attempt to flesh that process out. We
continue to try to gather information, which I think is at the
heart or should be at the heart of the legislative process. I
welcome the gentleman's offer of bringing additional data from
different structures in front of the Committee, which will
allow us to make an even more informed decision than would
otherwise be the case. I agree completely with the gentleman's
statement that he made at a previous hearing.
Mr. STARK. Would the gentleman yield? If he had been at
that hearing, he would have heard further testimony that
suggested that we ought to look at kickbacks to doctors and a
whole host of things that subsequently losing the gavel, I
can't claim any problems since '94. But that data should have
been established and I stand by the statement. I thank the
Chairman.
Chairman THOMAS. The Chair completely agrees with the
gentleman that we should not limit our pursuit of a reasonable
return on the taxpayers' dollar to not-for-profit, for-profit,
or any other particular definition of where the taxpayers'
dollars goes. With that, I want to welcome the panel. This
seems to be an especially useful panel which will allow us to
continue to focus on where we have been, how we got to where we
are, and to some extent, if they are bold and willing, where we
ought to be going. We have the honorable Mark Everson,
Commissioner of the Internal Revenue Service, certainly a
principal player in where we are today; the honorable David M.
Walker, Comptroller General, U.S. government Accountability
Office. Welcome back. Dr. Mark McClellan, the Administrator for
the Centers of Medicare and Medicaid Services, who in his
previous life had some involvement in academia looking at this
very question through slightly different spectacles. If we
will, I will start with Mr. Everson. Your written testimony
will be made part of the record and you can address us in the
time you have in any way you see fit.
STATEMENT OF THE HONORABLE MARK EVERSON, COMMISSIONER, INTERNAL
REVENUE SERVICE
Mr. EVERSON. Mr. Chairman, Mr. Rangel, distinguished
Members of the Committee, thank you for the opportunity to
discuss the tax-exempt hospital sector. I commend you for your
interest in this area and in the subject of charities more
generally. To start, I would like to put IRS oversight of the
tax-exempt sector into a broader context. Last year, we issued
the IRS Strategic Plan for 2005 through 2009. In that plan we
set three goals: to improve taxpayer service, to enhance
enforcement of the tax laws, and to modernize the IRS. As GAO
noted in a report issued just last week, over the past several
years, the IRS has made progress in each of these areas. As the
Comptroller General noted in his recent update to GAO's
governmentwide High Risk Report, the IRS still has important
work to do, particularly with respect to enforcement of the tax
law. Within the enforcement arena, we have four key objectives.
These include attacking abusive activity by corporations, high-
income individual taxpayers, and other contributors to the tax
gap; ensuring attorneys, accountants, and other tax
practitioners adhere to professional standards and follow the
law; and augmenting our investigations of tax and financial
crimes. Our fourth enforcement objective, which hits squarely
the issues you are addressing in your series of hearings on the
charitable sector, is to deter abuse within tax-exempt and
governmental entities and misuse of such entities by third
parties for tax avoidance or other unintended purposes.
While most charities, including hospitals, are good solid
citizens, we have made the tax-exempt sector a service-wide
important priority because we are seeing increasing problems.
Specific examples include problems with particular components
of the tax-exempt sector like credit counseling and supporting
organizations, as well as issues such as excessive compensation
across a larger portion of the sector. If we do not act now, we
will be faced with two results: first, an alarming erosion of
the tax base as individuals and for-profit entities masquerade
as charities in order to escape taxation and regulation;
second, erosion of the American public's trust in charities if
people conclude that charities no longer operate for the public
good. If that happens, one of our Nation's great strengths will
waste away. Over time, Americans will stop giving and those in
need will suffer. The extent of our concern is such that we are
dedicating increased resources to tax-exempt organizations,
reversing a multiyear trend. Although the total IRS budget for
fiscal year 2005 increased by only one-half percent, we have
boosted our budget for exempt organization examinations by over
20 percent. I would note that the President's 2006 request asks
for another $14\1/2\ million to further step-up our activities
in the tax-exempt sector.
Turning now to tax-exempt hospitals, since 1969 the basic
standard for tax exemption has been the community benefit
standard. The community benefit standard includes
considerations such as existence of a community-controlled
board and open medical staff, a full-time emergency room opened
to all without regard to ability to pay, acceptance of Medicare
and Medicaid, and appropriate use of earnings. While our
standard for assessing an organization's eligibility for tax
exemption has remained essentially unchanged over 36 years, the
hospital industry has not. What we have seen since 1969 has
been a convergence of practices between the for-profit and
nonprofit hospital sectors, rendering it increasingly difficult
to differentiate for-profit from not-for-profit health care
providers. In our review of tax-exempt hospitals, some of the
issues we are finding include complex joint ventures with
profit-making companies, excessive executive compensation,
operating for the benefit of private interest rather than the
public good, unrelated business income and employment taxes.
Let me state clearly that, as with other parts of the tax-
exempt sector and enforcement generally, we have not been able
to do enough with respect to tax-exempt hospitals. Our audit
rates are too low. We welcome your support as we strive to do
more.
As you consider possible changes to the law, let me
reiterate three points I have made before and I hope you
consider as a part of your review. First, is the question of
whether the IRS has sufficiently flexible enforcement tools.
There are times when revocation of exempt status is not
workable either because it imposes a disproportionate hardship
on those who need help or is otherwise not in the public
interest. We need intermediate sanctions that are of sufficient
impact and focused on the right parties. Second, enhanced
transparency is a vital component of a healthy tax-exempt
sector. Key to achieving this goal is the ability to require
sufficient numbers of organizations to electronically file
their form 990. Third, is whether the IRS can leverage its
activities through improved information sharing with fellow
State regulators. Increasing the capacity to share information
with State regulators would improve the Nation's ability to
combat abuses in the exempt community. In addition to these
areas of possible statutory revisions to boost oversight of the
tax-exempt sector, I also urge the Committee to support the
administration's 2006 budget request. The budget increases
enforcement by 8 percent generally, and would help expand our
coverage with respect to hospitals and other key areas of the
tax exempt sector. Thank you.
Chairman THOMAS. Thank you for that commercial message in
terms of the desire to have more money. Somehow I knew you
would work that into the testimony, but the other stuff is
really good and I appreciate that.
[The prepared statement of Mr. Everson follows:]
Statement of The Honorable Mark Everson, Commissioner, Internal Revenue
Service
Mr. Chairman, Congressman Rangel, distinguished members of the
Committee: Thank you for the opportunity to discuss tax-exempt
hospitals and health care organizations, and the IRS administration of
this area.
Tax-exempt hospitals and health care organizations are an important
and highly visible element of the tax-exempt community. According to
Statistics of Income (SOI) data for 2001, the most recent available,
this sector consists of approximately 7,000 entities. It includes
hospitals, clinics, other health care providers, cooperative health
service organizations, and medical research organizations. Over half
these organizations are traditional hospitals. That year, this sector
controlled approximately $490 billion in assets and received over $500
billion in gross receipts. In terms of assets, it is the largest
element within the universe of tax-exempt entities.
The country rightfully takes pride in its system of tax-exempt
hospitals and health care organizations. This sector employs the
talents of millions of dedicated professionals, staff and volunteers
who conscientiously, and with great dedication and skill, provide life-
saving medical and rehabilitative care, train medical professionals,
educate the public about health and medical issues, and conduct ground-
breaking research. Their contributions and importance to the country
cannot be overstated.
My remarks will focus on the law applicable to tax-exempt hospitals
and health care organizations, and on the Internal Revenue Service's
coverage of this area.
As I outline the law and our work in this area, what should become
clear is that we at the IRS are now faced with a health care industry
in which it is increasingly difficult to differentiate for-profit from
non-profit health care providers. Our agents at work in this industry
encounter dauntingly complex corporate tax issues. These derive from
the use of multiple inter-related entities and a complex web of service
and other contractual relationships. We regularly find ourselves
engulfed in paper as we attempt to discern whether those in control of
a particular non-profit health care provider are acting more as
investors for their own account or as stewards of charitable assets.
General Discussion of the Internal Revenue Service's Regulation of the
Non-Profit Sector
Before beginning a specific discussion of the health care sector, I
would like briefly to place health care within the context of our
overall regulation of tax-exempt organizations. I believe that the
overwhelming majority of charitable organizations do their utmost to
comply fully with the letter and spirit of the tax law. But we are now
at an important juncture. Simply stated, there are increasing
indications that the twin cancers of technical manipulation and
outright abuse that we saw develop in the profit-making segments of the
economy are now spreading to pockets of the non-profit sector.
We can see that abuse is increasingly present in the tax-exempt
sector, and we must work to address it. We will act vigorously, for to
do otherwise is to risk the loss of the faith and support that the
public has always given to the charitable community. And if that is
lost, the bountiful vitality of the American charitable sector will
wither.
That is why the IRS Strategic Plan for 2005-2009 recognizes the
significance of the tax-exempt sector as a whole for tax
administration. The IRS Strategic Plan sets out four key objectives
designed to enhance tax law enforcement over the next five years. One
of them directly addresses the charitable sector:
Deter abuse within tax-exempt and governmental entities and misuse
of such entities by third parties for tax avoidance and other
unintended purposes.
Despite the importance of the tax-exempt sector, and its unique set
of challenges, our enforcement budget did not keep up with the sector's
growth. From 1995 through 2003, the number of exempt organization
returns filed increased 40 percent, yet IRS staffing of the exempt
organizations function steadily declined.
The chart below shows that we have begun to turn this around. Using
1995 as a benchmark, the chart shows the percentage increase in exempt
organization returns filed, together with the percentage changes in
staffing and staffing per exempt organization, on a year-by-year basis.
Although our staffing devoted to exempt organizations has declined, we
are reversing this trend.
[GRAPHIC] [TIFF OMITTED] T6414A.001
This reversal reflects the priority we have given to the charitable
sector. Although the IRS budget as a whole increased only one-half
percent in FY 2005, the Exempt Organizations budget increased 13.8
percent, and the Exempt Organizations examination budget increased 21
percent.
In FY 04, we added 70 new agents to conduct exempt organizations
examinations, as well as additional employees to begin implementing our
plans for a more flexible approach to enforcement. This year's budget
supports additional staffing to continue our plans. We established two
new offices to enhance our ability to identify and resolve compliance
issues. The first, our new EO Compliance Unit, will help us interact
with a larger number of exempt organizations by reviewing Forms 990,
corresponding with organizations to resolve inconsistencies and errors,
and conducting correspondence audits. The second new office, the
Financial Investigations Unit, will focus on in-depth analysis of our
most complex and significant cases to identify civil tax issues as well
as potential fraud and terrorist-financing referrals, and will serve as
a strike force when we need to move quickly.
These units will be aided by two new groups and additional
staffing. The first group is the Data Analysis Unit, established in
2004, which uses combinations of data to better select cases for
examination. A second newly-funded group will identify and follow up
with selected Form 990 filers in the first years of their operations,
bridging the gap between what an applicant organization tells us when
it applies for exemption and how it actually operates. In addition, I
have reallocated resources to our Exempt Organizations function to
enable it to hire 69 additional compliance employees.
The Law Governing Tax Exemption for Hospitals and Health Care
Organizations
Overview: Current Exemption Requirements--the Current Community Benefit
Standard.
The current standard for exemption of a hospital, known as the
``community benefit standard,'' was first set forth in 1969 in Revenue
Ruling 69-545, 1969-2 C.B. 117. The factors considered in Rev. Rul. 69-
545 to determine whether a hospital met the community benefit standard
were the following:
(a) The governing body of the hospital is composed of members of
the community (as opposed to financially interested individuals);
(b) Medical staff privileges in the hospital are available to all
qualified physicians in the area, consistent with the size and nature
of the facilities;
(c) The hospital operates a full-time emergency room open to all
regardless of ability to pay;
(d) The hospital otherwise admits as patients those able to pay for
care, either themselves or through third-party payers such as private
health insurance or government programs such as Medicare and Medicaid;
and
(e) The hospital's excess funds are generally applied to expansion
and replacement of existing facilities and equipment, amortization of
indebtedness, improvement in patient care, and medical training,
education, and research.
In addition to meeting the community benefit standard, hospitals
must meet the general requirements for exemption under section
501(c)(3), including the prohibitions on inurement and substantial
private benefit.
History and Discussion of Tax Exemption for Hospitals.
Despite the significance of hospitals and health care organizations
in the tax-exempt sector, neither the Code nor the underlying
regulations explicitly provides for the exemption from federal income
tax of non-profit hospitals.
Nevertheless, we have long recognized that non-profit hospitals can
qualify for exemption as organizations described in section 501(c)(3)
of the Code. Before 1969, the IRS viewed the term ``charitable'' in
the limited sense of providing relief to the poor. Accordingly, in
1956, the first published position of the IRS regarding hospitals
recognized them as charitable organizations provided they accepted
patients without regard for their ability to pay, to the extent of the
hospital's financial ability. Rev. Rul. 56-185, 1956-1 C.B. 202.
Three years later, in 1959, the IRS determined that the term
``charitable'' in section 501(c)(3) should be interpreted in its
generally accepted legal sense and not limited to relief of the poor.
Treas. Reg. section 1.501(c)(3)-1(d)(2). Although the regulation
expanded the concept of charitable, it did not explicitly provide that
promotion of health is a charitable purpose even though promotion of
health was and is considered charitable under common law. Then, in
1965, Medicare and Medicaid were established. At the time, many
believed these government programs would eliminate the need for
indigent care.
Meanwhile, the ``financial ability standard'' set forth in the 1956
revenue ruling was being criticized for its imprecise standards
concerning the extent to which a hospital must accept patients unable
to pay in order to retain exempt status. An example of such criticism
is that expressed in 1969 at Congressional hearings (see H.R. Rep. No.
43, 91st Cong., 1st Sess. Pt. 1 at 43 (1969)). These factors led the
IRS to study the hospital industry and develop a new standard: the
community benefit standard, set forth in Rev. Rul. 69-545, and outlined
above. Under this standard, hospitals would no longer be required to
provide a specific level of care to the poor in order to qualify for
tax exemption, but instead must demonstrate that they benefit the
community sufficiently.
In Rev. Rul. 69-545, the IRS recognized that the promotion of
health is considered to be a charitable purpose under the common law of
charity. Promotion of health is deemed beneficial to the community as a
whole even though the class of beneficiaries eligible to receive a
direct benefit from activities does not include all members of the
community, provided that the class is not so small that its relief is
not of benefit to the community. Therefore, in order to qualify as an
organization described in section 501(c)(3), a hospital must
demonstrate that it provides benefits to a class of persons that is
broad enough to benefit the community and it must show that it is
operated to serve a public rather than a private interest.
Rev. Rul. 69-545 presents a snapshot of the hospital industry as it
existed in 1969. At that time, most for-profit hospitals were owned and
operated by physicians as an adjunct to their private practice.
Therefore, the particular facts illustrating the difference between the
exempt hospital and the for-profit hospital are based upon this model.
The ruling was challenged by a group of private citizens who argued
that the IRS should continue to require hospitals to provide free care
to those unable to pay in order to qualify for tax exemption under
section 501(c)(3). While the district court agreed with the plaintiffs'
assertion that the ruling was an improper reversal of long-standing
policy, the District of Columbia Circuit Court reversed that decision.
It held that the definition of charity was not limited to the relief of
poverty and the IRS was authorized to modify the requirements for tax
exemption for non-profit hospitals. The Supreme Court subsequently
vacated the Circuit Court's decision on jurisdictional grounds for
plaintiff's lack of standing. Eastern Kentucky Welfare Rights
Organization v. Simon, 370 F. Supp. 325 (D.D.C. 1973), rev'd, 506 F.2d
1278 (D.C. Cir. 1974), vacated on other grounds, 426 U.S. 26 (1976).
While the Supreme Court's decision on standing to sue effectively
precluded litigation seeking a return to the financial ability standard
as the sole method by which a non-profit hospital may qualify as a tax-
exempt organization, the decision has not meant that the financial
ability standard has no relevance. It was not repealed when the
community benefit standard was adopted. Rev. Rul. 69-545 did not revoke
Rev. Rul. 56-185; it merely modified it. While a hospital is no longer
required to operate to the extent of its financial ability for those
not able to pay, doing so is a major factor indicating that the
hospital is operated for the benefit of the community.
Rev. Rul. 69-545 was modified in 1983 with respect to the operation
of an emergency room as a factor. In Rev. Rul. 83-157, 1983-2 C.B. 94,
a hospital that did not operate an emergency room because the
appropriate governmental health agency had determined that this would
be unnecessary and duplicative could qualify for exemption by showing
that it operated to benefit the community through other factors.
Similarly, specialized hospitals, such as eye hospitals and cancer
hospitals, treating conditions that are unlikely to require emergency
treatment can qualify for exemption without operating an emergency room
based on similar, significant factors demonstrating community benefit.
Thus, other factors that demonstrate that the hospital is operating
for the benefit of the community may also be considered. Some factors
that may be considered are whether the hospital conducts medical
training or research activities, engages in activities to educate the
public regarding health care matters, or provides types of health care
services not otherwise available to the community.
The courts have adopted the Rev. Rul. 69-545 community benefit
standard and applied it to determine whether other types of health care
organizations qualify for exemption from tax. In Sound Health
Association v. Commissioner, 71 T.C. 158 (1978), acq., 1981-2 C.B. 2,
the Tax Court used that test in deciding if a health maintenance
organization qualified for exemption. Similarly, the community benefit
standard was applied in Geisinger Health Plan v. Commissioner, 985 F.2d
1210 (3rd Cir., 1993), rev'g 62 T.C.M. 1656 (1991).
Since the issuance of Rev. Rul. 69-545, there have been a number of
changes in the health care industry that have affected the application
of the community benefit standard. Under the Medicare and Medicaid
programs, hospitals were reimbursed for medical care of the elderly and
poor. The availability of this reimbursement was a major factor in the
rise of for-profit hospital chains. Thus, the typical model of the for-
profit hospital is no longer the physician owned facility operated as
an adjunct to a private practice. It has become the investor owned
hospital systems. Additionally, hospitals that participate in Medicare
and have an emergency room are required to treat any patient in an
emergency condition (not just those covered by Medicare or Medicaid),
regardless of ability to pay. Furthermore, to achieve cost containment,
Medicare and other insurance providers have changed their reimbursement
methodologies. With these changes in the health care industry, certain
factors specifically discussed in Rev. Rul. 69-545 appear less relevant
in distinguishing tax-exempt hospitals from their for-profit
counterparts. Having an open medical staff, participating in Medicare
and Medicaid, and treating all emergency patients without regard to
ability to pay are now common features of tax-exempt and for-profit
hospitals rather than distinguishing factors.
Nonetheless, the community benefit standard continues to be the
basis for determining tax exemption for hospitals and health care
organizations. More and more, the IRS looks to the independent board
exercising its fiduciary duty to operate for the benefit of the
community to differentiate the tax-exempt hospital from a for-profit
operation. This approach was illustrated in the IRS rulings on
integrated delivery systems and joint ventures.
In the 1990's a number of hospital systems were acquiring physician
practices to integrate the delivery of hospital and physician services
so that one organization could negotiate and bill for all of the
services rather than having the hospital and physician services
negotiated for and billed separately. Frequently, the acquired
physician practice would be established as a separate clinic within the
hospital system seeking exempt status under section 501(c)(3). In
reviewing these applications, we were concerned about the role the
physicians from the acquired practice played in the newly created
exempt clinic, and whether the clinic had an independent community
board based on the Rev. Rul. 69-545 community benefit standard. As part
of our review of these types of cases, we developed a sample conflict
of interest policy. Adopting a conflict of interest policy would
establish a set of procedures to follow to help avoid the possibility
that those in a position of authority, such as a director, officer, or
manager, may receive an inappropriate benefit and would help preserve
the independence of the community board. While not a requirement for
exemption of health care organizations, we routinely encourage health
care organizations to adopt such a policy.
Similarly, when developing guidance concerning hospital joint
ventures, the independent community board factor was of critical
importance when applying the community benefit standard of Rev. Rul.
69-545. In Rev. Rul. 98-15, 1998-1 C.B. 718, an organization that
contributed all of its hospital operating assets to a joint venture
continued to qualify for exemption when the governing documents of the
joint venture required the joint venture to operate for the benefit of
the community and to give charitable purposes priority over profit
maximization and the community members appointed to the governing board
of the joint venture by the organization had voting control over major
decisions thereby ensuring that the organization's participation in the
joint venture furthered the organization's charitable purposes.
Administrative Treatment of Hospitals and Health Care Organizations by
the Internal Revenue Service
General Overview.
The Internal Revenue Service's oversight of the hospital and health
care organizations sector employs two programs: the determination
letter process based on the organization's structure and proposed
activities, and the examination process based on the organization's
actual operations.
Determination Letter Process.
Like most other charitable organizations, hospitals and health care
organizations are required to apply for tax exemption by an
application. In FY 2004, we processed over 87,000 applications from
organizations seeking recognition of exemption under section 501(c)(3).
When we receive an application, it is assigned for screening by
specialists to determine whether it can be closed without further
review because it presents matters that can be resolved based on
established precedent and without further development. Cases that
cannot be processed under our screening procedures are assigned for
additional review and development. Due to their complexity, hospitals
generally require additional development.
Over the last ten years, we processed, on average, between 100 to
150 exemption applications per year filed by organizations that are
classified as hospitals, which includes hospitals, clinics, medical
research organizations, and cooperative hospital service organizations.
In FY 2004, we processed about 115 exemptions for these types of
organizations. This includes both newly established hospitals as well
as clinics formed by hospital systems that reorganize or that purchase
medical practices.
To qualify for exemption, hospitals must provide information
detailing their proposed operations, governance, and finances. In
addition, hospitals must complete a specialized hospital schedule to
Form 1023. In October, 2004, we undertook a major effort to overhaul
Form 1023, Application for Recognition of Exemption Under Section
501(c)(3) of the Internal Revenue Code, to make it easier to comprehend
and to allow us to identify exemption issues. For example, the hospital
schedule now asks whether the hospital has adopted a conflict of
interest policy consistent with a sample policy that is provided. If
not, the schedule pointedly asks how the hospital will avoid the
possibility of conflict of interest for those in a position of
authority absent adoption of a policy. Other key questions include
disclosures about joint ventures and other exemption issues based on
the community benefit standard. There are specific questions concerning
charity care.
In 2004, we issued a training document to assist our agents in
processing exemption applications filed by hospitals entitled Health
Care Provider Reference Guide. The guide provides a roadmap for agents
to make sure that a hospital is organized and operated to promote
health care consistent with exemption standards. This material is
available on our internet site so that the interested public is also
provided with information about how to comply as a tax-exempt hospital.
Review of Hospital Operations--Annual Reporting and the Examination
Program
Hospitals and health care organizations have long comprised a part
of the Exempt Organizations examination program, reflecting the
significance of the health care industry in the tax-exempt sector.
These organizations, like most other types of tax-exempt entities
must file annually a Form 990 that outlines their activities, revenues,
expenses, balance sheet, certain compensation information related to
key employees, officers and contractors, contributor information and
certain other information. The Form 990, with the exception of certain
contributor information, is publicly available. In addition, if the
organization receives more than $1,000 in unrelated business income, it
must file a Form 990T (Unrelated Business Income Tax Return).
Electronic filing is now available for the Forms 990, 990EZ and 990PF.
For 2005 returns, certain tax-exempt entities (viz., those with over
$100 million in assets and that file 250 or more returns with us) will
be required to file the Form 990 electronically. The asset level that
triggers this requirement will be lower in future years. The Form 990
is under revision. As part of this revision, there will be a new
schedule for hospitals that reflects the above-described 1023 schedule.
Thus, hospitals will be asked how they meet the community benefit
standard and its constituent components, including charity care.
While we expect improvements in light of the recent increase in
resources and modified business practices outlined above, our coverage
in the area of hospitals has not been robust. From FY 1995 through the
first half of FY 2005, we examined over 375 health care organizations
(out of a population of around 7,000), including both hospitals and
related organizations or parts of hospital systems. There are two
reasons for this level of coverage. The first is the overall lack of
available examination resources. The second is that many of these
entities were examined as part of our large case Team Examination
Program (TEP). Comprehensive TEP examinations of large, complex
organizations, which include related entities, are, by their nature,
exceptionally resource intensive because they involve teams of agents
looking at a wide variety of issues. Of the 375 plus examinations, many
were included as part of 79 TEP audits of health care organizations or
systems, including their myriad related entities.
In our TEP program, we examine large organizations on a team basis,
reviewing numerous issues. As part of those audits we review whether
the organization meets the community benefit standard, as well as other
exemption issues such as compensation and inurement, and tax issues,
including unrelated business income tax, allocations of income and
expenses among related entities, taxable subsidiary taxation, joint
venture income, employment tax, retirement plan issues and numerous
other issues.
In more than one quarter of our TEP health care cases we found tax
exemption issues. In these cases we can revoke the tax status of the
organization. We have done so in only a few instances because
traditionally we attempt to get a tax-exempt organization back on the
right track. (We have generally reserved revocation for cases in which
we believe the organization is incapable of furthering exempt purposes
in the future.) We attempt to resolve exemption issues with the
taxpayer short of revocation, often through the use of a closing
agreement. Almost half of the health care TEP cases ended in this
fashion.
The range of issues is even broader in our recent examinations,
reflecting the changes in the health care industry that have resulted
in ever more complex arrangements. For example, examinations of
organizations engaged in whole-hospital joint ventures with for-profit
partners present not only difficult exemption issues requiring analysis
of the degree of control retained by the tax-exempt partner, but also
issues of allocation of income and losses between the tax-exempt and
for-profit entity, and other partnership flow-through issues. Other
examinations raise the issue whether the organization is barred from
exemption because it is primarily engaged in providing commercial-type
insurance within the meaning of section 501(m). We also continue to see
a variety of compensation arrangements that include components, such as
deferred compensation, loan forgiveness, and non-accountable expense
plans, that raise excess benefit or inurement issues.
IRS Focus Areas for Discussion of Reforms_Unresolved Issues
The tax-exempt world and, in particular, the non-profit health care
industry have changed. We have indicated that the tax-exempt sector has
increased in size and complexity. This growth impacts our ability to
regulate, creates other pressures within the sector and has exacerbated
the decline in our enforcement presence as our staffing available for
examinations declined in the late 1990s.
In addition, the tax-exempt sector has not been immune from recent
trends toward lax corporate practices. Like their for-profit brethren,
many charitable boards appear to be lax in certain areas. In addition,
we are increasingly seeing the importation of corporate practices and
operating methods into the tax-exempt sector.
These factors have created opportunities for noncompliance. We
believe that with the additional staff and new business processes
underway, we are re-establishing meaningful oversight in this area.
However, notwithstanding our revitalized and refocused program, we
believe there are several areas that should be included as part of any
discussion of reform in the tax-exempt sector, including any reforms in
the area of hospitals and other health care organizations. We believe
that any discussion of reforms should include the following questions.
Have changes in practice or the industry created gaps in the statutory
or regulatory framework?
There has been huge growth in the tax-exempt sector, but much less
change in the law governing those organizations that qualify for tax-
exempt status. Since 1969 there has been only limited Congressional
review of the rules relating to tax-exempt organizations.
As we regulate various parts of the tax-exempt community,
compliance in some areas becomes difficult to administer where industry
practice, or the industry itself, changes, but the rules remain
constant decade after decade. As individual organizations and
industries grew, the skyline changed with more organizations
entertaining complex business structures and transactions. The
transformation of health care providers, and increased merger activity
in the health care sector in the 1980s and 1990s, is the prime example
of this kind of change. The health care industry grew up in a different
time, with different funding sources and competitive factors, and now
has evolved into something substantially different from what it was.
Yet the law remains largely unchanged.
Some have argued that it is time for a more thorough review. We
welcome that suggestion, both in general with respect to the law of
charities and other nonprofits, and more specifically with respect to
hospitals and health care organizations. A key question here is whether
there are additional bright-line tests that might be available to aid
the public in complying with the law, and the IRS in administering it.
Often in health care issues, the IRS is left with difficult and fact-
intensive administrative challenges. For example, as indicated, some
exempt providers have entered into joint ventures with for-profit
organizations, sometimes placing their entire health care operation in
the venture and transforming themselves into what is effectively a tax-
exempt holding company with a charitable grant-making function.
Although this is not impermissible, we insist that the charitable
entity ensure that the charitable purposes of the venture are not
sacrificed for the sake of maximizing profits. This is an example of
how the health care industry has changed. To determine control requires
our agents and courts to parse through reams of contracts, data and
state law. This is a far cry from the industry as it existed in 1969.
This is not to say that the IRS believes the community benefit
standard should be modified, but simply that many years have passed
since 1969. The community benefit standard is a reasonable
interpretation, within the current language of the statute, which
speaks only to charitable purposes. The standard reflected, and still
reflects, the economic rationale for tax exemption and allows for a
variety of mechanisms by which a hospital may attain exemption. In a
constantly changing health care market, this flexibility in approach
may be exactly what is needed.
Does the IRS have the flexibility to respond appropriately to
compliance issues?
We believe a discussion about reform should address whether we have
the proper range of tools to enforce compliance in a measured way. In
many areas of our jurisdiction, our remedial tools are not effective.
Often our only recourse is revocation of tax-exemption, a ``remedy''
that may work a disproportionate hardship on innocent charitable
beneficiaries. Moreover, even where we have an intermediate sanction,
it may not work as intended. Thus, as seen in the examination process
described above, we are left with many resolutions short of revocation
that are nonetheless imperfect.
There are two examples in this area. First, under section 4958,
certain compensation arrangements may be found to be excessive. In some
cases, however, the amounts considered permissible under section 4958
may be viewed by some as too high. The second example concerns our
ability to police expenditures and grants. In our attempts to ensure
that exempt organization funds are not diverted to improper purposes,
including terrorism, we do not have tools comparable to those
applicable to private foundations to sanction public charities that
fail to monitor their grants and expenditures.
Should more be done to promote transparency?
Transparency is a lynchpin of compliance within the tax-exempt
sector. ``Transparency'' refers to the ability of outsiders--donors,
the press, interested members of the public--to review data concerning
the finances and operations of a tax-exempt organization. By creating a
means by which the public may review and monitor the activities of tax-
exempt organizations, we promote compliance, help preserve the
integrity of the tax system, and help maintain public confidence in the
charitable sector. To achieve these goals, we began in the mid-to-late
1990s to image Forms 990, the annual information returns filed by many
tax-exempt organizations. Prior to 2005, the IRS only imaged returns of
organizations described in section 501(c)(3). Beginning this year, we
are imaging all Forms 990. We put this information on CDs, and provide
it to members of the public, including a number of watchdog groups that
monitor charitable organizations. These groups post the information to
their websites, where it is available to the press and to the public.
This process has resulted in increased press and public scrutiny of the
tax-exempt sector, which we believe is highly desirable. It also has
increased the ability of the IRS and state regulators to access Form
990 data, because they are more readily available.
However, there are legitimate questions about whether to further
enhance transparency, and if so, how to proceed. For example,
limitations exist on our ability to communicate with state charity
officials, and these prevent us from fully leveraging the relationship
and jurisdiction we share with them. Further, there are segments of the
community that we are unable to track, including several categories of
legal non-filers (for example, those exempt organizations that are not
required to file a Form 990, such as churches and organizations with
less than $25,000 in gross receipts). Our master-file is replete with
errors concerning these organizations.
Finally, one of our key transparency initiatives is the
establishment of electronic filing for Forms 990 and 990-PF. The recent
interim report by the Panel on the Nonprofit Sector supports requiring
electronic filing for all returns for nonprofits. As indicated, we have
issued temporary regulations requiring such filing for certain groups.
While this will markedly advance the ability of the Service, the
states, and the public to access Form 990 data in real time, our
ability to require e-filing is limited at present by statutory
restrictions that prevent us from mandating electronic filing for any
organization that files fewer than 250 returns. The Administration's
2006 Budget proposal echoes this concern. The Administration's proposal
would lower the current 250-return minimum for mandatory electronic
filing, but would maintain the minimum at a level high enough to avoid
imposing undue burden on taxpayers.
Does the IRS have the resources it needs to do the job?
While this is a topic worthy of discussion, I have outlined what we
have done to expand our resources in the tax-exempt area. I believe we
have done a credible job of recognizing the task before us and
preparing to meet that challenge. To continue this work, I ask the
Committee to support the Administration's 2006 budget proposal, which
calls for an 8 percent increase in our enforcement budget. If the
Congress approves the request, the amount we plan to dedicate to the
tax-exempt area would be used to combat abusive promotions involving
tax-exempt entities, to start examinations quickly when we detect a
risk, and to increase vigilance against the misdirection of exempt
organizations' assets for illegal activities or private gain.
Conclusion
We welcome the Committee's review of the law of charities and other
nonprofits, including the law of tax-exempt hospitals and health care
organizations. We are ready to assist the Committee in this endeavor.
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Chairman THOMAS. Mr. Walker.
STATEMENT OF THE HONORABLE DAVID M. WALKER, COMPTROLLER
GENERAL, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. WALKER. Mr. Chairman and Mr. Rangel, members of the
Ways and Means Committee, it is a pleasure to be back before
you again to discuss current tax exemptions for not-for-profit
hospitals. Since my entire statement has been entered into the
record, I will provide an executive summary for the benefit of
the members. At this Committee's recent hearing on the tax-
exempt sector as a whole, I emphasized the importance of
reviewing this sector, drawing parallels to our agency's call
to reexamine all major Federal policies and programs in light
of 21st century challenges. There are a number of issues that
merit reexamination, including whether not-for-profit hospitals
perform sufficiently different services of benefit to the
public to justify their tax exemption. At the request of this
Committee, we examined whether or not not-for-profit hospitals
provide levels of uncompensated care, specifically care
provided to a patient that a hospital is not reimbursed for,
and other community benefits that are different from other
hospitals. To examine the provision of uncompensated care by
the three major hospital ownership groups, we analyzed cost
data from two perspectives; namely, each hospital's group
percentage of total uncompensated care cost in a State and
patient operating expenses devoted to uncompensated care. We
obtained data for the year 2003 from five States: California,
Florida, Georgia, Indiana and Texas. Hospitals in these States
included 46 percent of the Nation's for-profit hospitals and
more than a quarter of all hospitals in the three major
ownership groups.
In summary, the cost burden of providing uncompensated care
varied among the three hospital groups, but the burden was
generally concentrated in a small number of hospitals. In four
of the five States, government hospitals as a group devoted
substantially larger shares of their patient operating expenses
to uncompensated care than did not-for-profit or for-profit
hospitals. The not-for-profit hospitals' uncompensated care
costs as a percentage of their patients' operating expenses
were higher on average than those of for-profit hospitals in
four of the five States, but the differences were not nearly as
great as the differences between the government hospitals in
both these groups. Further, the burden of uncompensated care
was not evenly distributed within each hospital group, but
instead was concentrated in a small number of hospitals.
Regardless of ownership status, the hospitals we reviewed
reported providing a wide range of other community benefits,
which in many cases they had the opportunity to define and in
some cases were defined by the States. Other community benefit
hospitals that reported providing involved many types of items,
but there was no clear distinction among the government, not-
for-profit or for-profit hospital group with regard to these
community benefits.
These observations illustrate a larger point that I raised
at the last hearing; namely, that current tax policy lacks
specific criteria with respect to tax exemptions for charitable
entities, in general, including not-for-profit hospitals, in
particular. If these criteria are articulated in accordance
with desired public policy goals, standards could be
established that would allow not-for-profit hospitals to be
held accountable for providing services that benefit the public
commensurate with their tax-favored status. In conclusion, Mr.
Chairman, I would like to refamiliarize the members with this
book that was published on February 16 by GAO. It is on our Web
site. Every Member received one in February--``21st century
Challenges: reexamining the Base of the Federal government.''
Candidly, Mr. Chairman, I think it is important that you are
looking at this issue, because we are currently on an imprudent
and unsustainable fiscal path. We need to reexamine the base of
the Federal government both on the spending side and the tax
side in light of 21st Century changes, challenges, and
realities. With regard to this hearing, Mr. Chairman, we need
to ask the basic question--why are we giving a preference? Who
are we giving a preference to? What does it cost? What public
benefit is achieved for that preference? These are the types of
basic questions that need to be asked about every major Federal
spending program and tax preference and you have to start
somewhere. So, thank you, Mr. Chairman.
[The prepared statement of Mr. Walker follows:]
Statement of The Honorable David M. Walker, Comptroller General, U.S.
Government Accountability Office
Mr. Chairman and Members of the Committee:
I am pleased to be here today as you discuss issues regarding tax
exemptions for nonprofit hospitals. At this Committee's recent hearing
on the tax-exempt sector as a whole, I emphasized the importance of
reviewing this sector, drawing parallels to our agency's call to
reexamine all major federal policies and programs in light of 21st
century challenges.\1, 2\ Provisions granting federally recognized tax-
exempt status and associated policies have been layered on one another
to respond to challenges at the time, but they need to be reviewed and
revised to reflect 21st century changes and challenges. On a broad
scale, a comprehensive reexamination could help address whether exempt
entities are providing services and benefits to the public commensurate
with their favored tax status, whether the current number and nature of
exemptions continue to make sense, whether the conditions and
restrictions on the activities of tax-exempt entities remain relevant,
and whether the framework for ensuring that exempt entities adhere to
the requirements attendant to their status is satisfactory.
---------------------------------------------------------------------------
\1\ GAO, Tax-Exempt Sector: Governance, Transparency, and Oversight
Are Critical for Maintaining Public Trust, GAO-05-561T (Washington,
D.C.: Apr. 20, 2005).
\2\ GAO, 21st Century Challenges: Reexamining the Base of the
Federal Government, GAO-05-325SP (Washington, D.C.: February 2005).
---------------------------------------------------------------------------
There are a number of issues that merit reexamination, including
whether nonprofit hospitals perform sufficiently different services of
benefit to the public to justify their tax exemption. To examine these
hospitals' tax-exempt status, we must look back several decades. Before
1969, the Internal Revenue Service (IRS) required hospitals to provide
charity care to qualify for tax-exempt status. Since then, however, IRS
has not specifically required such care for a hospital to be exempt
from federal taxation and have access to tax-exempt bond financing and
charitable donations, as long as the hospital provides benefits to the
community in other ways. Community benefits include such services as
the provision of health education and screening services to specific
vulnerable populations within a community, as well as activities that
benefit the greater public good, such as education for medical
professionals and medical research. Nonprofit hospitals may also be
exempt under state law from state and local taxes.
Seeking a better understanding of the benefits provided by
nonprofit hospitals, this Committee requested that we examine whether
nonprofit hospitals provide levels of uncompensated care--care provided
to a patient that a hospital is not reimbursed for--and other community
benefits that are different from other hospitals. My remarks today will
focus on our examination, for selected states, of (1) the provision of
uncompensated care by state and local government-owned, nonprofit, and
for-profit hospitals and (2) hospitals' reporting of other community
benefits.
To examine the provision of uncompensated care by the three
hospital ownership groups,\3\ we analyzed cost data from two
perspectives, namely each hospital group's percentage of (1) total
uncompensated care costs in a state and (2) patient operating expenses
devoted to uncompensated care. We obtained 2003 data from five states--
California, Florida, Georgia, Indiana, and Texas. Hospitals in these
states include 46 percent of the nation's for-profit hospitals and more
than a quarter of all hospitals in the three ownership groups. We
selected these states because they represented geographically diverse
areas; had a number of hospitals in each ownership group sufficient to
make comparisons; and collected hospital-specific uncompensated care
data, which not all states maintain.\4\ We compared each hospital
ownership group's provision of uncompensated care by examining each
group's uncompensated care costs\5\ as a percentage of its total
patient operating expenses.\6\ Our measure of uncompensated care
includes the cost of charity care as well as bad debt and deducts any
payments made by or on behalf of individual patients. We limited our
analysis of uncompensated care to nonfederal, short-term, acute care
general hospitals.\7\ In doing our work, we tested the reliability of
the state data and determined they were adequate for our purposes.\8\
To examine hospitals' provision of community benefits other than
uncompensated care, we reviewed 21 hospital or hospital systems'
reports and Web sites for information about such benefits. These
reports and Web sites covered nonprofit, for-profit, and government
hospitals in the five states. We also examined laws in the five states
regarding community benefit requirements for nonprofit hospitals,
reviewed the literature, and interviewed state officials and state
hospital association representatives. In addition, we interviewed
officials from the Centers for Medicare & Medicaid Services (CMS), the
American Hospital Association, and the Federation of American
Hospitals. We conducted our work from February 2005 through May 2005 in
accordance with generally accepted government auditing standards. (See
app. I for more detail on our scope and methodology.)
---------------------------------------------------------------------------
\3\ The state and local government-owned hospitals in this
statement refer to state-owned hospitals, such as those at state
universities, and locally owned hospitals, such as county and city
hospitals. In this statement we will refer to these as government
hospitals. Federal hospitals, such as those operated by the Department
of Veterans Affairs, are not included in this definition.
\4\ Reliable, hospital-specific data were not available nationwide.
In addition, some states do not have sufficient diversity in hospital
ownership to make comparisons for the purpose of this analysis; in
particular, some states have very few for-profit hospitals.
\5\ To obtain uncompensated care costs, we multiplied hospitals'
uncompensated care charges reported in the state data by hospital-
specific, cost-to-charge ratios from Medicare hospital cost reports.
These cost-to-charge ratios are specific to hospital costs and charges
as a whole, not to Medicare costs and charges.
\6\ Patient operating expenses include those expenses incurred for
patient care. They exclude such expenses as those incurred for
operating a parking garage, gift shop, and certain other nonmedical
expenses.
\7\ Cost, charge, and other data obtained from the states and other
sources are for individual hospitals, even if a hospital is part of a
larger hospital system.
\8\ We excluded 8 percent of the hospitals in the five states
because certain key information, such as total patient operating
expenses, was not available.
---------------------------------------------------------------------------
In summary, the cost burden of providing uncompensated care varied
among the three hospital groups, but the burden was generally
concentrated in a small number of hospitals. In four of the five
states, government hospitals, as a group, devoted substantially larger
shares of their patient operating expenses to uncompensated care than
did nonprofit and for-profit hospitals. The nonprofit hospitals'
uncompensated care costs, as a percentage of patient operating
expenses, were higher on average than those of the for-profit hospitals
in four of the five states, but the differences were generally not as
great as the differences between the government hospitals and both
these groups. Further, the burden of uncompensated care costs was not
evenly distributed within each hospital group but instead was
concentrated in a small number of hospitals. For example, in
California's nonprofit hospital group, the top quarter of hospitals,
ranked by uncompensated care as a percentage of patient operating
expenses, averaged 7.2 percent devoted to uncompensated care compared
with an average of 1.4 percent for hospitals in the bottom quarter.
Regardless of ownership status, the hospitals we reviewed reported
providing a wide range of other community benefits, from health
education to clinic services specifically for the community's indigent
population. Variations in the types of community benefits hospitals in
the five states reported providing could be explained by differences in
the services hospitals chose to provide as well as by variation in the
applicability, specificity, and breadth of state requirements.
Background
In 2003, of the roughly 3,900 nonfederal, short-term, acute care
general hospitals in the United States,\9\ the majority--about 62
percent--were nonprofit. The rest included government hospitals (20
percent) and for-profit hospitals (18 percent). States varied--
generally by region of the country--in their percentages of nonprofit
hospitals (see fig. 1). For example, states in the Northeast and
Midwest had relatively high concentrations of nonprofit hospitals,
whereas in the South the concentration was relatively low.
---------------------------------------------------------------------------
\9\ This total does not include critical access hospitals that
provide general acute care. Critical access hospitals are small, rural
hospitals that receive payment for their reasonable costs of providing
inpatient and outpatient services to Medicare beneficiaries, rather
than being paid fixed amounts under Medicare's prospective payment
systems. By excluding critical access hospitals, which are numerous and
small, we removed the effect that they would have on the distribution
of hospitals by ownership group.
---------------------------------------------------------------------------
Figure 1: Geographic Distribution of Nonprofit Hospitals in 2003
[GRAPHIC] [TIFF OMITTED] T6414A.004
Note: Hospitals include nonfederal, short-term, acute care general
hospitals, but not critical access hospitals that provide general acute
care.
The five states we reviewed varied in number and ownership
composition of hospitals (see table 1). For example, in California and
Indiana, nonprofit hospitals accounted for over half of each state's
hospitals. In Texas, government hospitals made up the state's largest
percentage, although the distribution between nonprofit, for-profit,
and government hospitals was similar; in Florida, most hospitals were
either nonprofit or for-profit, while 11 percent were government.
Table 1: Distribution of Hospitals Reviewed, by Ownership Type, 2003
----------------------------------------------------------------------------------------------------------------
Total number of Percent state and
hospitals Percent non-profit Percent for-profit local government
----------------------------------------------------------------------------------------------------------------
California 331 51 27 22
----------------------------------------------------------------------------------------------------------------
Florida 169 43 46 11
----------------------------------------------------------------------------------------------------------------
Georgia 133 43 21 36
----------------------------------------------------------------------------------------------------------------
Indiana 97 56 9 35
----------------------------------------------------------------------------------------------------------------
Texas 332 33 32 35
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of state and CMS data.
Note: Hospitals include nonfederal, short-term, acute care general hospitals.
The average size of hospitals in our study, as measured by patient
operating expenses, varied across the three ownership groups. (See
table 2.) On average, nonprofit hospitals were larger than for-profit
hospitals. The pattern held in all five states but the magnitude of the
difference varied. For example, in California, nonprofit hospitals were
twice as large as for-profit hospitals, whereas in Texas, this
difference was smaller.
Table 2: Average Hospital Size as Measured by Patient Operating Expenses, 2003
----------------------------------------------------------------------------------------------------------------
Average patient operating expenses (in millions)
-----------------------------------------------------------
State and local
For-profit Nonprofit government
----------------------------------------------------------------------------------------------------------------
California $71.7 $143.4 $141.2
----------------------------------------------------------------------------------------------------------------
Florida $90.8 $181.8 $229.3
----------------------------------------------------------------------------------------------------------------
Georgia $52.7 $ 91.8 $ 72.4
----------------------------------------------------------------------------------------------------------------
Indiana $62.1 $116.1 $ 47.6
----------------------------------------------------------------------------------------------------------------
Texas $73.9 $112.9 $ 43.0
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of state and CMS data.
Note: Hospitals include nonfederal, short-term, acute care general hospitals.
Hospital's Qualifications for Federal and State Tax-exempt Status
Hospitals may be extended a federal tax exemption by IRS if they
meet the Internal Revenue Code's qualifications for charitable
organizations under section 501(c)(3).\10\ Hospitals that qualify for
nonprofit status are exempt from federal income taxes and typically
receive other advantages, including access to charitable donations--
which are tax deductible for the individual or corporate donor--and
tax-exempt bond financing. To qualify forfederal tax-exempt status, a
hospital must demonstrate that it is organized and operated for a
``charitable purpose,'' that no part of its net earnings inure to the
benefit of any private shareholder or individual, and that it does not
participate in political campaigns on behalf of any candidate or
conduct substantial lobbying activities.\11\
---------------------------------------------------------------------------
\10\ Section 501(c) specifies 28 types of entities that are
eligible for tax-exempt status. Over 1.5 million entities have been
recognized as exempt by IRS.
\11\ Charitable activities may include those that relieve the poor,
distressed, or underprivileged; those that lessen the burdens of
government; and those that promote social welfare.
---------------------------------------------------------------------------
Before 1969, IRS required hospitals to provide charity care to
qualify for tax-exempt status.\12\ Since then, however, IRS has not
specifically required such care, as long as the hospital provides
benefits to the community in other ways. This ``community benefit''
standard came into existence with an IRS ruling, which concluded that a
hospital's operation of an emergency room open to all members of the
community without regard to ability to pay promoted health in a way
consistent with other activities--such as advancement of education and
religion--that qualify other organizations as charitable.\13\ In
addition, the 1969 ruling identified other factors that might support a
hospital's tax-exempt status, such as having a governance board
composed of community members and using surplus revenue to improve
facilities, patient care, medical training, education, and research.
---------------------------------------------------------------------------
\12\ See, for example, IRS Rev. Rul. 56-185, 1956-1 C.B. 202.
\13\ See IRS Rev. Rul. 69-545, 1969-2 C.B. 117. A revenue ruling is
a formally published interpretation of tax law by the IRS upon which
taxpayers are entitled to rely.
---------------------------------------------------------------------------
Nonprofit hospitals may also receive exemptions from state and
local income, property, and sales taxes, which, in some cases, are of
greater value than the federal income tax exemption. Some states have
defined community benefits for nonprofit hospitals, but their statutes
vary considerably in their specificity and scope. Appendix II provides
more information on statutory definitions of community benefits in the
states we reviewed.
Government Payments for Uncompensated Care and Other Costs
Hospitals may receive direct payments from different government
sources to help cover their unreimbursed costs, including those for
charity care, bad debt, and low-income patients. For example, Medicare
and Medicaid make payments to hospitals that serve a disproportionate
share of low-income patients under their respective disproportionate
share hospital (DSH) programs. Medicare bad debt reimbursement
partially reimburses hospitals for bad debt incurred for Medicare
patients. Other state payments may also be available to hospitals,
although their specific types vary widely. For example, hospitals may
receive payments from special revenues such as tobacco settlement
funds, uncompensated care pools that are funded by provider
contributions, and payment programs targeted at certain services such
as emergency services. (See app. III for more information on payments
for uncompensated care and other costs.)
Burden of Providing Uncompensated Care Varied among Hospital Groups,
but Burden Was Generally Concentrated in a Small Number of
Hospitals
In our review of hospitals' provision of uncompensated care in five
states, we analyzed cost data from two perspectives--namely, each
hospital group's percentage of (1) total uncompensated care costs in a
state and (2) patient operating expenses devoted to uncompensated care.
The former relationship showed hospitals' uncompensated care costs in
dollars, aggregated by groups; whereas the latter relationship showed
hospitals' uncompensated care costs as a proportion of their operating
expenses, thereby accounting for differences in hospital number and
size among the hospital groups. In general, government hospitals, as a
group, accounted for the largest percentage of total uncompensated care
costs and devoted the largest share of patient operating expenses to
uncompensated care costs. The uncompensated care cost burden was not
evenly distributed within each hospital group but instead was
concentrated in a small number of hospitals.
Government Hospitals Generally Accounted for the Largest Percentage of
the Uncompensated Care Costs in States Reviewed
Government hospitals, as a group, accounted for the largest
percentage of the total uncompensated care costs in three of the five
states--California, Georgia, and Texas. Nonprofit hospitals, as a
group, accounted for the largest percentage of the uncompensated care
costs in Florida and Indiana. For-profit hospitals, as a group,
provided 20 percent or less of total uncompensated care costs in each
state we reviewed. (See table 3).
Table 3: Total Uncompensated Care Costs Incurred by Hospitals Reviewed, by State, 2003
----------------------------------------------------------------------------------------------------------------
Total State and local
uncompensated care Nonprofit (percent For-profit government
costs(in millions) of total) (percent of total) (percent of total)
----------------------------------------------------------------------------------------------------------------
California $2,307 34 9 57
----------------------------------------------------------------------------------------------------------------
Florida $1,561 46 20 34
----------------------------------------------------------------------------------------------------------------
Georgia $ 830 43 10 47
----------------------------------------------------------------------------------------------------------------
Indiana $ 342 79 3 17
----------------------------------------------------------------------------------------------------------------
Texas $2,101 39 18 43
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of state and CMS data.
Note: Hospitals include nonfederal, short-term, acute care general hospitals.
In each of the five states, the nonprofit hospital groups accounted
for a larger percentage of total uncompensated costs compared with the
for-profit hospital groups. This difference was due, in part, to the
larger number of nonprofit hospitals and their larger size relative to
the for-profit hospitals. For example, in California, the nonprofit
group's percentage of total uncompensated care costs was almost four
times higher than that of the for-profit group, but this is not
surprising, as nonprofit hospitals outnumbered for-profit hospitals
almost 2 to 1 and were twice the size in patient operating expenses.
Government Hospital Groups Generally Devoted Largest Share of Patient
Operating Expenses to Uncompensated Care, but Shares Varied
across States
In four of the five states reviewed, government hospitals devoted
substantially larger shares, on average, of their patient operating
expenses to uncompensated care than did nonprofit and for-profit
hospitals.\14\ (See fig. 2.) In those four states, the differences in
average percentages between the government hospital groups and the
nonprofit hospital groups ranged from about 4.3 percentage points in
Georgia to 11.3 percentage points in Texas. In contrast, in the fifth
state, Indiana, the nonprofit hospital group devoted the largest share,
on average, of patient operating expenses to uncompensated care.
Between the nonprofit and for-profit hospital groups, the nonprofit
hospitals' average percentages were greater in four of the five
states--ranging from 1.2 percentage points greater in Florida to 2.3
percentage points greater in Indiana. In contrast, in the fifth state,
California, the nonprofit group's average percentage was similar to
that of the for-profit group.
---------------------------------------------------------------------------
\14\ These results are consistent with studies showing a similar
relationship. See L. Fishman, ``What Types of Hospitals Form the Safety
Net?'' Health Affairs, vol. 16, no. 4 (July/August 1997); J. Mann, et
al., ``A Profile of Uncompensated Hospital Care, 1983-1995,'' Health
Affairs, vol. 16, no. 4 (July/August 1997); and S. Zuckerman, et al.,
``How Did Safety-Net Hospitals Cope in the 1990s?'' Health Affairs,
vol. 20, no. 4 (July/August 2001).
---------------------------------------------------------------------------
Figure 2: Average Percent of Patient Operating Expenses Devoted to
Uncompensated Care, by Hospital Onwership Type, 2003
[GRAPHIC] [TIFF OMITTED] T6414A.005
Notes: The average percent of patient operating expenses devoted to
uncompensated care for a hospital ownership group is calculated by
dividing the sum of uncompensated care costs for hospitals in that
group by the sum of the group's total patient operating expenses.
Hospitals include nonfederal, short-term, acute care general hospitals.
The five states varied in their hospitals' shares of patient
operating expenses devoted to uncompensated care, ranging from an
average 4.1 percent for all Indiana hospitals to an average 8.3 percent
for Texas hospitals. (See table 4.) Similar state-to-state variation
found in other studies was due, in part, to differences in states'
proportions of uninsured populations, variation in Medicaid eligibility
or payment levels, and the presence of state programs that provide
health insurance to low-income uninsured individuals.\15\ Specifically,
prior research showed that hospitals located in states with more
uninsured individuals and hospitals in states with relatively more
eligibility-restricted Medicaid programs may have higher levels of
uncompensated care. Our data are consistent with these studies'
findings on the uninsured. For example, in our five-state review, Texas
had the highest percentage of uninsured--25 percent--and the highest
share, on average, of patient operating expenses devoted to
uncompensated care, whereas Indiana had the lowest percentage of
uninsured--13 percent--and the lowest average share.
---------------------------------------------------------------------------
\15\ See G. Atkinson, W. Helms, and J. Needleman, ``State Trends in
Hospital Uncompensated Care,'' Health Affairs, vol. 16, no. 4 (July/
August 1997); L. Fishman, ``What Types of Hospitals Form the Safety
Net?'' Health Affairs, vol. 16, no. 4 (July/August 1997); A. Davidoff,
A. LoSasso, G. Bazzoli, and S. Zuckerman, ``The Effect of Changing
State Health Policy on Hospital Uncompensated Care,'' Inquiry, vol. 37
(Fall 2000); K. Thorpe, E. Seiber, and C. Florence, ``The Impact of
HMOs on Hospital-Based Uncompensated Care,'' Journal of Health
Politics, Policy and Law, vol. 26, no. 3 (June, 2001); and GAO,
Nonprofit Hospitals: Better Standards Needed for Tax Exemption, GAO/
HRD-90-84 (Washington, D.C.: May 30, 1990).
Table 4: Average Percentage of Patient Operating Expenses Devoted to
Uncompensated Care, by State, 2003
------------------------------------------------------------------------
Average percentage of
patient operating
expenses devoted to
uncompensated care
------------------------------------------------------------------------
California 5.6
------------------------------------------------------------------------
Florida 6.4
------------------------------------------------------------------------
Georgia 8.2
------------------------------------------------------------------------
Indiana 4.1
------------------------------------------------------------------------
Texas 8.3
------------------------------------------------------------------------
Source: GAO analysis of state and CMS data.
Notes: We calculated the average percent of patient operating expenses
devoted to uncompensated care for each state by dividing the sum of
uncompensated care costs for hospitals in the state by the sum of the
hospitals' total patient operating expenses in the state. Hospitals
include nonfederal, short-term, acute care general hospitals.
For Each Hospital Group, Uncompensated Care Costs Were Concentrated in
a Small Number of Hospitals
For each group, uncompensated care costs were concentrated in a
small number of hospitals. We observed this pattern when examining the
percentages of patient operating expenses devoted to uncompensated care
costs as well as hospitals' shares of total uncompensated care costs in
a state. For the three hospital ownership groups, we ranked hospitals
according to their share of patient operating expenses devoted to
uncompensated care.
We found that, for all three hospital groups, the top quarter of
hospitals devoted substantially greater percentages of their patient
operating expenses to uncompensated care, on average, compared with the
bottom quarter of hospitals. (See fig. 3.) For example, in California's
nonprofit hospital group, the top quarter of hospitals devoted an
average of 7.2 percent compared with 1.4 percent for the bottom quarter
of hospitals. Similarly, in Florida's government hospital group, the
top quarter of hospitals devoted an average 19.6 percent compared with
an average 5.2 percent for the bottom quarter of hospitals. From state
to state, the difference in ranges between top and bottom quarters was
also substantial. For example, in Indiana's government group, the
average share of operating expenses devoted to uncompensated care for
hospitals in the top quarter was about 3 times larger than for those in
the bottom quarter; whereas in California, the average share for the
top quarter of hospitals was almost 13 times higher than that of the
bottom quarter.
Figure 3: Average Share of Patient Operating Expenses Devoted to
Uncompensated Care for Hospitals Ranked in Top and Bottom
Quarters, by Ownership Type, 2003
[GRAPHIC] [TIFF OMITTED] T6414A.006
Notes: Hospitals were ranked by percentage of patient operating
expenses devoted to uncompensated care. The average percent of patient
operating expenses devoted to uncompensated care for a hospital
ownership group is calculated by dividing the sum of uncompensated care
costs for hospitals in that group by the sum of the group's total
patient operating expenses. Hospitals include nonfederal, short-term,
acute care general hospitals.
When examining hospitals' shares of total uncompensated care costs
in a state, we found that uncompensated care costs remained
concentrated in a disproportionately small number of hospitals.
Specifically, each state's top quarter of hospitals accounted for a
disproportionately large share of the state's uncompensated care costs.
For example, in Texas, the top quarter of hospitals accounted for about
50 percent of total uncompensated care costs, yet accounted for only 18
percent of the total beds. (See table 5). Moreover, in Texas, six major
government teaching institutions accounted for 34 percent of total
uncompensated care costs, which amounted to over half of the
contribution of the hospitals in the top quarter. This pattern was also
true for California, Florida, and Georgia. For example, in California,
13 major teaching hospitals accounted for 42 percent of total
uncompensated care costs.\16\ In contrast, in Indiana, total
uncompensated care costs were distributed more evenly across a greater
number of hospitals.
---------------------------------------------------------------------------
\16\ We defined major teaching hospitals as those hospitals having
an intern or resident-to-bed ratio of 0.25 or more and minor teaching
hospitals as those having an intern or resident-to-bed ratio greater
than 0 and less than 0.25.
Table 5: Percentage of Total Uncompensated Care Costs in a State for Hospitals Ranked in Top Quarter, 2003
----------------------------------------------------------------------------------------------------------------
Percentage of state's Percentage of states'
State total uncompensated care hospital beds
----------------------------------------------------------------------------------------------------------------
California 68 25
----------------------------------------------------------------------------------------------------------------
Florida 47 22
----------------------------------------------------------------------------------------------------------------
Georgia 39 19
----------------------------------------------------------------------------------------------------------------
Indiana 21 14
----------------------------------------------------------------------------------------------------------------
Texas 50 18
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of state and CMS data.
Notes: Hospitals were ranked by percentage of patient operating expenses devoted to uncompensated care.
Hospitals include nonfederal, short-term, acute care general hospitals.
Several factors explain which hospitals were likely to be in their
group's top and bottom quarters. For example, in our five-state
analysis, we found that whether a hospital was a teaching institution
was an important predictor of whether it would be in the top quarter of
a state's government hospital group. Hospitals that had teaching
programs were more likely to be in the top quarter of a government
hospital group. In contrast, teaching status was not an important
predictor for either the nonprofit or for-profit hospital groups' top
quarter. For nonprofits, hospitals in rural areas were more likely to
be in the top quarter than hospitals located in urban areas. Other
factors that were outside the scope of this study, such as differences
in the proportion of uninsured populations in the hospital market, may
have also influenced the likelihood of a hospital's inclusion in the
top or bottom quarter.
Hospitals Reported Providing a Wide Range of Other Community Benefits
In addition to providing uncompensated care, hospitals may provide
other services to their communities for which they are not reimbursed.
In our review of hospitals' Web sites and reports about community
benefits--published documents specifying the types and value of
services hospitals provide to communities--we found that, regardless of
ownership status, hospitals reported providing a wide range of
community benefits.\17\ Variations in the types of community benefits
hospitals reported providing could be explained by differences in the
community benefits hospitals chose to provide as well as by variations
in the applicability, specificity, and breadth of state requirements.
---------------------------------------------------------------------------
\17\ To determine the types of community benefits hospitals
reported providing, we reviewed 15 publicly available reports about
community benefits for nonprofit and for-profit hospitals and six
government hospitals' Web sites.
---------------------------------------------------------------------------
Certain hospital industry guidance defines community benefits as
the unreimbursed goods and services hospitals provide that address
their communities' health needs, including health education, screening,
and clinic services, among others. Consistent with this industry
definition, we found through our review of reports and Web sites that
hospitals reported providing similar types of services, including:
community health education such as parenting education,
smoking cessation, fitness and nutrition, health fairs, and diabetes
management;
health screening services such as screening for high
cholesterol, cancer, and diabetes;
clinic services, including clinics targeted to specific
groups in the community, such as indigent patients;
medical education for physicians, nurses, and other
health professionals;
financial contributions, including cash donations and
grants, to community organizations;
coordination of community events and in-kind donations--
such as food, clothing, and meeting room space--to community
organizations; and
hospital facility and other infrastructure improvements.
Community health education and health screenings were listed by
most of the reports and Web sites we reviewed. Clinic services, support
groups, community event coordination, cash contributions to charities,
and medical education for health professionals were listed by over half
of the reports we reviewed.\18\
---------------------------------------------------------------------------
\18\ Our findings on the types of community benefits hospitals
reported providing are consistent with our findings in GAO/HRD-90-84
and industry publications.
---------------------------------------------------------------------------
Because of the wide variation in hospitals' reporting of community
benefits, we were not able to discern clear patterns in the provision
of these benefits across hospital ownership groups. The variation could
be explained by differences in the community benefits hospitals chose
to provide as well as by variations in the applicability, specificity,
and breadth of state requirements. Specifically, the five states
reviewed require all hospitals to report financial data, including data
on the cost of charity care they provide. However, as shown in table 6,
California, Indiana, and Texas also have statutory requirements for
nonprofit hospitals to develop plans for meeting their communities'
health needs and to report annually on the types and value of the
community benefits they provide.\19\ Of these three states, only Texas
and Indiana require nonprofit hospitals to report using standardized
forms and have the explicit statutory authority to impose fines for
noncompliance as part of the requirements.\20\ The Texas form is more
specific, as it includes line-items that capture the hospitals'
unreimbursed costs associated with providing traditionally
``unprofitable'' health services such as trauma care and community
clinics, education of medical professionals, medical research, and cash
and in-kind donations made by the hospital to local charities.
Indiana's form provides nonprofit hospitals more flexibility in
delineating the types and value of their community benefits but
includes supplementary guidance to nonprofit hospitals about what
should be considered community benefits, including financial or in-kind
support of public health programs, community-orientated wellness and
health promotion programs, and outreach clinics in economically
depressed communities. California has no form for annual community
benefit reports but requires that hospitals classify the services
provided into broad, statutorily defined categories, including cash and
in-kind donations to public health programs, efforts to contain health
care costs and enhance access, and services that help maintain a
person's health.
---------------------------------------------------------------------------
\19\ Georgia requires all ``hospital authorities,'' which create or
operate nonprofit hospitals, to submit ``community benefit reports''
that disclose the cost of charity and indigent care provided. GA. CODE
ANN. 31-7-90.1 (2004). However, this information is otherwise
required of hospitals in all groups in Georgia as part of financial
reporting requirements. GA. CODE ANN. 31-6-70 (2004).
\20\ In Texas, for-profit and government hospitals receiving
Medicaid DSH payments are generally required to meet the same community
benefit reporting requirements as nonprofit hospitals. TEX. HEALTH &
SAFETY CODE ANN. 311.046(e) (2004).
Table 6: Community Benefit Requirements for Nonprofit Hospitals
----------------------------------------------------------------------------------------------------------------
Penalties for
State Description of requirements noncompliance
----------------------------------------------------------------------------------------------------------------
Californiaa Maintain community benefit plans that include None explicitly
measurable objectives for meeting the authorized as part of
community's needs within specified time frames requirements.
and mechanisms to evaluate effectiveness. In
addition, report annually on the plans, as
well as the types and value of community
benefits provided.
----------------------------------------------------------------------------------------------------------------
Florida None. Not applicable.
----------------------------------------------------------------------------------------------------------------
Georgiab None. Not applicable.
----------------------------------------------------------------------------------------------------------------
Indianac Maintain and report annually on community Fines explicitly
benefit plans that include measurable authorized as part of
objectives for meeting the community's health requirements for failure
care needs within a specified time frames, to make annual report.
evaluation strategies, and a budget. In
addition, must describe the types and value of
any additional community benefits.
----------------------------------------------------------------------------------------------------------------
Texasd Maintain and report annually on community Fines explicitly
benefit plans that include measurable authorized as part of
objectives for meeting the community's health requirements for failure
care needs within specified timeframes, to make annual report.
mechanisms for evaluating effectiveness, and a
budget. In addition, must describe the types
and value of community benefits provided.
At a minimum, hospitals are required to Hospitals that fail to
provide: provide the required
community benefits must
be reported annually to
attorney general and
comptroller.
(1) charity and government-sponsored indigent
care at a level that is reasonable in relation
to community needs, the available resources of
the hospital, and the tax-exempt benefits
received;
(2) charity and government-sponsored indigent
health care equal to 100 percent of state tax-
exempt benefits; or
(3) charity care and other community benefits
equal to at least 5 percent of net patient
revenue, provided that charity care and
government-sponsored indigent health care are
provided in an amount equal to at least 4
percent.
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis.
a CAL. HEALTH & SAFETY CODE 127345, 127350, and 127355 (2004).
b Georgia requires all ``hospital authorities,'' which create or operate nonprofit hospitals, to submit
``community benefit reports'' that disclose the cost of charity and indigent care provided. GA. CODE ANN. 31-
7-90.1 (2004). However, this information is otherwise required of hospitals in all groups in Georgia as part
of financial reporting requirements. GA. CODE ANN. 31-6-70 (2004).
c IND. CODE 16-21-9-4--16-21-9-8 (2004).
d TEX. HEALTH & SAFETY CODE ANN. 311.043--311.047 (2004).
According to state officials or state hospital association
representatives in the five states we reviewed, for-profit and
government hospitals are not required to report on the community
benefits they provide outside of the requirements to report financial
data, including data on the cost of charity care they provide. However,
as we found through our review, some of these hospitals report
publicly--for promotional purposes--on the community benefits they
provide, either through published reports or by posting general
information on their Web sites.
Moreover, the three states with community benefit reporting
requirements--California, Indiana, and Texas--conduct limited
monitoring of nonprofit hospitals' community benefit reports. For
example, according to officials from state agencies, none of the three
states conducts audits of nonprofit hospitals' self-reported community
benefits information, although Texas reviews the reports to ensure that
``reasonable'' types of services are listed as community benefits. In
addition, these states do not routinely use the data collected through
community benefit reports to review hospitals' tax-exempt status.
Concluding Observations
Our comparison of the hospital ownership groups' uncompensated care
costs, as a percentage of patient operating expenses, was instructive.
Differences between the nonprofit and for-profit groups were often
small when compared with the substantial differences between the
government group and the other two groups. Moreover, the burden of
uncompensated care costs was not evenly distributed among hospitals,
which meant that a small number of nonprofit hospitals accounted for
substantially more of the uncompensated care burden than did others
receiving the same tax preference.
As for the other community benefits hospitals reported providing,
we were not able to discern a clear distinction among the government,
nonprofit, and for-profit hospital groups. Hospitals in the five states
reported conducting a variety of activities, which the hospitals
themselves considered community benefits. We were unable to assess the
value of these benefits or make systematic comparisons between
hospitals or across states.
These observations illustrate a larger point that I and others
raised at the hearing last month--namely, that current tax policy lacks
specific criteria with respect to tax exemptions for charitable
entities and detail on how that tax exemption is conferred. If these
criteria are articulated in accordance with desired goals, standards
could be established that would allow nonprofit hospitals to be held
accountable for providing services of benefit to the public
commensurate with their favored tax status.
Mr. Chairman, this concludes my prepared statement. I will be happy
to answer questions you or the other Committee Members may have.
Contact and Acknowledgments
For further information regarding this testimony, please contact A.
Bruce Steinwald at (202) 512-7101. Kristi Peterson, Thomas Walke,
Joanna Hiatt, Kelly DeMots, Mary Giffin, Emily Rowe, Craig Winslow, and
Hannah Fein contributed to this statement.
Appendix I: Scope and Methodology
To examine the provision of uncompensated care by the three
hospital ownership groups, we obtained 2003 uncompensated care data
from five states--California, Florida, Georgia, Indiana, and Texas. We
obtained all other data, such as cost-to-charge ratios,\21\ patient
operating expenses,\22\ and all descriptive statistics, from 2002 and
2003 Medicare hospital cost reports.\23\ We selected the five states
because they represented geographically diverse areas; had a number of
hospitals in each ownership group sufficient to make comparisons; and
collected hospital-specific uncompensated care data, which not all
states maintain.\24\ The 2003 state uncompensated care data and 2002
and 2003 Medicare hospital cost reports were the most recent available
at the time of our analysis. We also interviewed health officials from
all five states as well as officials from the Centers for Medicare &
Medicaid Services (CMS), the American Hospital Association, and the
Federation of American Hospitals. We limited our analysis to
nonfederal, short-term, acute care general hospitals for which a cost
report was available.\25\ This analysis included critical access
hospitals that provide general acute care. Our study included about 92
percent of nonfederal, short-term, acute care hospitals in the five
states.
---------------------------------------------------------------------------
\21\ These cost-to-charge ratios are specific to hospital costs and
charges as a whole, not to Medicare costs and charges.
\22\ Patient operating expenses include those expenses incurred for
patient care. They exclude such expenses as those incurred for
operating a parking garage, gift shop, and certain other nonmedical
expenses.
\23\ The reporting period of certain hospitals differed between the
state data and the cost reports. Therefore, we combined the 2003 state
data with the cost report, either 2002 or 2003, that best overlapped
the state data's reporting period.
\24\ Reliable, hospital-specific data were not available
nationwide. In addition, some states do not have sufficient diversity
in hospital ownership to make comparisons for the purpose of this
analysis; in particular, some states have very few for-profit
hospitals.
\25\ Cost, charge, and other data obtained from the states and
other sources are for individual hospitals, even if a hospital is part
of a larger hospital system.
---------------------------------------------------------------------------
We defined uncompensated care as the sum of charity care and bad
debt costs as reported in the state data. To determine uncompensated
care costs, we multiplied uncompensated care charges by a hospital-
specific cost-to-charge ratio. Although specific definitions of charity
care varied, states generally defined it as charges for patients deemed
unable to pay all or part of their bill, less any payments made by, or
on behalf of, that specific patient. States generally defined bad debt
as the uncollectible payment that a patient is expected to, but does
not pay. Our definition of uncompensated care does not include any
contractual allowances or cost shortfalls.\26\ In addition, we did not
subtract any charity care-specific block grants or donations a hospital
may receive, as this information was not available for all states.
---------------------------------------------------------------------------
\26\ Contractual allowances are the difference between a hospital's
full charges for a service and the payment it has agreed to accept for
that service from a particular insurer. Cost shortfalls are the
difference between the accepted payment for a service and the actual
cost of that service, in the case that the payment is less than the
cost.
---------------------------------------------------------------------------
We analyzed uncompensated care cost data from two perspectives--
namely, each hospital ownership \27\ group's percentage of (1) total
uncompensated care costs in a state, and (2) average patient operating
expenses devoted to uncompensated care. To examine factors that could
explain differences in the provision of uncompensated care by hospital
ownership groups, we examined certain hospital characteristics
including a hospital's size, teaching status, and location. We used
patient operating expenses to measure hospital size. For teaching
status, we defined major teaching hospitals as those hospitals having
an intern/resident-to-bed ratio of 0.25 or more and minor teaching
hospitals as those having an intern/resident-to-bed ratio greater than
0 and less than 0.25. We defined a hospital as urban if it was located
in a metropolitan statistical area and as rural if it was not located
in a metropolitan statistical area. We supplemented our analysis with a
review of the literature to determine other factors that could explain
differences in the provision of uncompensated care by hospital
ownership groups.
---------------------------------------------------------------------------
\27\ In order to determine a hospital's ownership status, we
compared its ownership from the state data (if available) to that from
the Medicare cost report data. Where the two sources did not match, we
used the 2002-2003 AHA Guide to confirm one of the sources as correct.
If possible, we also confirmed ownership status using the hospital's
Web site.
---------------------------------------------------------------------------
We assessed the reliability of the hospital Medicare cost reports
and the reliability of state uncompensated care cost data from
California, Florida, Georgia, Indiana, and Texas in several ways.
First, we performed tests of data elements. For example, we examined
the values for uncompensated care costs and patient operating expenses
to determine whether these data were complete and reasonable. We also
verified that the dollar amount of uncompensated care in the 2003 data
was consistent with the amount in 2002. Second, we reviewed existing
information about the data elements. For example, we compared
descriptive statistics we calculated from the Medicare hospitals cost
reports with statistics published by CMS. Third, we interviewed state
and agency officials knowledgeable about the data in our analyses and
knowledgeable about hospital uncompensated care costs. We determined
that CMS and all five states performed quality assurance tests on the
data before releasing them. Overall, we determined that the data we
used in our analyses were sufficiently reliable for our purposes.
To examine hospitals' provision of community benefits other than
uncompensated care, we reviewed 21 hospital reports and Web sites for
information about such benefits in five states. Specifically, we
reviewed 12 publicly available reports about the community benefits
provided by nonprofit and for-profit hospitals and 3 reports for for-
profit hospital systems representing multiple hospitals. We also
reviewed 6 government hospitals' Web sites to determine the extent to
which they publicized the provision of services that are generally
considered community benefits. We also examined laws in five states
regarding community benefit requirements for nonprofit hospitals,
reviewed the literature, and interviewed state officials and hospital
association representatives.
We conducted our work from February 2005 through May 2005 in
accordance with generally accepted government auditing standards.
Appendix II: Statutory Definitions of Community Benefits in the Five
States Reviewed
Table 7 summarizes the statutory definitions of community benefits
for nonprofit hospitals in the states we reviewed. We found that the
statutes vary considerably in their specificity and scope. In addition,
of the five states we reviewed, only the Texas statute contains an
explicit link between the statutory definition of community benefits
and hospitals' qualifications for state tax exemptions.
Table 7: Statutory Definitions of Community Benefit for Purposes of Requirements Specific to Nonprofit Hospitals
----------------------------------------------------------------------------------------------------------------
Cross-reference to tax
State Statutory definition of community benefit exemption in community
benefit provisions
----------------------------------------------------------------------------------------------------------------
Californiaa Hospital activities to address community needs No provisions explicitly
and priorities through disease prevention and cross-referencing
improvement of health status, including, but definitions and related
not limited to: requirements to tax
exemption.
(1) health care services, rendered to
vulnerable populations (e.g., charity care and
unreimbursed costs of providing services to
uninsured and underinsured);
(2) health promotion, prevention services,
adult day care, child care, medical research
and education, nursing and other professional
training, home delivered meals, aid to the
homeless, and outreach clinics;
(3) financial or in-kind support of public
health programs;
(4) donation of funds, property, or other
resources for a community priority;
(5) health care cost containment;
(6) enhancement of access to health care;
(7) services offered without regard to
profitability to meet a community need; and
(8) goods and services to help maintain a
person's health.
----------------------------------------------------------------------------------------------------------------
Florida Not defined. Not applicable.
----------------------------------------------------------------------------------------------------------------
Georgiab Not defined, but community benefit reporting No provisions explicitly
requirement refers to charity and indigent cross-referencing
care. definitions and related
requirements to tax
exemption.
----------------------------------------------------------------------------------------------------------------
Indianac Unreimbursed cost to hospitals of providing No provisions explicitly
charity care, government-sponsored indigent cross-referencing
care, donations, education, government- definitions and related
sponsored program services, research, and requirements to tax
subsidized health services. Does not include exemption.d
hospital taxes or other government
assessments.
----------------------------------------------------------------------------------------------------------------
Texase Unreimbursed cost to hospitals of providing Numerous provisions
charity care, government--sponsored indigent cross-referencing
health care, donations, education, government- definition of community
sponsored program services, research, and benefit and related
subsidized health services, but not hospital requirements to tax
taxes or other government assessments. exemption.
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis.
a CAL. HEALTH & SAFETY CODE 127340 and 127345(c) (2004).
b GA. CODE ANN. 31-7-90.1 (2004).
c IND. CODE ANN. 16-18-2-64.5 and 16-21-9-1 (2004).
d There are no provisions explicitly cross-referencing community benefits to nonprofit hospitals' tax exemption,
but hospital-owned physician offices or practices, or other property not substantially related to inpatient
facilities, must provide or support charity care or community benefits, as it is defined above, to qualify for
property tax exemption. IND. CODE ANN. 6-1.1-10-18.5 (2004).
e TEX. HEALTH & SAFETY CODE ANN. 311.042 and 311.045 (2004).
Appendix III: Government Payments for Uncompensated Care and Other
Unreimbursed Costs
Hospitals may receive direct payments from different government
sources to help cover their unreimbursed costs. Such payments may
include special Medicare and Medicaid payments, known as
disproportionate share hospital (DSH) payments, Medicare bad debt
reimbursement, and other state payments.
Medicare DSH: The Medicare DSH adjustment provides payments to
hospitals that serve a disproportionate share of low-income patients.
The Congress mandated this adjustment in 1986 to address the concern
that hospitals that serve such patients have higher Medicare costs per
case because they have higher overhead and labor costs and their
patients are in poorer health with more complications and secondary
diagnoses. Hospitals qualify for the Medicare DSH adjustment based on
their low-income patient share.\28\ The low-income patient share is
computed as the percentage of a hospital's Medicare inpatient days
attributable to patients that are eligible for both Medicare part A and
Supplemental Security Income \29\ plus the percentage of total
inpatient days attributable to patients eligible for Medicaid, but not
Medicare part A. For hospitals that qualify for a DSH adjustment, their
actual adjustment is based on several factors, including the number of
acute care beds, number of patient days for low--income patients, and
location (rural or urban). See table 8 for Medicare DSH payments in
2003 to the hospitals in the selected states we analyzed.
---------------------------------------------------------------------------
\28\ To qualify for Medicare DSH, a hospital must have a share of
low-income patients that exceeds 15 percent. Alternately, large
hospitals located in urban areas can qualify if more than 30 percent of
their total net inpatient care revenue is for indigent care and comes
from state and local governments (excluding Medicare and Medicaid
funds).
\29\ Medicare Part A pays for inpatient hospital stays, care in a
skilled nursing facility, hospice care, and some home health care. The
Supplemental Security Income program makes payments to people with low
income who are at least 65 or are blind or have a disability.
Table 8: Medicare DSH Payments to Hospitals Reviewed, 2003 (in millions)
----------------------------------------------------------------------------------------------------------------
Medicare DSH payment to hospitals (in
State millions)
----------------------------------------------------------------------------------------------------------------
California $1,122
Florida 486
Georgia 209
Indiana 94
Texas 637
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of state and CMS data.
Note: Hospitals include nonfederal, short-term, acute care general hospitals.
Medicaid DSH: The Medicaid statute requires that states make DSH
adjustments to the payment rates of certain hospitals treating large
numbers of low-income and Medicaid patients. The Medicaid DSH
adjustment was established by the Congress in 1981 and establishes
broad guidelines for hospital eligibility to receive Medicaid DSH and
for the methods used to compute the amount of payment. States have
discretion in designating DSH hospitals and calculating adjustments for
them.\30\ States also vary in terms of program rules and resource
levels as well as the degree to which they target payments to different
types of hospitals.\31\
---------------------------------------------------------------------------
\30\ Congressional Research Service, Medicaid Disproportionate
Share Payments (Washington, D.C.: 2005), 15.
\31\ Congressional Research Service, Medicaid Reimbursement Policy
(Washington, D.C.: 2004), 36.
---------------------------------------------------------------------------
Medicaid DSH is the largest source of financial support for
hospital uncompensated care and is funded jointly by the states and the
federal government. State approaches to financing the state portion of
Medicaid DSH include obtaining funds from hospitals through provider
taxes or intergovernmental transfers in order to establish the state's
contribution required to obtain the federal match for Medicaid DSH
funding. Therefore, it is not always possible to determine what portion
of Medicaid DSH payments to individual hospitals is the net additional
payment to the hospital.
Medicare bad debt reimbursement: Medicare partially reimburses
acute care hospitals for bad debts resulting from Medicare
beneficiaries' nonpayment of deductibles and co-payments after
providers have made reasonable efforts to collect unpaid amounts. If a
hospital can document that a Medicare patient is indigent, the hospital
can then forgo collection efforts from the patient. Medicare pays
hospitals 70 percent of their reimbursable bad debts, except critical
access hospitals,\32\ for which it pays 100 percent of their
reimbursable bad debts. See table 9 for total Medicare bad debt
reimbursements in 2003 to the hospitals in the selected states we
analyzed.
---------------------------------------------------------------------------
\32\ See GAO, Medicare: Modest Eligibility Expansion for Critical
Access Hospital Program Should Be Considered, GAO-03-948 (Washington,
D.C.: September 2003).
Table 9: Medicare Bad Debt Reimbursements to Hospitals Reviewed, 2003
----------------------------------------------------------------------------------------------------------------
Medicare bad debt reimbursement to hospitals
State (dollars in millions)
----------------------------------------------------------------------------------------------------------------
California $160
----------------------------------------------------------------------------------------------------------------
Florida 55
----------------------------------------------------------------------------------------------------------------
Georgia 45
----------------------------------------------------------------------------------------------------------------
Indiana 20
----------------------------------------------------------------------------------------------------------------
Texas 78
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of state and CMS data.
Note: Hospitals include nonfederal, short-term, acute care general hospitals.
Other state sources: Other state sources of payment to hospitals
for uncompensated or unreimbursed care vary widely, and may include
special revenues such as tobacco settlement funds, uncompensated care
pools that are funded by provider contributions, and payment programs
targeted at certain services such as emergency services. For example,
Massachusetts has used a portion of the state's tobacco settlement fund
to help cover uncompensated care costs.
Chairman THOMAS. Thank you very much, Mr. Walker. Dr.
McClellan.
STATEMENT OF THE HONORABLE MARK MCCLELLAN, M.D, PH.D.,
ADMINISTRATOR, CENTERS FOR MEDICARE AND MEDICAID SERVICES
Dr. MCCLELLAN. Chairman Thomas, Congressman Rangel,
distinguished Committee members, thank you for inviting me to
testify about how the Medicare and Medicaid programs assist
hospitals that provide uncompensated care. We recognize the
need for hospitals to provide health care to those who are
uninsured and underinsured as well as the other important
contributions to the community and to public health made by
hospitals. CMS supports these efforts through a variety of
programs. With respect to forgiving bills for the uninsured and
discounting, hospitals are at liberty to establish their own
indigency policies, including defining eligibility indicators
such as income level. Furthermore, the provider payment rules
for Medicare and Medicaid in no way restrict the ability of
hospitals and other providers to offer free or discounted care
to patients who do not have coverage under Medicare or Medicaid
or to offer relief to Medicare and Medicaid beneficiaries who
can't afford their copayments and deductibles. We issued
guidance on this topic in early 2004.
Because hospitals may bear a significant burden for
providing uncompensated care, Congress has mandated that CMS
make certain payments to hospitals partially in recognition of
that role. Since 1986, certain hospitals have received enhanced
reimbursements under the Medicare Disproportionate Share
Hospital or DSH program. Hospitals qualify for Medicare DSH
payments if they treat a disproportionate share of patients
with only Medicaid insurance or with Medicare and SSI. The
payments are a percentage add-on to the normal hospital
payments to Medicare. The Medicaid program also provides DSH
payments which vary with each State program, but are targeted
to hospitals treating a large share of low-income Medicaid and
uninsured patients. Our preliminary data show that during 2004,
Medicare DSH payments amounted to $8\1/2\ billion, while
Medicaid DSH payments totaled nearly $17.2 billion.
Since academic medical centers that engage in graduate
medical education have higher costs per discharge because of
their teaching activities, when Congress implemented that
Medicare payment system, it created add-on payments for these
teaching institutions. Congress deliberately crafted these
payments to exceed the measured costs associated with teaching.
One of those add-on payments, the Indirect Medical Education
payment, or IME, is projected to total $5.2 billion during
fiscal 2004, rising to 5.7 billion in fiscal year 2005.
Hospitals can bill Medicare directly for bad debt resulting
from an inability to collect deductibles and copayments from
Medicare beneficiaries. Hospitals are not required to use very
aggressive measures to collect this bad debt. Rather, if the
hospital wants to bill Medicare for bad debt, they must use the
same level of reasonable collection efforts as they do to
secure collection of debts by non-Medicare patients.
In fiscal year 2000, the latest year for which we have
final data, CMS, our agency, provided $1.03 billion in bad debt
payments and we expect this to rise to about $1.6 billion in
2005. Mr. Chairman, we and many States are trying to take steps
to shift the uncompensated care that occurs in relatively
costly settings like emergency rooms and hospital admissions
for costly but preventable disease complications to community
settings where complications can be prevented to reduce the
cost of using the emergency room and using inpatient care. Many
States have used the Medicaid waiver authority to move from
reimbursing providers for direct care in hospitals to
increasing community care and health insurance coverage. The
goal of these demonstration programs is to obtain better
quality care at a lower cost for more people. Some specific
examples include redirecting DSH funds in order to provide
insurance coverage rather than uncompensated care. Hawaii,
Tennessee, New York, Vermont, Massachusetts, Maine, and the
District of Columbia have all established innovative programs
with the use of section 1115 demonstration authority in
Medicaid.
Community health centers provide preventive and primary
care to low-income individuals in their communities. Nearly 40
percent of the care provided by these centers is uncompensated
and funding supplied to them under the President's Health Care
Initiative reduces the amount of uncompensated care that
otherwise would have been provided in hospitals. Recent
evidence shows that this approach can be more cost effective
than in-patient hospital delivery of care for patients without
insurance. The fiscal year 2005 appropriation for community
health centers exceeds $1.7 billion. Finally, undocumented
immigrants use medical services, and this has been a
longstanding issue for emergency medical services for medical
providers. To help address this problem and ensure the
continued availability of emergency services in border areas,
section 1011 of the Medicare Modernization Act provides $1
billion through 2008 to help hospitals and other emergency
providers to recoup some of the expenses of providing this
critical care to undocumented immigrants. In total, these
Federal payment mechanisms will provide about $30 billion this
year to our hospitals. In addition, as you have heard,
nonprofit hospitals will realize substantial additional
financial support through tax exemptions. I am familiar with
how often these institutions provide uncompensated care and I
know how valuable they can be to a community. However, some of
the results I describe in my written statement suggest that
there may be better ways to target funds that support
uncompensated care to the programs and settings that provide
the best value in terms of the types of care they can provide.
I thank you for the opportunity to appear before you today and
I am looking forward to any questions you might have.
[The prepared statement of Dr. McClellan follows:]
Statement of The Honorable Mark McClellan, M.D., Ph.D., Administrator,
Centers for Medicare and Medicaid Services
Chairman Thomas, Representative Rangel, distinguished Committee
members, thank you for inviting me to testify today about the tax
exempt status of many of our nation's hospitals and the way in which
the Centers for Medicare & Medicaid Services (CMS) assists hospitals
who provide uncompensated care.
As you are aware, our nation's hospitals frequently treat patients
who do not have the ability to pay, or who can only pay a portion of
their bill. This is one of the many ways in which a nonprofit hospital
can promote the health of the community it serves. The Federal
government and state governments have granted non-profit, tax preferred
status to hospitals that operate for the benefit of the community.
Today's hearing primarily seeks to review what we know about the value
of the uncompensated and under-compensated care provided by these non-
profit hospitals, and the tax benefits and other support they receive.
Although the Committee is focusing on the issue of tax exempt status
for hospitals, which is within the purview of the Treasury Department
and the Internal Revenue Services, it might also want to review current
policies that exist to assist hospitals that provide uncompensated care
and to consider whether funds used in those efforts are providing care
in the most efficient and effective manner possible. To address this
issue, a number of related questions are relevant, including the extent
to which quality, costs, and behavior of non-profit hospitals differ
from for-profit and public hospitals.
Current Research
Some believe that the financial rewards inherent in for-profit
ownership might provide incentives for hospitals to contain costs and
respond effectively to patients' needs--for the same reasons that free
markets work in the economy at large. Others believe that, because it
is difficult for patients and society to evaluate the quality of health
care, the opportunity to earn profits might lead hospitals to take
advantage of patients or otherwise ``cut corners.''
These differences are at the root of several important policy
debates. Should non-profits' exemption from taxes, access to tax-exempt
bonds, and ability to solicit tax-deductible charitable contributions
be preserved or be limited? To what extent does tax status correlate
with hospital performance or better patient outcomes? To assist the
Committee with its deliberations on these questions, we have compiled
findings from relevant research.
Economists and health policy scholars have conducted numerous
studies to better understand the relationship among for-profit, non-
profit and public hospitals. Prior to my government service, as an
academic researcher, my colleagues and I analyzed data on the medical
expenditures, mortality, and rates of cardiac complications of elderly
Medicare beneficiaries hospitalized for new heart attacks between 1985
and 1996. We found that geographic areas with for-profit hospitals have
approximately 2.4 percent lower levels of hospital expenditures per
patient as areas without for-profit hospitals but virtually the same
patient health outcomes.\1\
---------------------------------------------------------------------------
\1\ Kessler, Daniel P. and Mark B. McClellan. ``The Effects of
Hospital Ownership on Medicaid Productivity.'' RAND Journal of
Economics. Vol 33(3). Autumn 2002: 488-506.
---------------------------------------------------------------------------
Areas with for-profits have both lower labor and lower capital
costs. When an area's elderly population declines, for-profit hospitals
eliminate unneeded beds quickly, whereas non-profits eliminate them
much more slowly. (Interestingly, public hospitals are almost as
responsive to population declines as for-profits.)
These effects are a combination of direct effects of for-profits on
their own patients' costs and of ``spillover'' effects on neighboring
non-profits' behavior. That is, the neighboring non-profits also start
lowering their costs. The bulk of the 2.4 percent savings is achieved
when the for-profit presence increases from near zero to only a small
fraction of admissions in the area. Direct effects of for-profits on
their own patients' costs cannot by themselves account for the savings
we observe.
Our study is only one piece of a larger puzzle. We evaluated the
effects of ownership on only one facet of health care--productivity, or
the quality and cost of care for individual patients. Other studies
find that ownership may affect important social and economic outcomes,
such as hospitals' propensity to exploit Medicare's complex regulated
price system, or the volume and quality of care for uninsured patients.
Also, we examined only one illness and one patient population; the
effects may be different in other settings. Finally, although our
measures of health outcomes cover the common adverse outcomes that
matter to patients (serious enough complications to cause readmission
to the hospital), they may fail to capture fully all of the health
consequences of differences in ownership. Other studies have addressed
these additional issues.
Most studies have found little difference in the community benefits
provided by for-profit versus non-profit hospitals, where community
benefits are defined to include uncompensated care and the provision of
unprofitable or non-reimbursable services.\2\ Indeed, some studies find
that non-profits actually treat fewer indigent patients than do for-
profits.\3\ There is some evidence that public hospitals that convert
to for-profit status reduce the amount of uncompensated care that they
supply. However, public hospitals that convert supply much lower levels
of uncompensated care pre-conversion than public hospitals that do not
convert.\4\
---------------------------------------------------------------------------
\2\ Young, Gary J., and Kamal Desai. ``Non-profit Hospital
Conversions and Community Benefits: New Evidence from Three States.''
Health Affairs 8 (1999):146-55.
\3\ Duggan, Mark. ``Hospital Market Structure and the Behavior of
Not-for-profit Hospitals.'' RAND Journal of Economics 33 (2002):433-46.
\4\ Desai, Kamal, Carol V. Lukas, and Gary J. Young. ``Public
Hospitals: Privatization and Uncompensated Care.'' Health Affairs 19
(2000):167-72.
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I worked jointly on a study that compared patient outcomes in for-
profit and non-profit hospitals between 1984 and 1994 using a new
method for estimating differences across hospitals that yields much
more accurate estimates of hospital quality than previously available.
While we found that, on average, for-profit hospitals have higher
mortality among elderly patients with heart disease, much of the
difference appears to be associated with the location of for-profit
hospitals. We noted in our paper for the National Bureau of Economic
Research, ``Within specific markets, for-profit ownership appears, if
anything, to be associated with better quality care. Moreover, the
small average difference in mortality between for-profit and non-profit
hospitals masks an enormous amount of variation in mortality within
each of these ownership types.'' In other words, hospital-specific
factors besides ownership were much more important influences on
hospital performance than ownership alone.\5\ A later study by Yu-Chu
Shen examined the effect of hospital ownership type on patient outcomes
after treatment for acute myocardial infarction. Shen found that for-
profit and government hospitals have higher incidence of adverse
outcomes than non-profit hospitals.\6\
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\5\ McClellan, Mark, and Douglas Staiger, ``Comparing Hospital
Quality at For-Profit and Not-For-Profit Hospitals,'' Working Paper
7324, National Bureau of Economic Research, August 1999.
\6\ Shen, Yu-Chu, ``The Effect of Hospital Ownership Choice on
Patient Outcomes After Treatment for Acute Myocardial Infraction,'' in
The Journal of Economics, vol. 21, 2002, pp. 901-922.
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The debate over the effects of for-profit ownership of hospitals
must reflect a range of policy considerations. But with expenditures on
hospital care running into the hundreds of billions of dollars each
year, the productivity benefits of free markets and competition deserve
careful consideration.
Uncompensated Care Provided by Hospitals
CMS does collect data on uncompensated care through the hospital
cost reports, but we do not have data on the value of the tax
exemptions that non-profit hospitals receive. Much of the data that CMS
collects in hospital cost reports are tied to payment and the Medicare
trust fund. CMS ensures that these data are rigorously audited. Data on
uncompensated care, however, do not impact Medicare payment, and hence,
are not audited. Further, the most complete data collection instrument
in the cost report is relatively new, and hospitals are still becoming
accustomed to reporting uncompensated care data in a standard format.
Thus, these data are somewhat less reliable than those used to make
payments. CMS staff has engaged in discussions with the Medicare
Payment Advisory Commission (MedPAC) and the Government Accountability
Office (GAO) concerning this issue and is considering ways to make the
data on uncompensated care more reliable and useable. However, at this
time, it is not possible for CMS to make the sorts of comparisons that
are needed to answer the primary question of today's hearing. Congress
has, however, mandated that CMS make certain payments to hospitals in
recognition of their role in providing uncompensated or under-
compensated care and I would like to describe those payments here
today.
Before detailing these payment mechanisms, it is important to
review the requirements of CMS' regulations with respect to the
uninsured, or underinsured. The provider payment rules for Medicare and
Medicaid in no way restrict the ability of hospitals and other
providers to offer free or discounted care to patients who do not have
coverage under these two programs, or to offer relief to Medicare and
Medicaid beneficiaries who simply cannot afford to fulfill their
responsibility for co-payments and deductibles.
Nearly two years ago, CMS was approached by a number of hospitals
requesting guidance concerning whether it was permissible to discount
charges to low-income, uninsured, or underinsured patients. In December
of 2003, then-Secretary Thompson received a letter from the American
Hospital Association (AHA) that alleged that Medicare program rules, as
well as restrictions imposed by statutory authorities within the
jurisdiction of the Health and Human Services (HHS) Office of Inspector
General, hindered the ability of hospitals to provide discounts to low-
income patients or to patients who were medically indigent. Secretary
Thompson responded to the AHA letter in February 2004.
There are three central ideas addressed in the guidance provided by
HHS to the hospital community:
Discounts
Medicare billing requirements do not prevent discounts to uninsured
patients as long as:
Full charges, not discounted charges, are reported on the
cost report.
Accounts and records are maintained in a manner that
would be necessary for any business.
Indigency
Medicare indigency requirements do not prevent discounting to
uninsured patients.
Providers may make indigency (including medical
indigency) determinations using their customary methods.
In order to protect all patients and the Medicare
program, the methods used in determining indigency for non-Medicare
patients should be similar to those used for Medicare patients.
Indigency should be supported by documentation (good
business practices would dictate that).
Indigence should be determined on a patient-by-patient
basis because financial need is specific to each patient.
Medicare does not reimburse the bad debts of non-Medicare
patients.
Once indigence is determined, collection is no longer
undertaken with regard to the patient for the forgiven amount.
Collection
Medicare does not require providers to be aggressive in their
collection of accounts. Medicare rules state that:
Efforts to collect from non-Medicare patients must be
similar to the efforts to collect from Medicare patients. Medicare
wants parity in the treatment of Medicare and non-Medicare patients to
protect the program and all patients, not just our beneficiaries.
Efforts to collect on accounts should be more than a
token effort. Rather, they should be proactive efforts that would be
used by any prudent business.
Since the enactment of the Medicare program in 1965, the program's
rules have attempted to prevent ``cross-subsidization''--in other
words, preventing the Medicare program from subsidizing a service that
should be paid for by another payor, or preventing another payor from
subsidizing a service the Medicare program should be reimbursing. One
way that Medicare's regulations do that is to require hospitals to list
their stated charges for a service on their cost reports and maintain a
uniform charge for a service. To repeat, nothing in CMS regulations
prevents a hospital from providing a discount off of that stated
charge. But when filing its cost report, the hospital must list its
full charges.
Without question, Medicare program rules permit a hospital to
provide free care or discount charges to uninsured or underinsured
patients. As we noted in our response to the American Hospital
Association, ``[n]othing in the Centers for Medicare & Medicaid
Services' (CMS') regulations, Provider Reimbursement Manual, or Program
Instructions prohibit a hospital from offering discounts to any
patients, Medicare or non-Medicare, including low-income, uninsured or
medically indigent individuals.''
Therefore, in reference to the ability of a hospital to develop an
indigency policy, it is overstating matters to say that the Medicare
program imposes a ``restriction'' on this. Hospitals--not the federal
government--set their own indigency policies and have the discretion
and flexibility to define eligibility indicators including income
level. This makes sense because a hospital, as a community institution,
is in the best position to know what policy best suits the community
that it serves.
As I have stated earlier, if a hospital wishes to provide a
discount off of its customary charges as part of an indigency policy,
it can do so, but it must report the full charge for that service on
its Medicare cost report.
Turning to the issue of bad debt, we often hear from hospitals that
Medicare somehow ``requires'' aggressive collection efforts that
include seizing a patient's home, use of a bill collector, and other
similar tactics. The reality is otherwise. The Medicare program does
not require any particular level of collection activity. It does not
require that collection activities be ``aggressive.'' It does not
require that hospitals seize patients' homes or bank accounts. What the
program does require, however, is that if the hospital wants to bill
the Medicare program for bad debt related to unpaid deductibles and
coinsurance by Medicare beneficiaries, it must use the same level of
collection activity as it does to secure collection of debts by non-
Medicare patients. For example, if a hospital wants to use a bill
collection agency for its bad debts, it cannot turn only non-Medicare
patient bills over to that collection agency; rather, the hospital must
treat all bad debts the same. But nothing requires a hospital to use a
bill collection agency for its bad debts. The principle, again to
prevent cross-subsidization, is that collection of Medicare and non-
Medicare debts need to be treated similarly.
In addition, a hospital may make an individualized indigency
determination for a particular Medicare patient and excuse that patient
from any efforts to collect unpaid deductibles and coinsurance. Doing
so would not prevent the hospital from collecting bad debt payments
from Medicare on those unpaid amounts, provided the hospital treats all
indigent patients the same. This is also true if the patient is a
dually-eligible Medicare and Medicaid beneficiary. In such a case, the
hospital would submit a bill for the unpaid deductible and coinsurance
amounts to the state Medicaid plan. If the state Medicaid plan was not
liable and denied payment on the account, the hospital could bill the
Medicare program for it as a bad debt.
It is also important to note that in very limited circumstances,
Medicare payment could be affected by the ``lesser of cost-or-
charges,'' or ``LCC'' principle. This principle was of significant
importance in the early years of the program, but is admittedly less so
now that most providers are reimbursed on the basis of a prospective
payment methodology rather than on the basis of costs. However, where
the LCC principle is applicable, a Medicare provider is paid the
lesser of its actual costs or its actual charges. Implementing a
reduced charge program for uninsured patients could potentially trigger
the LCC principle because if a hospital lowered charges for enough
patients, a hospital's fiscal intermediary could take the position that
a hospital's charges were not its posted, or stated, charges, but
rather, the charges applicable to most of its patients who were
receiving discounted services. If the FI did take that position, it
could then invoke the LCC principle and pay the hospital that lower
charge-based amount.
Few providers are subject to the principle at all. The only example
I am aware of is a pediatric or cancer hospital in its first year of
operation, before it becomes subject to the TEFRA methodology, because
there are no base year costs upon which to calculate a TEFRA target
rate limitation. Other providers, including critical access providers,
are not subject to the LCC provision.
Medicare and Medicaid Payments to Hospitals Providing Care to Uninsured
Individuals
A recent study calculated the revenue cost of the tax subsidy
provided to non-profit hospitals and found that in 1994-95 it amounted
to $9.21 billion 2002 dollars, including an exemption from income taxes
of $5.43 billion, an exemption from property taxes of $2.01 billion,
tax deductibility of donor contributions of $1.34 billion, and tax-
exemption of interest paid on debt of $0.43 billion.\7\ In addition,
Medicaid and Medicare have several payment mechanisms to compensate
hospitals for providing care to uninsured individuals. The President's
FY 2006 Budget includes proposals to ensure that funds provided to
hospitals to reimburse for uncompensated care are used appropriately.
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\7\ Gentry, William M., and John R. Penrod. ``The Tax Benefits of
Not-for-Profit Hospitals.'' In David M. Cutler, ed., ``The Changing
Hospital Industry: Comparing Not-for-profit and For-profit
Institutions.'' Chicago: University of Chicago Press, 2000.
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1. Disproportionate Share Hospital Payments
Since 1986, select hospitals have received payment under the
Medicare disproportionate share hospital (DSH) program. The original
intent of DSH payments was to reimburse hospitals for increases in
their Medicare costs that were associated with treating a large share
of low-income patients. Since that time, several changes to the
statutory formula have increased the likelihood that DSH payments also
compensate hospitals for the costs of treating uninsured patients.
Hospitals qualify for Medicare DSH payments if they treat a
``disproportionate share'' of low-income patients--defined in the
statute as the share of a hospital's total inpatient days attributable
to Medicare patients who are also eligible for SSI compared to days
attributable to all Medicare patients, plus days attributable to
patients who are eligible for benefits under Medicaid and also not
eligible for Medicare compared to all patients. That ratio, along with
consideration of urban/rural status and bed size, plays into a specific
formula that yields 16 different categories of hospitals for DSH
payment purposes. The payments themselves are a percentage add-on to
the Medicare diagnosis related group (DRG) payments used to reimburse
hospitals for inpatient services.
The Medicaid program also provides DSH payments. The formulas for
establishing those payments vary with each state program, although
there are certain categories of hospitals which must be designated as
DSH hospitals by state Medicaid plans. States must designate hospitals
as eligible for Medicaid DSH payments if they have a low-income
utilization rate of 25 percent or more (LIUR is calculated as the sum
of the ratio of Medicaid revenues divided by total revenues and the
ratio of inpatient charity charges divided by total charges); or their
Medicaid utilization rate (Medicaid days divided by total days) is more
than one standard deviation above the mean Medicaid utilization rate in
the state.
The Medicaid DSH program is also advantageous for states because
DSH payments to a hospital under a state plan are not counted in
determining whether or not the state has exceeded the Medicaid upper
payment limit, thus enabling states to increase payments to other
providers participating under their state plan. Preliminary data show
that during 2004, Medicare DSH payments amounted to about $8.5 billion,
while Federal and State Medicaid DSH payments totaled nearly $17.2
billion.
2. Bad Debt Payments
As I mentioned above, Medicare also reimburses hospitals and
certain other providers for the bad debt that arises from treating
Medicare beneficiaries who are unable to pay their cost sharing and
deductible amounts. Providers who make reasonable efforts to collect
Medicare co-payments and deductibles, but are unable to do so, can
report those amounts as bad debt. Hospitals are paid for this bad debt
at a rate of 70 percent. Other eligible providers receive payments
amounting to 100 percent of their bad debt. In FY 2000, the latest year
for which we have finalized data, CMS provided $1.03 billion in bad
debt payments. For FY 2005, we estimate that bad debt payments will
total around $1.6 billion.
3. A Portion of Indirect Medical Education (IME) Payments
As with the DSH, the IME is intended to recognize legitimate
variations in hospitals' costs for treating Medicare patients. Academic
medical centers that engage in graduate medical education incur higher
costs per discharge as a result of their teaching activities. In
recognition of that fact, when Congress instituted the inpatient
prospective payment system (IPPS), it created add-on payments for these
teaching institutions. One of those payment types was meant to cover
the indirect costs of providing such education and is referred to as
IME. IME payments are based on the estimated relationship between the
hospitals' Medicare costs per discharge and their teaching intensity as
measured by the ratio of residents to beds. Because Congress was unsure
about the ability of the IPPS to fully capture differences in patient
severity and other factors that might account for teaching hospitals'
higher costs, the Congress required the Secretary to double the
empirically estimated IME adjustment. Current law and the most recent
data indicate that IME payments are still set at twice the estimated
empirical effect of teaching activities on a hospital's cost per
discharge. Some say that the difference between the empirical estimate
and the current level of IME payments is a subsidy for uncompensated
care. Projected spending for IME during 2004 stands at $5.2 billion and
that projection rises to $5.7 billion for FY 2005.
The Medicare Payment Advisory Commission (MedPAC) has recommended
revising this situation, but at the same time, recognizes that doing so
may cause problems for these institutions. Teaching hospitals provide a
high level of uncompensated care, amounting to 20 percent in major
public teaching hospitals, but only 5 percent in major private teaching
institutions. Medicare patients account for only a portion of total
patient population, so even increased payments for Medicare services do
not necessarily cover costs incurred for all uncompensated care.
Nevertheless, the IME payments do provide funds that these institutions
can and do use to cover that gap. Whether this approach to funding
hospitals that provide uncompensated care actually results in the most
healthcare per dollar invested, and is the most appropriate method for
targeting those dollars to the uninsured, or indigent, is not clear.
4. Medicaid Waivers
Medicaid waivers allow states to explore new approaches to delivery
and payment for health care services. In particular Medicaid section
1115 waivers have been used to develop new mechanisms to provide health
insurance for uninsured individuals with a limited income.
The 1993 approval of the Hawaii Quest Demonstration program
includes redirected DSH funds in order to provide insurance coverage
rather than uncompensated care. Similar initiatives were included in
the early TennCare program, New York Partnership, Vermont Health Access
Program, Massachusetts MassHealth Program--all broad comprehensive
statewide section 1115 demonstration programs that included eligibility
expansions to uninsured populations. Also, more recently, CMS has
collaborated with the State of Maine and the District of Columbia to
reprogram Medicaid DSH funds to provide health insurance instead of
uncompensated care. These two states have used demonstration authority
to focus on redirecting Medicaid DSH payments to increase the insurance
coverage in the states.
The State of Maine currently has a HIFA waiver under the authority
of Section 1115 of the Social Security Act, implemented October of
2002, that has allowed the State to expand coverage to childless adults
up to 125 percent of the Federal Poverty Limit. Maine chose to use its
unspent Medicaid DSH Federal allotment to extend coverage to this
population. This program has provided health insurance coverage to an
additional 26,000 residents of the State of Maine (as of February 28,
2005).
The District of Columbia currently has a Section 1115
demonstration, implemented February of 2003, to provide primary and
preventive health care services to non-disabled, childless adults,
between the ages of 50 and 65, with income at or below 50 percent of
the Federal Poverty Limit. The funding source for this demonstration is
the District of Columbia's Medicaid DSH Federal allotment. This program
was implemented with an enrollment cap of up to 2,400 people.
These two programs have expanded insurance coverage to more than
20,000 low-income childless adults. At the start of 2004 there were
20,900 childless adults up to 100% of the Federal poverty level (FPL)
insured through the program in Maine and 2,400 childless adults up to
50% of the FPL in the District of Columbia. In both of these programs
the participants receive benefit of the full Medicaid benefit package.
These examples illustrate that states have options available, under
demonstration authority, to move from reimbursing providers for direct
care to increasing health insurance coverage.
In the state of Massachusetts, demonstration authority will be used
to reimburse forprimary care services for the uninsured and encourage
the utilization of services that can prevent the need for more costly
hospital services for these individuals. Under the MassHealth Section
1115 Demonstration, effective with the extension period beginning July
1, 2005, a Safety Net Care Pool will be established to pay for costs
related to providing health care services to the uninsured. The Safety
Net Care Pool (SNCP) will be established using a combination of
demonstration savings, in addition to the Commonwealth's Medicaid DSH
allotment.
5. Increased Funding for Community Health Centers
This Administration has undertaken other initiatives to provide
health care services to individuals who otherwise lack access to health
insurance or who may be under-insured. Community health centers (CHCs)
serve as the ``front line'' treatment option for low-income uninsured
individuals. They provide professional, family-oriented preventive and
primary care to low-income individuals within their communities.
Typically, about 40 percent of the patients of a community health
center are uninsured. A study published in Health Affairs earlier this
year illustrated the important role of CHCs as a reliable source of
primary and preventive care for a vulnerable population.\8\ According
to the study, visit rates for uninsured CHC patients, individuals for
which a chronic disease condition was ``managed'', and established CHC
patients all increased. Furthermore, CHC patients experienced fewer
hospitalizations and emergency room visits for ambulatory care,
compared with similar people living in the same areas who seek care
elsewhere. The President's Health Centers Initiative, which began in FY
2002, will open or expand 1,200 health center sites to serve another
6.1 million patients by 2006. The FY 2005 appropriation for community
health centers exceeded $1.7 billion. The President has set a new goal
to open a health center or rural health clinic in every poor county
that can support one. The FY 2006 Budget level includes $26 million to
open new health center sites in 40 of the Nation's poorest counties and
will support 25 planning grants as well. These expansions complement
the President's proposals to increase health insurance coverage in
private and public insurance programs, to help ensure that all
Americans have access to health care. The President's Health Centers
Initiatives will broaden the health center safety net and increase
access to primary health care for the Nation's underserved populations,
thus reducing the amount of uncompensated care that must be provided by
our hospitals.
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\8\ O'Malley, Ann S., Forrest, Christopher B, Politzer, Robert M.,
Wulu, John T. and Shi, Leiyu. ``Health Center Trends, 1994-2001: What
Do They Portend For the Federal Growth Initiative,'' Health Affairs
24(2) 2005: 465-472.
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6. Section 1001 of the Medicare Modernization Act (MMA)
Under the Emergency Medical Treatment and Labor Act (EMTALA),
hospitals participating in Medicare must medically screen all persons
requesting a medical screening examination to determine whether or not
the individual is suffering from an emergency medical condition. In
addition, if the hospital determines that the individual has an
emergency medical condition, it must provide the treatment necessary to
stabilize that individual, regardless of payment method or insurance
status. As a result, hospital emergency departments treat uninsured or
underinsured individuals who cannot pay for the services they receive.
Undocumented immigrants' use of medical services has been a long-
standing issue for medical providers, particularly for hospitals
located along the U.S.-Mexican border. Section 1011 of the Medicare
Modernization Act (MMA) provides $1 billion through 2008 to help
hospitals and other emergency providers recoup some of the expenses of
providing this critical care to undocumented immigrants. Earlier this
month, CMS announced the final implementation plan for hospitals and
other providers to being receiving reimbursement under section 1011.
Between Medicare and Medicaid DSH, IME, bad debt payments, and the
other mechanisms I have mentioned, the Federal and state governments
will provide tens of billions of dollars this year to our hospitals to
compensate them for the provision of uncompensated care. In addition to
these payments, according to the study I cited earlier, non-profit
hospitals will realize several billion dollars more in tax exemptions.
As someone who trained as a physician in a teaching hospital, and who
has conducted some published research this topic, I am familiar with
how often these institutions provide uncompensated care and I know how
valuable they can be to a community. However, the question that should
be asked is whether the funding mechanisms I have mentioned most
effectively target those funds to the programs and settings that
provide the best value in terms of the type of care they provide.
Other Administration Initiatives for the Uninsured
The Administration has approached the issue of the uninsured along
other lines as well, advocating giving an advanced health coverage tax
credit to certain individuals who are receiving a pension from the
Pension Benefits Guaranty Corporation or who have become unemployed due
to the adverse effects of international trade and are eligible for
Trade Adjustment Assistance. This tax credit pays 65% of the premium
for qualifying health insurance, including either employer-sponsored
``COBRA'' coverage or a state-designated private health insurance plan.
The Administration's Medicaid waivers, state plan amendments, and HIFA
waivers have provided health insurance for 2.6 million people who would
have otherwise lacked coverage.
Many of you in Congress voted for and deserve credit for the
provisions in the MMA that accelerate adoption ofhealth savings
accounts and help make insurance more affordable for millions of
Americans. In addition to creating a Medicare prescription drug benefit
and providing interim savings and subsidies through Medicare-approved
discount cards, this historic legislation allows people to establish
health savings accounts (HSAs) in conjunction with affordable, high-
deductible major medical coverage. These new products will make health
insurance more affordable to businesses large and small, as well as to
individuals whose employers do not sponsor coverage.
Conclusion
CMS strives to make sure that the payments we provide are in line
with statutory requirements and that they meet the legitimate, data-
driven needs of our partnering providers. The programs we administer
serve some 80 million Americans and we want to be sure that we are
supplying them, and those who serve them, with the best we are capable
of. I appreciate the chance to appear before you this morning and look
forward to any questions you may have.
Chairman THOMAS. Thank you all for your testimony. I
believe out of necessity, Dr. McClellan, what you were
reviewing were in essence payments made to hospitals for a
category that could be broadly called the indigent or those who
are not able to benefit; the old under Medicare and the poor
under Medicaid, is that correct?
Dr. MCCLELLAN. That is correct.
Chairman THOMAS. What is the rough dollar in that area?
Dr. MCCLELLAN. About $30 billion per year.
Chairman THOMAS. But that does not include the traditional
benefit of tax exemption either from Federal, State, or local
taxes?
Dr. MCCLELLAN. That is correct.
Chairman THOMAS. Do any of you have a number on that, or
ballpark number, or do we need to research that?
Mr. EVERSON. I think you are suggesting about the joint
Committee. We have a lot of data that would go into that. In
the hospital area, I understand the revenues are something like
374 billion and expenses are 287.
Chairman THOMAS. I am looking for pure benefit from the
enjoyment of tax-exempt status. If you give it at the Federal
level, there is reverberation down to the State and local.
Clearly if you didn't have the Federal exemption, the pressure
at the State and local would be greater. Mr. Walker.
Mr. WALKER. Mr. Chairman, I think additional research is
necessary in this area, because there are a number of
dimensions here. Number one, you have Federal tax exemption,
and State income tax exemptions. You have the fact that
individuals who make contributions to not-for-profit hospitals
get a tax deduction. You have State and local property tax
exemptions as well. I don't think there has been a
comprehensive study done on this, but clearly it would involve
a lot of money.
Chairman THOMAS. Well, I appreciate that technical term, a
lot of money. Clearly 30 billion, which can be determined more
precisely--and if we look at the other, I assume we are around
50 billion or more. The whole point is this is the reason why I
think it is essential that Congress look at it. One of the
things I did in preparation for us beginning to look at the
area was to examine the history. What I found, and frankly
striking, was the history of examining three separate
timelines. One is tied to IRS rulings and the date that IRS
rulings were made; Federal statutes which affected who the
Federal government provided funds for in assisting health care,
principally Medicare and Medicaid; and what was going on in the
real world in terms of not-for-profit hospitals and for-profit
hospitals. When you then examine all three of those timelines,
certain things just popped out to me in a very striking way.
I guess one of the framing questions and answers would be
what I found in 1990 in terms of the Chairman at that time, the
Aging Committee, the gentleman from California, Mr. Roybal, in
questioning IRS and the American Hospital Association. As you
might guess, as we get more and more into the timeline coming
more and more to the present time, some of this stuff starts to
sound like tautologies rather than rationale for why people did
things. For example: ``Mr. Chairman, what gives you tax-exempt
status?`` Mr. McGovern, who is the IRS person: ``A
determination by the Internal Revenue Service that you have met
the criteria for tax exemption.'' ``That is good, because what
has happened is there has been a change in definition of what
it is that allows you the privilege of tax exemption.'' I
mention that is a particular timeline that might be useful to
look at.
Here is the question and answer from the American Hospital
Association representative, and the Chairman asked Mr. Pugh,
who was the AH representative to discuss the relationship
between for-profit and not-for-profit, and his answer was:
``The for-profit hospitals, although they may provide a variety
of services and do an excellent job, the bottom line is, the
bottom line is that they are investments by individual owners
who are concerned about the return of net income, which will
accrue back to them.'' The Chairman says, ``These are the
hospitals that are organized for profit?`` The AH
representative says, ``Yes, these are the for-profit
hospitals.'' The Chairman says: What about the not-for-profit
hospitals?`` The representative says: ``The not-for-profit
hospitals, as I just described, are the ones owned by the
community. There is a community benefit there. The assets are
owned by the community.''
That is an important concept. It is not just charity care.
Then they go on to examine the fact being owned by the
community has some virtue beyond the fact that they are owned
by the community. When you begin to pull all of these strings
together, this is what I get out of comparing these three
timelines. The principal historical reason for establishing
not-for-profit hospitals was to serve those who otherwise
wouldn't have care, principally the indigent. In fact, that was
the definition that was codified by the IRS in 1956, although
it had a common law basis over a long period of time. One of
the key and principal reasons--and if you examine any of the
organizations and that is why many of them were religious-based
or otherwise humanitarian-based in providing the reason in
creating these hospitals. Then in 1965, the government passed
legislation which said the government is going to provide
payment to those who provide services to the indigent, the old,
Medicare and Medicaid.
Well, it is pretty obvious if the definition for giving tax
exemption is that you provide aid to the poor, and the
government is now going to pay you for providing aid to the
poor, that you would be in danger of losing your tax-exempt
status. So, it would be convenient to have a different
definition of tax exemption. Lo and behold in 1969, the IRS
provides a definition which removes the test of giving service
to the poor. It gives a broader definition of community
benefit, which was sited by Mr. Everson, including for example,
emergency room service provided 24 hours a day, 7 days a week,
to anyone who called, not just those who can pay.
Interestingly enough, in a subsequent IRS ruling, that was
removed as well. When you examine the for-profit and the not-
for-profit history from the very beginning, if there was
something called a for-profit hospital, it was essentially an
adjunct to a physician providing services and providing for a
structure which assisted them in doing that. The early
hospitals were really all not for profit. So, where was the
real growth of the for-profit hospitals? Well, if in fact the
only difference between a for-profit and a not-for-profit today
is that one is owned by the community and the other one is not,
the idea of a business plan or an administrative flow chart
being the difference between the two, it is obvious that once
the government began making payments to the poor beginning in
the mid-sixties, you saw the development for-profit hospitals.
Then when the government went beyond that and said we are going
to create diagnostic-related group payments so you can have a
source of money based upon particular services offered, the
for-profit hospitals continued to grow far faster, because they
could figure out how as a business to be able to make money
principally because the government was making the payments. At
the same time, the for-profit hospitals began to grow because
they could figure how to make a business principally based on
government payments.
The definition for the tax exemption continued to change,
which brings us to today, when one of our witnesses that will
come before us shortly provides a definition, a partial
definition, I will admit, of what it is that not-for-profits
do, which require us to make the tax-exempt benefits. Moreover,
the ability to use tax-exempt financing allows facilities to
borrow at lower costs, thereby allowing them to make the
necessary capital investments to replace or update the
facilities and equipment to fulfill their mission. The ability
to update facilities in technology and health care is closely
tied to quality and health outcomes. We get the tax break to be
able to buy new modern equipment. How in the world are for-
profit hospitals who have the burden of paying taxes able to
stay competitive because, frankly, in the marketplace they have
to buy quality equipment to update and stay modern as well, but
they carry the extra burden of paying taxes.
Back to the original question: What do we get for our
money? Here is a more curious underlying question. It appears
based upon the timelines that not-for-profit hospitals found
that they got a far greater return on their investment lobbying
the IRS to get changes in the revenue rulings than they did to
undergo the difficult reexamination of their mission and change
what they did, because the society was changing and in fact,
the society decided to pay for low-income, instead of relying
on tax exemptions for nonprofits to perform that particular
function. My real concern is as things changed, including the
definition of charity, what hasn't changed to a certain extent
is the role and the action of the not-for-profit hospitals and
that they got a greater return on their time and energy in
getting IRS rulings, which were actually health policy
decisions, than they did in attempting to figure out what a new
and more appropriate role would be to receive that tax
exemption benefit.
Although it is true, as the gentleman from California said,
Congress has examined this a number of times and hasn't done
anything about it, I do think, based upon the testimony and the
rationale provided, there will be ample evidence to say that we
need to look at this and figure out how we can help not-for-
profit hospitals redefine their mission and to examine what it
is they think we are getting for the tax-exempt billions of
dollars that are being offered, so we can reconcile again
people with a mission that deserves a tax-exemption status.
You folks are going to be absolutely critical to our
ability to begin to look at a changing definition to be able to
assist the society and those institutions in the society who
have changing roles and that simply redefining what it is you
do to get the tax exemption has largely placed us where we are
today; and that is, we really can't tell the difference all
that much between a for-profit and a not-for-profit. That,
frankly, isn't a sufficient answer to cover tens of billions of
dollars currently offered by taxpayers for getting what they
think is something. Gentleman from New York.
Mr. RANGEL. Thank you, Mr. Chairman. Mr. Everson, the
Chairman indicated that because there is loss revenues at
hospitals that this will be an area we should give some
priority. Do you agree with that?
Mr. EVERSON. Mr. Rangel, I agree first, as I indicated,
that looking at tax exemptions and charities more broadly is
important. This is an area that was highlighted.
Mr. RANGEL. I agree with you on that 100 percent. We ought
to look at whatever there is, tax exemptions. I am talking
about hospitals.
Mr. EVERSON. We did this priority--we did a list a couple
of months ago for finance. They asked----
Mr. RANGEL. Who asked?
Mr. EVERSON. The Finance Committee did. We included this on
the list of the top 20 issues of concern to us because we do
see it as an area----
Mr. RANGEL. Are there other areas where there is lost
income that you need some congressional direction?
Mr. EVERSON. We have particular concerns in areas like
credit counseling. This is an important subject of inquiry
because, as you know, under the new bankruptcy bill, people
will be steered toward these.
Mr. RANGEL. Besides credit unions and hospitals, what else
is on the list?
Mr. EVERSON. Excessive compensation across the entire
sector----
Mr. RANGEL. I want to talk about industries, not across the
sector. Would you agree we ought to start off with a flat-tax
concept, eliminate all deductions and everything, and then go
revisit and then see what is worthwhile?
Mr. EVERSON. You are over my head there when you are
getting into a policy call like that. That is for the
administration and Congress to work out.
Mr. RANGEL. Considering the IRS has been lobbied by the
not-for-profits in order to get you to include what the
standards should be, is that policy? Are you influenced by
outside lobbyists?
Mr. EVERSON. We interpret the law. The Chairman is
substantially correct in what he said. I think Congress had a
role too. Some of the hearings back in the sixties, pointed out
that there can be many benefits other than indigent care, an
example being, emergency rooms----
Mr. RANGEL. Do you make a determination what the emergency
room should be?
Mr. EVERSON. We consider that as an important factor.
Mr. RANGEL. Is that policy?
Mr. EVERSON. We interpret the law that you pass.
Mr. RANGEL. You interpret that emergency rooms is a part of
the law, even though it is not written into it?
Mr. EVERSON. We are attempting to determine whether a
charity or an entity is operating for the public good. This is
a common law standard. The hospitals aren't mentioned in the
Code itself, in the law you have written.
Mr. RANGEL. What about our university systems? They get
tremendous tax exemptions. What guides you in that area for
profit and not for profit? Was that on your list?
Mr. EVERSON. Universities per se are not, we don't believe.
We make judgments all the time.
Mr. RANGEL. Was that on your list to the Senate Finance
Committee?
Mr. EVERSON. No, it wasn't, I don't believe.
Mr. RANGEL. Did you have it listed and the amount of money
of lost revenue to the government in order to determine the
priority?
Mr. EVERSON. We did not look at it solely from the point of
view of money and we did not quantify the money. As noted by
the Chairman, there are multiple factors here.
Mr. RANGEL. Multiple factors? He wants to go where the
money is lost. That is not multiple.
Chairman THOMAS. Will the gentleman yield?
Mr. RANGEL. If you want to tell me about churches and
synagogues.
Chairman THOMAS. There is a fundamental First Amendment
constitutional right, rather than a privilege, dealing with
that. The gentleman will remember--and I recall back when I was
young--we began looking at universities on the basis of
activities that universities engaged in which were in direct
competition with the private sector, and it was surrounding the
unrelated business income tax, whether or not they should pay
for it. So, each of these various tax-exempt areas need to be
looked at in terms of what peculiarities are about them. The
Chair invites, in fact welcomes, an examination in all these
areas, because we found it quite interesting at the time, as
you recall, why university presidents were explaining why they
ran gas stations, bowling alleys, gyms, travel agencies out of
book stores, and that sort of thing. It was because it was in
the pursuit of knowledge. That is the kind of thing where we
haven't shown the rigor necessary to get a better answer. The
Chair is excited about the gentleman's direction of going
beyond just the big money areas, but if we start with those and
move onto the others, we can create a list and move fairly
quickly.
Mr. RANGEL. The Chair would be even more surprised how all
of us want to work to get rid of abuse and corruption and loss
of revenues. The problem we have, especially with the IRS, is
that some people really believe they were on the list, there is
a reason for them to be on the list rather than other people.
The earned income tax credit. There are some people in this
country believe that you are putting resources against the poor
and not enough resources against the higher-income people. Of
course, that is ridiculous. When you get on the IRS list, there
is something that allows people to believe that they think you
are doing something wrong. When you start talking about credit
unions and then you are talking about hospitals, I would like
to see the list. That is all. I don't think there should be a
private list that just the IRS has and you share it with the
Finance Committee. Could we get that whole list?
Mr. EVERSON. It is a public document.
Mr. RANGEL. Name some institutions so that we can make the
hospitals feel more comfortable.
Mr. EVERSON. We haven't singled them out.
Mr. RANGEL. Who else is on the list?
Mr. EVERSON. You mentioned universities, but supporting
organizations. The Chairman talked about that.
Mr. RANGEL. No. No. I may be a supporting organization.
When you say hospitals, everyone knows who you are talking
about. When you say credit unions, everyone knows who you are
talking about.
Mr. EVERSON. We are concerned about issues like Indian
gaming.
Mr. RANGEL. Indians are on your list. Who else?
Mr. EVERSON. I didn't say Indians. I said Indian gaming.
Mr. RANGEL. There are 20?
Mr. EVERSON. Eighteen or 20. It covers a range----
Mr. RANGEL. Just give me some idea of who will have to get
lobbyists in a hurry.
Mr. EVERSON. As I said, it ranges across issues like credit
counseling.
Mr. RANGEL. You mentioned them three times.
Mr. EVERSON. Pardon me. There are some issues like Indian
gaming or credit counseling. There are other pervasive problems
like supporting organizations that touch a variety of sectors
such as education. There is excessive compensation, which is a
problem across the entire sector. So, there are a variety of
problems that are stated. Inflated deductions is another.
Mr. RANGEL. I support all of the things you have said
categorically.
Mr. EVERSON. Easements.
Mr. RANGEL. You are talking about people gaming the system
and all of us want you to give us direction to have hearings or
do whatever is necessary. But that is not like saying
hospitals. We want to know what industries that you believe
deserve to be questioned as to their tax exemption.
Mr. EVERSON. I mentioned three.
Mr. RANGEL. You said there were 20.
Mr. EVERSON. I said there are some segments and other
issues as to structure, like supporting organizations. There
are issues that cut across the spectrum like donor revised
funds. There are issues like, as I indicated, the excessive
deductions people give. Easements, conservation easements.
Mr. RANGEL. You have any recommendations to make as it
relates to determining whether or not a hospital should be tax
exempt or not? Do you have any recommendations to make to this
Committee that would allow us to better determine which
hospitals deserve tax exemption and which don't?
Mr. EVERSON. I think it is a difficult subject. We rely
increasingly on the community judgment. There is a standard
where community members on the board be represented over half
of the membership.
Mr. RANGEL. Can you recommend to this Committee how we can
legislate a better way to do it than what we already have on
community organizations and whether they have emergency rooms?
Is there a better way which you can recommend that we can
determine which hospitals deserve to be tax exempt and which
hospitals will be taxed as commercial organizations? Can you
help us out there?
Mr. EVERSON. I am happy to take that back and talk broadly
in the Department. I am concerned that if you put any bright-
line test in there, it might be helpful to us, but they perhaps
would have unintended consequences. Let me just raise one issue
with the emergency room. If you say you have to have an
emergency room, but one entity has a burn unit----
Mr. RANGEL. I didn't say that; the IRS said that.
Mr. EVERSON. It is a factor in our decisionmaking process.
We have an application process that, for hospitals, runs a
couple of pages, it asks the question, ``Do you have an
emergency room?``
Mr. RANGEL. Are you saying you need guidance from this
Committee?
Mr. EVERSON. If you want to write something in the law, we
will implement it. I ask you to move carefully only because
this can have unintended consequences.
Mr. RANGEL. We leave it alone?
Mr. EVERSON. I am not suggesting that. I am telling you it
is difficult to administer because of just what the Chairman
said, the indistinguishable nature between the two, profit and
not-for-profit. I am concerned about these joint ventures. That
is a big issue where profit-making entities will shift the
income into the nonprofits and the cost will go into the
profit-making entity. There is a lot of money at stake.
Mr. RANGEL. I don't have a problem with that. If we have a
problem, we should have a hearing and try to assist you in
correcting it. General Walker.
Mr. WALKER. Mr. Rangel, I would respectfully suggest that
today's subject is illustrative of a much broader need that the
Congress needs to address. Specifically, there are many areas
both on the tax preference side, such as not-for-profit
hospitals, as well as on the spending side with regard to
programs where I would respectfully suggest there needs to be
more guidance provided as to principles and criteria are
needed. For example, what factors should be considered in
determining whether and to what extent tax-favored status
should be granted, to whom it should be granted, under what
circumstances it should be granted; and therefore, what is
expected that the public will benefit from, so that we can
monitor and evaluate. I will give you three possible examples.
One, you could look at community need from the standpoint of
whether or not there is adequate capacity in a community or a
particular area, which is geographic. You could look at certain
types of services and activities, which would be something that
wouldn't be geographic necessarily but could be considered.
Then you could look at certain types of individuals, namely the
poor. You could end up deciding that there are certain
principles or criteria that you would like to make sure are
considered and then delegate to the IRS some discretion to come
up with the details considering changes over time, but then you
have a chance of having more consistency. Then you have a basis
to be able to provide certain standards that you could evaluate
what people are doing and then you could oversee it, report
back to the Congress, and then make changes periodically if you
deem it appropriate.
Mr. RANGEL. I have 18 municipal hospitals in the city of
New York, and they have standards by the city and by the State.
Why in God's name do we have to now reinterpret what good a
tax-exempt city hospital is doing when we got the city and we
got the State? Do you have recommendations to make to us as to
additional criteria that would assist the IRS?
Mr. WALKER. Mr. Rangel, I will be happy to take that back
and talk to our people about some areas that might be of
assistance to this Committee. You properly point out that the
States and localities have a number of criteria. At the same
point in time, that doesn't moot the need that to the extent
that you decide to provide Federal tax preferences--and it is
not just the issue of income tax. That might not be the big
issue, quite frankly, given the profitability of the industry.
It could be more of an issue from the standpoint of the fact
that people get to have deductions when they make contributions
to not-for-profit hospitals. There could be issues that involve
frankly, much more money than the income tax exemption. I would
not be surprised if it was 50 billion-plus by the time you end
up counting all the different tax preferences.
Mr. RANGEL. If we were to have a flat tax that we can take
into consideration, all the deductions, all the exemptions--and
I understand that the President intends to bring to the
Congress a new reform bill and it may be part of the Social
Security bill. Who knows where that is going or if it is going
anywhere? But having said that, isn't that the best way to find
out how much money we are not collecting? Just start from the
beginning and have an evaluation as to whether or not some of
these deductions and exemptions were politically motivated?
Wouldn't you think that would be the best way to do it so
everyone is on the list and they have to come forward and they
have to justify why they were able to get preferential
treatment, instead of just picking on hospitals?
Mr. WALKER. Mr. Rangel, I think that is a much bigger
subject for a different hearing. One clear basis that I can
think of as to why the Chairman may have chosen to start with
this is because we have done work in this area over a number of
years that has shown there is not a substantial difference
between for-profit and not-for-profit. This study basically
reconfirms the findings we had in 1990. If you look at the
amount of money involved alone, these are the big numbers.
Mr. RANGEL. I am glad to hear that, because most of us
thought the Chairman had a very bad experience with a not-for-
profit and that is why he keeps coming back on this list. But
if this is it, it is the dollar factor and you can help us to
sort this out and do it in a better way--but you ought to think
of a way where institutions that have not been charged with
wrongdoing, and the general public believes they are providing
a service and deserve to be recognized for it, that they don't
get on a hit where constantly they have to come forward. I
would hate to believe that I am the only Member of Congress
that is being investigated because they keep calling me and
they said, oh, no, we are calling everybody in a very general
way. It doesn't allow for the morale of people who are trying
to do the right thing to constantly believe that we are
reviewing them when they are not only not doing harm, but when
they are providing good. That is what bothers me, because
people are no more vigorous in routing out those people that
are abusing the law and tax law--because as I told the
Commissioner, if we don't keep the law where people believe it
is going to be enforced, more and more people would be inclined
to abuse it. Thank you, Mr. Chairman, for your generosity and
your time.
Chairman THOMAS. I thank the gentleman. Does the
gentlewoman from Connecticut, Chairman of the Subcommittee on
Health, wish to inquire?
Mrs. JOHNSON. I thank you, Mr. Chairman.
Chairman THOMAS. Would the gentlewoman yield briefly?
Mrs. JOHNSON. Yes.
Chairman THOMAS. Mr. Everson, I find it totally ironic that
you are concerned that if the Congress acts in this area there
may be unintended consequences. If you will examine the IRS
rulings, the primary reason there is no real difference,
discernible difference, between not-for-profit and for-profit
is fundamentally based upon the IRS rulings which continued to
blur the clear difference between the two. As I said, the
timing of those IRS rulings were when what it was that you used
to call charity was changed by virtue of government statute.
What you have failed to admit, even today, based upon the
history, is that the health policy that was changed by the IRS
rulings is the real reason we are in the problem we are today.
My question is, did you consult any health experts when you
decided to make the change in the definition of charity in
terms of services provided? I think the answer is no. You will
take a look at what Congress did. Congress made changes that
didn't allow for compensation to the poor. You changed the IRS
ruling to say that taking care of the poor was not a criteria
to determine tax exempt status. What happened was the IRS
rulings chased reality to create the current situation. You
can't tell the difference between the two because society has
augmented and assisted in ways that the definition that we
started with wouldn't allow, and it is easier to change an IRS
ruling than it is to figure out what your new mission is, and
that is why we are here. I appreciate the gentlewoman's
yielding.
Mr. EVERSON. If I could take just a very brief moment, sir.
I don't disagree with your analysis of the history. The only
point I was trying to make about my remark about unintended
consequences is that this right now, I don't want to risk
drawing Mark into this, but in reading his testimony--I will
just read you one or two sentences which I think get to the nub
of this. It says hospitals, not the Federal government, set
their own indigency policies and have the discretion and
flexibility to define eligibility indicators, including income
level. This makes sense, because a hospital as a community
institution is in the best position to know what policy best
suits the community that it serves. The only point I am trying
to raise is that, go ahead, we will implement whatever you put
in there, but recognize you are going to be having an impact on
communities that may be at variance----
Chairman THOMAS. All I ask you to do is recognize the fact
that in making IRS rulings you made health policy and you put
us in this position.
Mr. EVERSON. I don't quibble with that, sir.
Chairman THOMAS. I thank the gentlewoman and recognize her
for her time.
Mrs. JOHNSON. Mr. Everson, thank you. I think it is
important to know what we are paying for and where our money is
going. I think it is also extraordinarily important that we
begin to understand the unsustainable costs that are going to
be on the shoulders of our children in the future. So, I don't
oppose this hearing. I do believe that we are not yet able to
talk to ourselves honestly about this issue, and so I want to
put a word of caution out there. First of all, the three of you
sitting at the table, if you wanted to, could agree on a single
report that all hospitals made available within 6 months of the
close of business of the fiscal year. Every hospital in my
State provides an audited statement within 6 months from which
we can talk about their fiscal state, who they are serving,
what kind of job they are doing and so on. So, the load of
paperwork, the difference between the IRS forms, the Medicare
forms, the State forms, it is ludicrous. This Committee asked
for reports to help us get to a single document. None of those
reports were useful, I might add. This is imperative. Second,
we have no uniform definition of what uncompensated care is,
what charitable care is, what even bad debt is. So, we cannot
talk to ourselves honestly about whether the costs of the
nonprofit in these areas are equal to the cost of the for-
profit. Any guesstimates we hear in testimony are just that,
guesstimates. Even in Connecticut there is no consistent
definition. So, we have to be cautious, because we don't
actually know what we are talking about.
Now, we also don't actually know what we are talking about
because we have been regulating Medicare, the biggest health
care system, on average for years. For 3 years, I have been
trying to get a better look at negative margin hospitals. We
don't know whether negative margin hospitals are mismanaged or
whether they just have a lot of uncompensated care, a lot of
injuries, they are inner city or whatever. We do not know why
they are negative margin. We can have gross things like
occupancy rate. We have some other gross things. We know small
hospitals in rural areas, we not only have to pay the Medicare
rate, we have to pay cost. So, you know, we know very little.
You mentioned, Mr. Walker, that government hospitals, in a
sense you get the best return because of the most uncompensated
care. Where there are no government hospitals in those whole
regions of the country, the nonprofits are carrying that. Do we
distinguish between those nonprofits who have that kind of
burden in their emergency room and other nonprofits? No, we
don't. We are experiencing an explosion of construction of
hospitals. They happen to be outside of our tax-regulated body.
Do we look at whether there is a need for those? Do we look at
whether they are carrying their share of uncompensated costs?
Do we look at what the future sustainability of health care
costs will be?
One of the reports that one of the government agencies gave
my Committee said there was no impact of the new specialty
hospitals on the existing community hospitals. But when you
actually talk to the community hospitals, they negotiated
higher reimbursement of managed care costs, managed care
contracts. So, overall, national health care costs will rise.
Now, that is not an impact? No, it didn't impact the Medicare
margin, which is what we looked at. How myopic can you be? Now,
let me just point out that the taxes the for-profits pay, which
I respect, but they go to government's ability to provide
public education, national defense, roads and bridges, so on
and so forth. The tax benefit that we provide goes directly to
health care access in that community. When my friend, Mr.
McNulty, talks about Albany, we could all talk about hospitals
that have to be open 24 hours a day, 7 days a week, and not
just provide emergency care, we all know that is a loser, or
trauma care, that is a loser, or neonatal units, that is a
loser. They have to be able to provide the most sophisticated
care and every single type of care, and that is not reflected
in our public analysis of uncompensated care or anything else,
maybe a little bit in overhead, but you see, that 24 hour/7
across all medical disciplines is the real mission. That is the
real community benefit. The real community benefit is not
whether or not you take more or less uninsured cases. They all
have to do that.
In my area, the hospitals do--the not-for-profits, because
we don't have any for-profits, do take more than their share. I
think we have to know more about mission. It isn't just people
who don't have insurance. We don't take into account whether
you are in a State where there is a low Medicaid reimbursement
rate or a generous Medicaid reimbursement rate. So, we really
have to think about what is that community mission that not-
for-profit community hospitals fulfill, and when we are able to
analyze the cost of that, which we have not done, then we will
have a better grasp of whether or not the tax benefit that
flows directly to health, in the case of nonprofits, is worth
it. We will be able to see what happens to the tax benefit of
taxpaying entities in terms of their impact on health. I would
just note--and I know the Chairman is trying to cut me off
here, and I don't blame him but----
Chairman THOMAS. The gentlewoman's 5 minutes has expired.
We have a few minutes left on the vote.
Mrs. JOHNSON. I do think we have to look at this issue of
mission. What do we know about it? What can we analyze about
it? We have to look at the issue of the accuracy and
inaccuracy, really gross inaccuracy, of our database at this
time. We have to work on those things so that in the end we can
have the right policy and then decide how much of it should be
tax incentivized and how much of it should be tax collected.
Thank you, Mr. Chairman.
Chairman THOMAS. I thank the Chairwoman for her statement.
Had that been the function in the sixties as the government's
role of paying at the Federal level for the elderly and the
poor, you would have not have had the lobbying of the IRS for a
new ruling to change the definition of tax exempt. You would
have changed the mission of those hospitals that provided care
for which they got tax exemption. That is primarily the reason
we are here today.The Committee will stand in recess for 15 or
20 minutes or so. I appreciate you folks staying for the other
members to inquire.
[Recess.]
Chairman THOMAS. The Committee will reconvene. Our guests
will find seats, and the Chair would recognize the gentleman
from Florida, Mr. Shaw.
Mr. SHAW. Thank you. Thank you, Mr. Chairperson. I
congratulate you for really opening up a bucket of worms here.
I thought I knew what a nonprofit hospital was until I started
listening this morning, and now I am convinced that nobody
really has a good definition that is going to satisfy us and we
are going to have to kind of work our way through it.Mr.
Everson, I have got a couple of questions I would like to ask
you, and I would invite the other two panelists to respond if
they feel that they have something to contribute. Would you
just give us a short definition of community service or
community benefit?
Mr. EVERSON. The community----
Mr. SHAW. Define what the community is.
Mr. EVERSON. The standards--we have really listed five
factors that are in that community benefit standard. One is the
nature of the control. As the Chairman indicated, having a
community board, in that case a truly independent board that is
making decisions on behalf of the community.
Mr. SHAW. Is that a requirement?
Mr. EVERSON. What we have is, we have a series of factors.
They are not gauged per se, like the emergency room that was
mentioned. That is another factor that is available to all.
Some hospitals might have a burn unit or something that is very
worthwhile instead of an emergency room, so it is not an
absolute. The second factor is these emergency rooms. A lot of
the for-profit hospitals grew out of practice groups of
doctors. For a not-for-profit, a consideration is whether any
doctor from the community who is qualified can participate at
the hospital. Acceptance of the Federal payment programs,
Medicare, Medicaid; and then finally how the institution uses
the earnings. Do they plow the earnings back into more care or
is it going to the benefit of individuals? For a profit making
business, of course, it goes to investors. Those are the five
general factors. What happens is we have a questionnaire where
we ask as someone is applying--about 100 hospitals apply for
exemption each year. We consider these factors, and if there is
a no answer, say, on the emergency room, then we say why, what
else do you have? They are considered as a whole.
Chairman THOMAS. Will the gentleman yield briefly?
Mr. SHAW. Yes, I will be glad to yield.
Chairman THOMAS. You indicated one of the indices, the five
that you mentioned, was that they plow money back in for more
care. That was an example that you gave. In fact, isn't it true
there is no requirement that that money go for care, that they
just can't show a profit and it can't inure to any individual?
So, I wouldn't want us to leave the assumption that they take
this money and reinvest it to provide better care. That is not
a requirement to retain your----
Mr. EVERSON. Fair enough. What I meant is--what you are
talking about, the equipment and using it in a broad sense.
Chairman THOMAS. I understand. I understand. But when you
do that, you are giving a justification as to why they are
getting the tax exempt status, which isn't actually a criteria
they need to meet. Now, if that were a criteria, then we could
judge whether or not the amount of money ploughed back in and
the care received is commensurate with the benefit they get.
Those are the kinds of measuring tools we need to look at. I
just want to make sure that people understood that your example
was, in fact, not reality.
Mr. SHAW. Commissioner, it would be helpful if we could
have a copy of that questionnaire.
Mr. EVERSON. Absolutely, sir.
[The information follows:]
_______________________________________________________________________
Form 1023 (Rev. 10-2004) Name: EIN:
Page 16
_______________________________________________________________________
Schedule C. Hospitals and Medical Research Organizations
_______________________________________________________________________
Check the box if you are a hospital. See the instructions for a
definition of the term ``hospital,'' which includes an
organization whose principal purpose or function is providing
hospital or medical care. Complete Section I below.
Check the box if you are a medical research organization
operated in conjunction with a hospital. See the instructions
for a definition of the term ``medical research organization,''
which refers to an organization whose principal purpose or
function is medical research and which is directly engaged in
the continuous active conduct of medical research in
conjunction with a hospital. Complete Section II.
_______________________________________________________________________
Section I Hospitals
_______________________________________________________________________
1a Are all the doctors in the community eligible for staff
privileges? If ``No'', give the reasons why and explain how the
medical staff is selected.
Yes
No
_______________________________________________________________________
2a Do you or will you provide medical services to all
individuals in your community who can pay for themselves or
have private health insurance? If ``No'', explain.
Yes
No
b Do you or will you provide medical services to all
individuals in your community who participate in Medicare? If
``No,'' explain.
Yes
No
c Do you or will you provide medical services to all
individuals in your community who participate in Medicaid? If
``No,'' explain.
Yes
No
_______________________________________________________________________
3a Do you or will you require persons covered by Medicare or
Medicaid to pay a deposit before receiving services? If
``Yes,'' explain.
Yes
No
b Does the same deposit requirement, if any, apply to all other
patients? If ``No,'' explain.
Yes
No
_______________________________________________________________________
4a Do you or will you maintain a full-time emergency room? If
``No,'' explain why you do not maintain a full-time emergency
room. Also, describe any emergency services that you provide.
Yes
No
b Do you have a policy on providing emergency services to
persons without apparent means to pay? If ``Yes,'' provide a
copy of the policy.
Yes
No
c Do you have any arrangements with police, fire, and voluntary
ambulance services for the delivery or admission of emergency
cases? If ``Yes,'' describe the arrangements, including whether
they are written or oral agreements. If written, submit copies
of all such agreements.
Yes
No
_______________________________________________________________________
5a Do you provide for a portion of services and facilities to
be used for charity patients? If ``Yes,'' answer 5b through 5e.
Yes
No
b Explain your policy regarding charity cases, including how
you distinguish between charity care and bad debts. Submit a
copy of your written policy.
c Provide data on your past experience in admitting charity
patients, including amounts you expend for treating charity
care patients and types of services you provide to charity care
patients.
d Describe any arrangements you have with Federal, state, or
local governments or government agencies for paying for the
cost of treating charity care patients. Submit copies of any
written agreements.
e Do you provide services on a sliding fee schedule depending
on financial ability to pay? If ``Yes,'' submit your sliding
fee schedule.
Yes
No
_______________________________________________________________________
6a Do you or will you carry on a formal program of medical
training or medical research? If ``Yes,'' describe such
programs, including the type of programs offered, the scope of
such programs, and affiliations with other hospitals or medical
care providers with which you carry on the medical training or
research programs.
Yes
No
b Do you or will you carry on a formal program of community
education? If ``Yes,'' describe such programs, including the
type of programs offered, the scope of such programs, and
affiliation with other hospitals or medical care providers with
which you offer community education programs.
Yes
No
_______________________________________________________________________
7 Do you or will you provide office space to physicians
carrying on their own medical practices? If ``Yes,'' describe
the criteria for who may use the space explain the means used
to determine that you are paid at least fair market value, and
submit representative lease agreements.
Yes
No
_______________________________________________________________________
8 Is your board of directors comprised of a majority of
individuals who are representative of the community you serve?
Include a list of each board member's name and business,
financial, or professional relationship with the hospital.
Also, identify each board member who is representative of the
community and describe how that individual is a community
representative.
Yes
No
_______________________________________________________________________
9 Do you participate in any joint ventures? If ``Yes,'' state
your ownership percentage in each joint venture, list your
investment in each joint venture, describe the tax status of
other participants in each joint venture (including whether
they are section 501(c)(3) organizations), describe the
activities of each joint venture, describe how you exercise
control over the activities of each joint venture, and describe
how each joint venture furthers your exempt purposes. Also,
submit copies of all agreements.
Note. Make sure your answer is consistent with the information
provided in Part VIII, line 8.
Yes
No
_______________________________________________________________________
Page 17
_______________________________________________________________________
10 Do you or will you manage your activities or facilities
through your own employees or volunteers? If ``No,'' attach a
statement describing the activities that will be managed by
others, the names of the persons or organizations that manage
or will manage your activities or facilities, and how these
managers were or will be selected. Also, submit copies of any
contract, proposed contracts, or other agreements regarding the
provision of management services for your activities or
facilities. Explain how the terms of any contracts or other
agreements were or will be negotiated, and explain how you
determine you will pay no more than fair market value for
services.
Note. Answer ``Yes'' if you do manage or intend to manage your
programs through your own employees or by using volunteers.
Answer ``No'' if you engage or intend to engage a separate
organization or independent contractor. Make sure your answer
is consistent with the information provided in Part VIII, line
7b.
Yes
No
_______________________________________________________________________
11 Do you or will you offer recruitment incentives to
physicians? If ``Yes,'', describe your recruitment incentives
and attach copies of all written recruitment incentive
policies.
Yes
No
_______________________________________________________________________
12 Do you or will you lease equipment, assets, or office space
from physicians who have a financial or professional
relationship with you? If ``Yes,'' explain how you establish a
fair market value for the lease.
Yes
No
_______________________________________________________________________
13 Have you purchased medical practices, ambulatory surgery
centers, or other business from physicians or other persons
with whom you have a business relationship, aside from the
purchase? If ``Yes,'' submit a copy of each purchase and sales
contract and describe how you arrived at fair market value,
including copies of appraisals.
Yes
No
_______________________________________________________________________
14 Have you adopted a conflict of interest policy consistent
with the sample health care organization conflict of interest
policy in Appendix A of the instructions? If ``Yes,'' submit a
copy the policy and explain how the policy has been adopted,
such as by resolution of your governing board. If ``No,''
explain how you will avoid any conflicts of interests in your
business dealings.
Yes
No
_______________________________________________________________________
Section II Medical Research Organizations
Q04____________________________________________________________________
1 Name the hospitals with which you have a relationship and
describe the relationship. Attach copies of written agreements
with each hospital that demonstrate continuing relationships
between you and the hospital(s).
_______________________________________________________________________
2 Attach a schedule describing your present and proposed
activities for the direct conduct of medical research; describe
the nature of the activities, and the amount of money that has
been or will be spent in carrying them out.
_______________________________________________________________________
3 Attach a schedule of assets showing their fair market value
and the portion of your assets directly devoted to medical
research.
_______________________________________________________________________
Form 1023
(Rev. 10-2004)
Mr. SHAW. That may put some light on what we are trying to
accomplish here today. Is research one of questions on there?
Mr. EVERSON. Research can be a factor, because you have
teaching hospitals. Obviously, that is not activity necessarily
that is engaged in by all hospitals in some of the smaller
communities, but that could be something that we would
consider, as an example, favorably where they might fall short
in some other area.
Mr. SHAW. I am concerned about one part of your testimony.
I think it was you, maybe one of the other witnesses also
mentioned it. It is a question--I think maybe Mr. Walker
mentioned it--a question of these nonprofit hospitals, when
they see a chance for a profit jettison out a new corporation
of which then would be for profit. That would keep the cost of
the non--or put the costs over there or somehow they we would
jimmy their books so they could get the most favorable tax
treatment and still make a profit. Now, that is of great
concern to me, and I think that is something that this
Committee is going to really have to focus hard on.
Mr. EVERSON. Yes, sir. I was going to mention that. These
joint ventures, which can be quite large in scale, our concern
is--and what we do is, we try to work it from both sides. We
see something that concerns us on the not-for-profit
examination, we will look over to the profit making corporation
as well and marry up our audit teams. It is just like in the
corporate world where you have a lot of concerns about
shelters, of course, it is the same sort of set of issues.
Mr. SHAW. Now, community can be the entire country,
couldn't it, as well as a small community in which we, you
know, think about just community health care, but actually when
you think of some of these specialized hospitals, as some of
these large cancer centers, which I have a great deal of
concern about, their community is much broader than just the
local community.
Mr. EVERSON. Absolutely, Congressman. I was looking at this
last night. Look at Shriners. Shriners, as an example, has 7
billion--over $7 billion in assets and operates 22 hospitals.
Most of the work they are doing, I think, is without
compensation at all. They are getting a couple hundred million
in contributions, but they are operating off of a large
endowment, and it is a large organization that has a governing
structure at the top. I don't know the details on a hospital-
by-hospital basis, but they are running a national program.
Yes, sir.
Mr. SHAW. Their home is in Tampa, but their community is
all the way across this country.
Mr. EVERSON. Absolutely, and I think they even have one
facility in Mexico.
Mr. SHAW. They are doing some good work, and a lot of these
people are doing some wonderful work. Just one other quick
question, if the Chairman would just indulge me for another
minute, one of the things that concerned me about hospitals is
everybody I think on this Committee has insurance. Our
insurance companies will go and negotiate down on fees and
hospital costs. The noninsured, their bill will be double what
our insurance company would pay. I think that is a little
concerning, particularly when you get into a situation where
you find that it is usually the poor or the lower economic rung
of people who are getting really stung with those big bills,
and we are also seeing a great deal of bankruptcies coming out
of that. Is that looked at when you do your audits or trying to
figure out whether a hospital is actually performing a
community service?
Mr. EVERSON. I would want to check as to how--what level of
detail we would get into on a specific question like debt
forgiveness or other areas before answering that. I think that
would be a factor.
Mr. SHAW. There is a lot of people who don't qualify for
Medicaid but can get wiped out with large hospital bills.
Mr. EVERSON. Of course. Yes, sir.
Mr. SHAW. Mr. Walker?
Mr. WALKER. Mr. Shaw, one of the reasons that we reported
based upon operating costs was exactly because of the issue you
talked about. The irony is that individuals who do not have
insurance many times are charged quite a bit more money than
individuals who do have insurance, because they don't have the
benefit of the contractual arrangements that have been
negotiated. Therefore there would be higher writeoffs.
Therefore, our data is based upon the cost side in order to
recognize that reality. The matter you noted is of increasing
concern.
Mr. EVERSON. Mr. Walker has helped me here, because I have
got the questionnaire, I have now looked at our form. One of
the questions is, do you provide services on a sliding fee
schedule depending on financial ability to pay? So, that is in
there. This is the application for exemption. I would imagine
the audits follow this fairly closely.
Mr. SHAW. Thank you.
Chairman THOMAS. Thank you, gentlemen. The gentleman from
California, Mr. Stark, wish to inquire?
Mr. STARK. Thank you, Mr. Chairman. I heard in passing a
previous reference by Mr. Walker, in answer to somebody else's
question, that he mentioned in his answer that he thought
profit and for-profit hospitals were of equal quality. Mark,
you cite your own personal research in your testimony. One
could interpret that research--although I gather it was limited
in that case to cardiac--that you thought that for-profit and
not-for-profit hospitals were the same quality. Now--and I am
prejudiced. I just don't think that is so, and I don't think
there is any, absolutely any statistics that will support that.
But, I know, Mark, that you are intimately familiar with
Stanford and Brigham and Women's. Would it surprise you that
U.S. News consistently has them in the top dozen hospitals in
the country?
Mr. MCCLELLAN. Not at all. Not because of my association
there.
Mr. STARK. That is what I thought it was. Can you name one
for-profit hospital that--what anybody would rank in the top 10
of anybody's list of----
Mr. MCCLELLAN. Congressman, we don't do rankings.
Mr. STARK. No. No. Your knowledge. We asked Donald Relman
this in testimony some years ago in Rhode Island. In response
to that question, he said there isn't one premier hospital in
the United States that is for-profit. Would you disagree with--
--
Mr. MCCLELLAN. I think one of the main findings from our
research is that there are a lot of hospitals that are very
good in terms of quality and in terms of efficiency that are
nonprofit, but also some that are for-profit. There is a lot of
variation in the quality out there.
Mr. STARK. Name three for-profit hospitals that you think
are any good.
Mr. MCCLELLAN. Well, I am not going to name names in my
current job.
Mr. STARK. Let us do it this way then. Would it surprise
you that HCA, Tenet, Triad, together over 400 hospitals, which
is half of the for-profits? Would it surprise you further that
HCA has probably been under indictment a dozen times and that
Tenet Hospital killed 167 cardiac patients in Redding,
California, and is either under indictment or should be, and
the executive of Tenet should be charged with murder?
Mr. MCCLELLAN. I know there are investigations ongoing.
Mr. STARK. Now, and that is not to say that some for-profit
hospitals haven't--not-for-profit hospitals haven't snitched a
little. University of Pennsylvania, Stanford as a matter of
fact got caught overcharging the Federal government. But
nonetheless, can you make the case or would you say that you
think for-profit hospitals come anywhere close to being in the
top tier of hospital quality in the country?
Mr. MCCLELLAN. There are a lot of aspects of quality. For
some of the ones that we looked at for the delivery of care to
individual patients, they have good or better outcomes----
Mr. STARK. Let me ask you this way----
Mr. MCCLELLAN. --and lower cost.
Mr. STARK. You have a new quality data that you are
collecting. In this quality data that you are currently
collecting, would we be able to rank hospitals or tell us how
many for-profit hospitals will be getting the bonus and how
many not-for-profit or are you----
Mr. MCCLELLAN. That is exactly why we are doing more of the
quality rating. As you know, putting this information out there
is a good way to increase transparency about exactly what we
are getting for what we are paying and to help patients and
doctors make better choices.
Mr. STARK. Although you went on to MIT and got a Ph.D. and
I flunked out, so I will defer to you. What did you learn when
you were getting your economics doctorate that would suggest
that anything in a for-profit structure in the delivery of
medical care improves it?
Mr. MCCLELLAN. Well, just to give you one example, they
have been seen in some of these research studies to be more
responsive. If the population in an area goes down, they are
more likely to close beds faster----
Mr. STARK. Does that improve medical care?
Mr. MCCLELLAN. Well, it reduces cost and it enables the
focus----
Mr. STARK. Does reducing cost necessarily provide better
quality medical care?
Mr. MCCLELLAN. If they can shift the resources to patients'
care that can really make a difference, such as to outpatient
care, or to new ways of delivering care.
Mr. STARK. Give me an example of--let us suggest one of the
things you learned, I am sure, in your economics study, that
for a free market to operate there has to be good information.
Mr. MCCLELLAN. Absolutely.
Mr. STARK. Do you think patients in general have any way
that they can as individuals select a hospital? Do patients
have any way of knowing, individually, other than reading U.S.
News and World Reports?
Mr. MCCLELLAN. Many patients get advice from physicians----
Mr. STARK. Bingo.
Mr. MCCLELLAN. --who are experts in the community.
Mr. STARK. They are the only ones who can decide. Now what
about the cost of capital? What did you learn about the cost of
capital at MIT? What is the most expensive form of capital?
Mr. MCCLELLAN. I am not quite sure what you are----
Mr. STARK. Well, wouldn't you suggest that equity is the
most expensive form of capital for an enterprise?
Mr. MCCLELLAN. Well, it depends on the risks associated
with the enterprise. There are a lot of factors that determine
the cost of capital.
Mr. STARK. I think you better go back. Would you suggest
the cheapest form of capital is, what, for an enterprise? Debt,
right?
Mr. MCCLELLAN. Congressman, it depends on the debt, the
interest rates that can be obtained. It depends on a lot of
specific characteristics of the financing----
Mr. STARK. Mr. Chairman, I know why I flunked out. I didn't
have enough vague answers to go through MIT's economic issues.
Chairman THOMAS. The Chair sympathizes with the gentleman
from California, because the witness simply won't provide the
answer he is looking for, and I understand the difficulty when
they don't respond the way you want them to. That is one of the
dangers of actually asking questions, and I understand the
gentleman's frustration.
Mr. STARK. Well, I would just close and ask Dr. Walker, if
you have any information? I know you have done some studies on
JACO recently, which we appreciate, but do you have any studies
at GAO that would indicate that for-profits hospitals are equal
in quality than not-for-profit?
Mr. WALKER. Mr. Stark, we have not done that work. There is
nothing in my testimony that would say that, nor is there
anything that I have said today that would reflect one way or
the other on that issue.
Mr. STARK. Do you have any estimate on--if we did tax
hospitals any idea how much revenue we could raise? Do you have
any statistics along that line?
Mr. WALKER. I don't. It is something where additional
research is needed. I would respectfully suggest it wouldn't
just be the issue of the tax exempt status. You would also have
to look at the fact that individuals who are able to make
contributions to these entities get a tax deduction. There are
a variety of issues that would have to be considered.
Mr. STARK. Bingo. Right. I guess it would be, Mr. Everson
and I were talking before, foundations could no longer
contribute to for-profit, the way NABKC or Robert Wood Johnson
could contribute to Harvard or to Stanford to help Dr.
McClellan.
Mr. EVERSON. There would be many effects. You have got tax
exempt bond offerings, you have got the property taxes. There
are a host of effects that if you really want to look at that
have broad ramifications.
Mr. STARK. I would just close, Mr. Chairman, and say it
would be so easy, I believe, between Joint Tax and GAO, to
what, less than 6,000 hospitals, for us to get a compendium,
without identifying any particular hospital, and say let us
just add it up. I don't think it would take 3 months, honestly,
to get some figures in terms of how much debt is out there, and
get an idea just in the aggregate of what we are talking about.
I mean we know generally, but I think we could get very
specific. I don't know that we could identify the uncompensated
care. We could start with a broad database that would help us
in future hearings. I would urge the Chair, as a result of
these hearings, to see if he wouldn't ask, I would like to join
him in requesting that kind of a study if he would. Thank you,
Mr. Chairman.
Chairman THOMAS. I thank the gentleman, and the Chair
agrees, because notwithstanding the imprecision, a ballpark
figure, at least in broad generalities, begins to guide us in
terms of where it makes sense to make policy and get a return
on that investment. The Chair awaits the next IRS ruling which
will redefine health policy as we move forward. The gentleman
from California wish to inquire?
Mr. HERGER. Yes. Thank you, Mr. Chairman. Commissioner
Everson, could you tell me how many times in the last 10 years
the IRS has revoked the tax exempt status of a hospital?
Mr. EVERSON. It is extremely limited, sir, it is fewer than
10 times. It is a true rarity. My understanding is that in
general, if we see problems, what we try to do is work them out
because, as you can imagine, this is a very serious step that
could have real ramifications on a community. As I mentioned at
the top in my oral statement, one of the things that we are
interested in is getting better intermediary sanctions here so
that you don't just have a de minimis penalty or that very
strong option. That is something I would ask the Committee to
think about as we go forward.
Mr. HERGER. Because of the concern for that revocation of
status was a punishment not likely to be used, in 1996,
Congress gave the IRS the ability to impose intermediate
sanctions on nonprofits. Could you tell me how often have
intermediate sanctions been imposed on tax exempt hospitals and
for what types of infractions?
Mr. EVERSON. They are being used--I don't think they are
particularly common. My understanding, if you look at the
compensation issue as an example, what happens is we can impose
a 25 percent tax on the individual if the compensation for that
officer is deemed to be out of line with commercial practices.
That is the tough part of this, making the judgment. Is a
hospital director being overpaid vis-a-vis the commercial or
other standard? There could be a lot of argument about that,
but I would hasten to say there is no impact on the
institution. In talking to my people, that may attach to the
individual when it is invoked, which is rare, but there is no
impact on the organization.
Mr. HERGER. When the IRS testified before this Committee 14
years ago about the standards of hospital tax exemption, the
audit rate for nonprofit hospitals was 1.5 percent. What is the
rate today? Given IRS resources, is there any prospect that
rate will significantly increase?
Mr. EVERSON. That rate is about a third of what it was, and
it is about a half a percent, which is a low rate in line with
other exempt organizations. If you look at my written
testimony, you will see a continuing decline over the years,
recent years, in the number of revenue agents, people who do
these audits. We are bringing them back now. We have been
increasing enforcement more broadly at the IRS during the last
several years. The administration has requested additional
funding to do that. I don't think we are doing enough in this
area and across exempt organizations. What I indicate at the
top is that this year, though, we only got a half a percent
increase for the whole budget of the agency. That obviously
doesn't even cover inflation. We are making a 20 percent
increase in our audit count, number of auditors for exempt
organizations, because we think it is such a serious problem.
Mr. HERGER. Thank you very much. Thank you, Mr. Chairman.
Chairman THOMAS. Thank the gentleman. Gentleman from
Michigan wish to inquire?
Mr. LEVIN. There is no disagreement about the need to get
at abuse. None at all. I will give you my reaction to the
hearing so far and to the back and forth between the Chairman
and the Ranking Member and Mr. Stark and others. This is an
issue that cries out for true collegial, bipartisan discussion,
to talk about what the problem is, to talk about how a hearing
is shaped, and where we go after that. What has been I think
the typical pattern doesn't work for this kind of a problem,
and everybody is wondering why we are here. It isn't because we
don't care about abuse. We do, very much so. It raises all
kinds of reactions. It would be much better if we could sit
down, well in advance, and discuss collegially, as I said, in a
bipartisan basis, is there a problem, what is it? Where do we
go? Let me just ask you quickly. As I understand it,
nonprofits, the assets cannot go for private benefit, right?
Right?
Mr. EVERSON. Yes, sir.
Mr. LEVIN. Also this emergency requirement applies across
the board, right, to all tax exempt hospitals, right?
Mr. EVERSON. It is a factor. As I have indicated, it is a
factor in our consideration of the application for exemption,
yes, sir.
Mr. LEVIN. For all hospitals, for all not profits?
Mr. EVERSON. For all the hospitals we ask that question. If
the answer is no, and I will read you the question. It says----
Mr. LEVIN. Anyway, you ask the question of everybody?
Mr. EVERSON. Yes. Yes, sir.
Mr. LEVIN. They have to say--if they say no----
Mr. EVERSON. If they say no, then we say what other things
are you doing that entitles you to an exemption?
Mr. LEVIN. Okay. Let me just talk to you about oversight,
because I am deeply concerned with your answer so far. You talk
about the number of returns that are audited. I take it they
are the 990 returns?
Mr. EVERSON. Yes, sir.
Mr. LEVIN. As I understand it in terms of oversight you
have mainly been looking when there is an abuse, a tax shelter,
something like that. How much oversight have you been doing all
these years as to whether nonprofits are undertaking community
work? How much of that has there been by the IRS?
Mr. EVERSON. I don't think there has been enough.
Mr. LEVIN. When has there been?
Mr. EVERSON. The rate of inquiry has declined steadily over
the years, and we are now starting to bring that back.
Mr. LEVIN. The rate of inquiry as to the nature of the
activities or as to tax shelters or compensation?
Mr. EVERSON. It is the combination of factors. We would
address this issue that you are raising in an audit, or in the
front end process of the exemption application. We get about a
hundred applications each year from hospitals for exemption.
Mr. LEVIN. That is new. I would like you to send to us
within the rules of, the appropriate rules, an indication as to
the last 10 years what inquiry there has been that relates to
the basic activities of nonprofits and profits, not just the
issue of tax shelters, you know, kind of the typical IRS stuff,
but relating to this basic issue as to whether nonprofits have
been pursuing their purpose. I would like you to send that,
because my guess is we are going to find that there has been a
huge, huge gap, and so all we are doing here is conjecturing
and everything is ad hoc, is anecdotal at best. For example, is
any major nonprofit hospital--have you found any major
nonprofit that was overcompensating their executives?
Mr. EVERSON. I believe we have. I think we have revoked the
exemptions in one or two instances. Some of them are actually
in court now.
Mr. LEVIN. So, it has been one or two, and I would like to
know which ones, because it is so easy to take out after
hospitals, after the nonprofits. I don't think we really know
what we are talking about, to put it in simple English. I think
your testimony and your warning to us about where we go from
here and being careful about unintended consequences is so
cogent. So, I would hope, Mr. Chairman, Mr. Stark threw out a
suggestion to you that we now go back and sit down and talk
about what is the problem, how do we get all the data, which we
don't have, and where do we go from here? Thank you.
Chairman THOMAS. The Chair appreciates any and all
assistance in trying to begin to look at this in a disciplined
way. The Chair would be very anxious to see--as that
information that the gentleman from Michigan requested, the
Chair would be curious that in creating the specific revenue
rulings and the modification of those revenue rulings to what
extent you reached out to health care experts inside the
government, or not, in redefining those particular rules to
make sure that they were in fact health care oriented and
addressed the changing nature of health care delivery vis-a-vis
statutes and competition. The gentleman from Louisiana wish to
inquire?
Mr. MCCRERY. Thank you, Mr. Chairman. As to why we are
having this hearing, it should be obvious why we are having
this hearing. We are beginning the examination of tax exempt
entities. Today's hearing is on hospitals, which do represent
the largest segment of tax exempt entities. As far as I know,
there is no bill that has been filed by anyone in Congress to
revoke the tax exempt status of hospitals. I certainly don't
have that intention sitting here today, and I don't know of
anyone on this Committee, including the Chairman of the full
Committee, that has that intention. I do I think it is
incumbent upon this Committee, it is our obligation, to
occasionally review tax exempt entities, tax breaks of all
sorts that we give to see if the original rationale for giving
those tax breaks still exists. That is the purpose of this
hearing. Should we have more? Perhaps. Should we gather more
data? Probably. That doesn't mean we shouldn't be having this
hearing today. So, I am glad we are having the hearing. I
really appreciate this first panel and the expertise that you
bring, and I also want to thank each of you for agreeing to
serve the public. You are each outstanding individuals in terms
of your background, your education, and for you to offer
yourselves for public service is a testament to the greatness
of this country. So, thank you. One thing that I am curious
about is this bad debt and uncompensated care, and any of you
may wish to address this. What is the difference between
uncompensated care and bad debt? Or are they the same in most
instances? Or is there any difference? Dr. McClellan.
Mr. MCCLELLAN. Congressman, the hospitals may set policies
to provide care for indigent patients for whom they know they
are not going to be compensated. We would encourage hospitals
to have a written policy and base it on characteristics of the
patients that are associated with just not being able to pay
the bills. That is where uncompensated care should be targeted.
In addition to that, hospitals may also fail to collect
payments from patients who probably should have the ability to
pay the co-pays or the deductibles or who are wealthy enough
and don't have insurance to pay maybe even the whole cost of
their care. That is the bad debt. In our Medicare policies, we
try to make sure that we are not doing anything to stand in the
way of offering discounts to patients who need it, the indigent
patients, and at the same time are helping to support the
regular business practices that hospitals would use to collect
on their bad debt paying. So, it is the difference between
patients who can pay but don't and patients who cannot pay and
who need indigent help who receive truly uncompensated care.
Chairman THOMAS. Gentleman yield briefly on that? You might
leave the impression that in fact when a person in a bed in a
hospital fits that poverty structure on uncompensated care,
that a hospital would get the payment because of who is in the
bed. We know that is not true, correct? The money goes out even
though the person in the bed doesn't match the profile for
which the money is being given?
Mr. MCCLELLAN. Right. The additional payments that we do
provide are based on formulas. The hospitals can report on bad
debt that they try to collect but don't collect on Medicare
beneficiaries and we will pay that. We pay over a billion
dollars----
Chairman THOMAS. The only point I wanted to establish was
uncompensated care is supposed to pay for people in bed. There
are some hospitals who don't get uncompensated care, even
though they have those people in the beds. There are hospitals
who get that payment who don't have those people in the beds.
But that is another story.
Mr. MCCRERY. Commissioner Walker, I will let you answerin a
second. The DSH payments that Medicare and Medicaid pay, are
those related to uncompensated care, in any way? Dr. McClellan?
Mr. MCCLELLAN. For Medicare DSH payments are related to the
share of Medicare only patients that a hospital treats and the
share of SSI patients, and the idea is that that is related to
the burden of uncompensated care, as well as higher costs that
low income patients who do have coverage may have, but it is
not, as the Chairman said, directly related to the
uncompensated care that is actually provided, and it is not
compensated from other sources.
Mr. MCCRERY. In those two policies, DSH and bad debt
reimbursement, the government is in some way trying to
compensate hospitals for providing care to the indigent?
Mr. MCCLELLAN. That is certainly at least part of the goal.
Again, there may also be some cost differences for these lower
income patients who are covered by Medicare or Medicaid. As the
Chairman said, the formulas aren't directly based on the
uncompensated care provided. It is based on these other
measures that may be related to uncompensated care.
Mr. MCCRERY. Thank you, Mr. Chairman.
Chairman THOMAS. Thank you, gentlemen. Prior to calling on
the gentleman from Maryland, it is indicated that it isn't
absolutely essential that Dr. McClellan be at the witness
table, and I know that you have been beckoned based upon your
fundamental responsibilities back to the White House for some
meetings. So, the Committee wants to thank you. This is
probably a good time to bow out because I don't want anyone to
think that I asked you to leave because the gentleman from
Maryland is just beginning.
Mr. CARDIN. I don't want to give you an impression that we
didn't think that you were a very important witness.
Mr. MCCLELLAN. No offense taken. Thank you very much.
Chairman THOMAS. Bye. Gentleman from Maryland.
Mr. CARDIN. Thank you, Mr. Chairman, and I thank you for
this hearing, I found the testimony to be very, very helpful.
Mr. Walker, you raised a point that I think we need to explore
more in reviewing this subject, and that is that as we look at
the revenue that is affected by the direct status of a not-for-
profit hospital, that that might be a very small part of the
overall revenue impact if we were to remove the tax preference
status. You raised the issue of contributions that are made,
and being tax preferenced. We also have the State and local
government revenue impact, and I would at least put on the
table in another part of this, and that is that not-for-profit
hospitals have generally community support. That community
support comes in different ways. If it is a church affiliated
hospital, it might be one way. If it is a hospital that is in a
particular community and it is the only hospital that they
have, it might be in a different way, and it may affect the
type of support it has to carry out the mission related to the
community itself.
I am just wondering, you know, a not-for-profit hospital
does not have stockholders, it is the profits, to the extent
that they have profits, are put back into the hospital. As you
pointed out, they are not big profits that are being made,
whereas for-profit hospital it is more driven toward the
economics of the issue. So, I am just wondering whether we have
any information as to what impact we need to take a look at if
we removed the tax preference status as it relates to the
support from the community and the impact on State and local
government, not just the direct revenues to the Federal
treasury.
Mr. WALKER. Mr. Cardin, first I would say that I think this
is a legitimate subject to be examining. I would also agree
that more data is necessary in order to be able to get a fuller
picture of this particular sector and what the potential
implications are. If this Committee and the Congress decided
that you wanted to revisit what criteria should be considered
by the IRS in granting tax exempt status, what factors should
be used to evaluate not-for-profit hospitals, and what factors
should be considered in monitoring and periodically reporting
back to the Congress on them, we can help. We do need more
data. I think this is a perfect example of a major segment of
the Tax Code where more clarity is needed, where more data is
needed, and where more in oversight is needed.
Mr. CARDIN. Mr. Everson, in my community I have a lot of
faith-based hospitals that have direct relationships with
different religions. If the 501 status of the hospital was
removed, would it affect the ability of the charitable
institution to provide direct support to the hospital?
Mr. EVERSON. I think that is a question that the Congress
would have to address. There are contributions that are made to
States, people give moneys to States, they donate park lands or
other things all the time that don't necessarily--they aren't
precluded from doing so because of questions of tax exemption
or issues I think. So, I think you can address that up here. I
don't think it is something we would address.
Mr. CARDIN. Under current law, if it is a 501 organization,
would it be permitted to provide direct assistance to a
hospital that was not tax preferenced, not a 501 organization,
and still be able to maintain its status as a 501 organization?
Mr. EVERSON. The prohibitions in that area are not from
helping. It is from political, direct political intervention or
lobbying. I will just ask my colleague. There is nothing that
would preclude that, no. The prohibitions you have written into
law are more in this area, the political world, and I don't
think this would be interpreted as a political world.
Mr. CARDIN. One last question. Many of these hospitals have
foundations or have endowments. Would there be any additional
challenges if the tax status was different as it relates to
these endowments?
Mr. EVERSON. I think you would have to sort through that. I
think there may very well be.
Mr. CARDIN. I thank you. Mr. Chairman.
Chairman THOMAS. Gentlemen yield briefly before his time
expires. This is related to a point that I believe Mr. Everson
tried to bring up earlier, and perhaps some people aren't
aware, in terms of various organizations, type 1, type 2, and
type 3, and the ones that we are most interested in focusing on
are the type 3 supporting organizations that don't have to have
any affiliation with the particular entity, and in fact don't
even require the permission of the entity to contribute to it
and list it as one of the factors that they contribute to. This
area has exploded in the last few years. We are going to have
to look at what we mean by type 1, type 2, and especially type
3, and the relationships to what would otherwise be 501(c)(3)s
and other activities, private foundations vis-a-vis charitable
structures. This is all an area that is overdue for us to
examine in some detail, and as we do that you will begin to see
the cross ripple effect between the points that you are making
and the structures that are growing very rapidly, and we are
going to do that. The gentleman from Michigan wish to inquire?
Mr. CAMP. I do. Thank you, Mr. Chairman. Thank you for your
testimony today. I certainly understand why we are having this
hearing, and I do want to say that I think it is appropriate
that we look at the tax exempt nature of hospitals. I do want
to say that I have obviously heard from many hospitals in
Michigan. In my district we only have not-for-profit hospitals
in our State, and obviously they are very concerned about
continuing the tax exempt policy for hospitals. I have a large
rural district, and just the fact that they are there is a
challenge, and to keep hospitals providing health care in rural
communities is critical. I want to get back to this idea of
uncompensated care and the lack of data. Dr. McClellan said
that they really don't have the information to make the kinds
of comparisons that we need to make to answer the questions
raised by today's hearing, and yet they are mandated to make
certain payments to hospitals in recognition of that care. I
just wondered if you had any ideas, either of you, on how we
might get a better handle on that issue. I know I hear from my
hospitals that that is a growing item in terms of, you know,
the challenges that they face, and I wondered if we can somehow
standardize that or get better information on that. If you
would any thoughts, please.
Mr. WALKER. Mr. Camp, my understanding is that Mr.
McClellan may have been talking about the quality data. But
with regard to the cost data, let me explain briefly what we
did, which directly relates to your question, and Mr. McCrery's
question. You need to try to have a standard definition in
order to be able to have comparability. The definition that we
use for compensated care was a sum of a hospital's charity care
and bad debt costs as it related to the cost of providing the
services, not what was actually billed. That is my
understanding. The definition that we used is consistent with
what the AHA uses, as well as the Federation of American
Hospitals. It is generally agreed that it is better to do it
that way, in part for the reason that Mr. Shaw mentioned
before, namely that the billing rates vary dramatically and,
ironically, sometimes people who are uninsured get billed a lot
more money than people who are insured because they are not
covered by a preferred provider arrangement or some type of
managed care arrangement where there has been some type of
negotiated cost. So, I think, at least as it relates to
uncompensated care, I think the approach that we have used in
reporting today in our testimony is pretty generally accepted
and reasonable. The question is where do we not have enough
data? We don't have enough data on quality. We don't have
enough data on tax expenditures and tax benefits, and these are
areas where I think we need more data.
Mr. CAMP. Any quick comment?
Mr. EVERSON. I don't have any particular observation on
this, sir.
Mr. CAMP. The other comment that he made was that, you
know, it is really not ownership, and this is on the
performance or quality side. It really isn't the type of
ownership that determines hospital performance, but it is
really other hospital specific factors. Is that something that
you would agree with, Mr. Walker?
Mr. WALKER. Well, I would say that there are a number of
factors, but one of the things you have to keep in mind is to
the extent that you are a for-profit entity, your governance
model and your accountability mechanisms are likely to be a lot
more stringent and rigorous than otherwise might be the case if
you are a not-for-profit entity for a variety of reasons.
Mr. CAMP. I am just referring--and I mentioned briefly the
geography aspect of it. It seems to me a lot of this depends on
where the hospital is and what sort of patient population they
are serving, much more than the structure that they are
organized under. I just wanted your thoughts on that.
Mr. WALKER. Absolutely. Some of the things that Mrs.
Johnson said before I would wholeheartedly agree with. The fact
of the matter is where is the facility? What type of services
is it providing? To whom is it providing it? I think there are
a variety of factors that are legitimate to be considered in
determining whether or not a not-for-profit status or tax-
favored status should be conferred. I would expect that a vast
majority of the entities out there probably meet whatever
criteria you come up with. However, the mere absence of clearly
defined criteria means you can't consistently apply it, which
by definition means that you also can't hold people accountable
over time.
Mr. CAMP. All right. Thank you very much. Thank you, Mr.
Chairman.
Chairman THOMAS. Thank the gentleman. Gentlemen from
Washington wish to inquire?
Mr. MCDERMOTT. Thank you, Mr. Chairman. As I listened to
this discussion, I keep coming away with a fundamental
question. I have a hospital in my district that takes care of
26 percent of the charity care in the whole State. They get
about 4 percent of the money that is put out there through the
various methods that we use to distribute it. My question is,
does it make sense, or can you see, I would like to hear your
idea about how to change our present disproportionate share
legislation and whatever that would make it possible for this
hospital to receive what it really ought to get, which is a
much larger share, of the money that comes out to the State for
the fact that it is the only place that is really doing any
significant amount of charity care.
Chairman THOMAS. Gentleman yield briefly, and I apologize
because Dr. McClellan had to go back to the White House, and
although these gentlemen are certainly free to respond to that
question it sounds to me like it is one that is right down the
middle for Dr. McClellan. Let us see what these guys do.
Mr. EVERSON. I would just say, the Chairman already told me
I was making health policy. I don't totally agree with him. If
I go this way, I certainly will be. So, I don't want to get in
more trouble with the Chair by answering that question.
Mr. MCDERMOTT. You won't be in trouble with me though.
Chairman THOMAS. The gentleman is free to choose.
Mr. EVERSON. I will stand down and leave it to Mr. Walker.
Mr. WALKER. I am a prudent individual, Mr. McDermott. I
think I will pass on that one.
Chairman THOMAS. Gentlemen yield briefly, because the Chair
is interested in pursuing exactly the concern the gentleman
has, and what was brought up during conversation by the
gentleman from Louisiana to Dr. McClellan was the point that
uncompensated care is currently paid on a formula basis and
does not necessarily go to those hospitals who have the people
for which uncompensated care was designed for in their beds.
The Chair is interested and to the maximum extent possible
paying for the people who are supposed to be paid for based
upon the criteria for which the money is offered.
Mr. MCDERMOTT. Thank you. Now, the next question I have in
my mind is let us suppose we decide we are going to save some
money and take away this tax exemption for everybody but those
hospitals that are giving charity care, any not-for-profit
hospital or anybody else. What impact would there be in the
health care system?
Mr. WALKER. Well, first it is almost impossible, Mr.
McDermott, to be able to say what the impact would be because
without knowing what criteria would be used to determine which
entities would continue to receive tax favored status, which I
would respectfully suggest would probably be a vast majority of
the current ones, including the one that you gave as an
example, it is virtually impossible to say what the impact
would be because you don't know who would be affected and the
related magnitude. I think this is a perfect example of what
something Mr. Stark said before, and others, we need some more
data in this area in order to be able to make a more informed
judgment on that.
Mr. MCDERMOTT. You are suggesting that Murphy's law may be
around the corner if we wade into this too quickly, the law of
unintended consequences?
Mr. WALKER. I think this is a perfectly legitimate area for
you to be concerned with, because it is illustrative of the
need to reexamine tax preferences, spending programs, et
cetera, that have been put into place many years ago,
especially in light of our current and future fiscal
challenges. You need to have solid data in order to be able to
make informed decisions. We gave you some today on
uncompensated care. I would respectfully suggest you probably
need some more.
Mr. MCDERMOTT. It would probably not surprise the Chairman
that I would suggest that the only answer here is a universal
health care system, that as long as we try and figure out who
has the hot potato today and who do we pay for the hot potato
and what, who will shift the hot potato to somebody else, we
are going to wind up doing this endlessly because this
situation of trying to get hospitals to do charity care has
been going in the wrong direction for the last--at least as
long as I have been involved in it, since the 1970s, when
hospitals are closing emergency rooms. There was a time in
Seattle, in the State of Washington, when if you were hit in an
automobile accident 50 miles from Seattle, you had to wait for
a police helicopter to lift you to Seattle because that was the
only emergency room that would take those kinds of cases. Now
that is the situation in at least one State, and I think that
that is going on everywhere. Everybody is trying to get rid of
those people who don't bring in money. As long as their basic
motivation is how to keep their bottom line because they are
not being adequately provided for because of the health care
financing system in this country, it seems to me we are never
going to solve the problem with the Tax Code.
Mr. MCDERMOTT. The Tax Code will not be the way we solve
it. We will solve it when we have a universal health care
system in this country.
Chairman THOMAS. Thank the gentleman. The gentleman from
Georgia, Mr. Lewis, wish to inquire?
Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman.
Let me thank members of the panel for being here today.
Commissioner Everson, good to see you here again. I would like
to know from you, have you had an opportunity in recent weeks
or months, maybe you know something about the history of this,
to revoke the tax exemption of any religious institution,
churches, mosques, synagogues?
Mr. EVERSON. I am unaware of any we have done in recent
months. We can't talk about a specific matter, but I am not
sure--revocation is a rare event. As I indicated earlier, what
we try to do is work with organizations to cure what we see is
a defect, and that would be a rather extreme step. What I said
in the testimony, what I would hope the Committee would
consider is to give us better tools in the middle where we can
hold an organization or its officers accountable in a way we
can provoke meaningful change in the public interest because
sometimes taking that step as you mentioned can be quite
draconian. We are talking about hospitals today, but if you
have one hospital serving a broad community, it would be a big
step and the same thing would be true for other organizations
you are talking about.
Mr. LEWIS OF GEORGIA. As a rule, how do you go about
getting the information, data? Do you read something in the
newspaper, hear something on television or see something on
television or hear something on radio or do you field staff
people to go out and conduct investigations?
Mr. EVERSON. There are a variety of means by which we
conduct our examinations or make an inquiry. Some of it comes
through information, if you are looking at say hospitals, on
returns that are filed. Other information comes from
allegations that are made, letters we receive or calls that we
will receive. If you refer back to last summer when we talked
about political intervention and that issue became quite
vigorously discussed, we had leads or concerns that were
written in to us and what we did was refer those to a group of
career folks within the tax exempt and governmental entities
unit. They assessed these and determined whether they thought
they were credible or not. If they were credible, we would get
in touch with the organization. There might be a written
inquiry for which there would be some answers coming back, and
there could be a full blown audit in some cases.
Mr. LEWIS OF GEORGIA. I know you don't want to talk about a
particular case, but just a few weeks or months ago, there was
a church in North Carolina where apparently the minister
suggested that if people were inclined to vote in a certain
direction in a particular way, maybe they should leave the
church, and apparently, a group of them did leave. Anything
happen or you want to say anything about that?
Mr. EVERSON. Congressman, I would not answer, and I am
precluded from answering on a particular case. The law here is
clear. The organization, be it a church or charity, can't be
advocating for or against a particular political candidate.
Nothing wrong with talking about policy positions, but when you
cross that line and you are starting to talk about a particular
candidate, that is when the problems occur.
Mr. LEWIS OF GEORGIA. Can some minister stand up and say,
like, God told me that a certain person shouldn't be elected?
You don't try to get between the minister and God, do you?
Mr. EVERSON. I don't ever try to get between a minister and
God. We are concerned if anybody who has that exempt status is
advocating for or against a particular candidate; that is the
law that they can't do that. So, if we have credible
information that someone is doing that, we will follow up and
introduce the appropriate inquiry.
Mr. LEWIS OF GEORGIA. Maybe the two of you can respond,
what effect would eliminating the tax-exempt status of health
care providers have on access to service for the uninsured or
the underinsured?
Mr. WALKER. I think if you eliminate it across the board,
it clearly would have an adverse effect. I don't think anybody
here is suggesting doing that. I think what is being talked
about is, what should the criteria be in determining when tax
preferred status would be given--and after the criteria have
been determined and properly administered, then what type of
reporting mechanisms would be in place to try to make sure in
fact that people are doing what they are supposed to be doing
in order to maintain their tax-exempt status. Clearly, it would
have a significant adverse effect if it was across the board. I
don't think anybody is talking about that.
Mr. LEWIS OF GEORGIA. Mr. Chairman, I know my time is up if
I could have 15 seconds?
Chairman THOMAS. Certainly.
Mr. LEWIS OF GEORGIA. Thank you, Mr. Chairman. When you
look at many of these religious-based health providers, you
could call names like St. Jude in Montgomery or Holy Family in
Atlanta, Good Samaritan in Selma, in a certain region in the
country, only service that African-Americans and minorities
could receive. It was from these tax-exempt church-based health
providers who many others discriminated against. If it hadn't
been for St. Jude in Montgomery, Good Samaritan in Selma and
others, I don't know where a whole segment of the population
would be. You should keep that history and legacy in mind.
Mr. EVERSON. I appreciate that sentiment, sir. I want to
say to you that no one has said to me that problems within this
sector have anything to do with the religious-sponsored groups
as a particular element. That is not a concern that has ever
been raised to me.
Mr. LEWIS OF GEORGIA. Thank you, Mr. Chairman.
Chairman THOMAS. Gentleman from Pennsylvania, Mr. English,
wish to inquire?
Mr. ENGLISH. Thank you, Mr. Chairman, I do. Mr. Everson,
much of what we heard today hinges on the changes made in 1969
to eliminate the charity care standard in favor of the
community benefit standard. Since 1969, other regulatory
changes have been made to this standard, as I understand it,
including a change in 1983. Based on activities of tax-exempt
hospitals over recent years, do you feel that the basis for
which the 1969 standard was established still as a practical
matter serves its original purpose? In your view, are there
additional regulatory updates that the IRS could make that
reflect the dynamic nature of modern health systems?
Mr. EVERSON. This may get me back cross-wise with the
Chairman. I think that, based on the law as it exists today, we
are comfortable with that community benefit standard, because
it enables us to inquire about charity care, but it also
enables us to consider compensating issues about whether there
may be a research facility or some other charitable purpose. It
is analogous to saying, does an educational institution have a
history department or a chemistry department? We don't pick
between the two based on the general guidance that you give us.
I do agree though that what we do rule on is whether there has
been an impact on practices. If you revisit that, we will of
course move forward in a different way.
Mr. ENGLISH. Seeing how the IRS clearly takes a case-by-
case approach when examining whether a hospital falls under
tax-exempt status or not, I realize it is difficult for you to
provide an exhaustive list of factors that you look at when
making a determination, but are there certain factors that
would serve as an immediate red flag, and if so, what would
some of those factors be?
Mr. EVERSON. I would suggest to you what we have seen here
in these five general factors we have mentioned, is a
convergence in areas like profits and non-profits. Both have
open participation by community doctors and operate the same
way regarding emergency rooms and billing. Where we have the
divergence between the two is who is controlling them. Is this
community board real? Or if they have a relationship with a
joint venture, is the joint venture, the profit-making entity
really calling the shots? That is the thing of concern to us,
and also, what is happening to the money? Is the money being
put back into equipment or funding the facility or new types of
care or in some way going to the benefit of the directors of
the hospital or maybe the doctors or whatever it would be? It
is more about control. As the Comptroller General mentioned,
the governance structure is a big piece of that and what is
happening to the money.
Mr. ENGLISH. Mr. Walker, early in your testimony, you note
that tax-exempt hospitals as charitable organizations are able
to receive other financial contributions such as donations. In
your closing observations, you note that a small number of non-
profit hospitals accounted for substantially more of the
uncompensated care burden than did others. Did you examine and
can you comment on whether urban or teaching non-profit
hospitals receive more income from other sources, such as
donations than hospitals not accounting for the substantially
higher burden of uncompensated care?
Mr. WALKER. Mr. English, with regard to the work we did for
the Committee, I do not believe that we got down to that level
of detail. I would be happy to go back and take a look,
however. While we didn't specifically look at it by teaching
hospital or by geographic area, those are factors that you
would want to consider in whatever criteria you may come up
with as well as such things as whether or not public research
might be conducted by these facilities as well.
Mr. ENGLISH. Thank you very much. Thank you, Mr. Chairman.
Chairman THOMAS. Thank the gentleman. The gentleman from
Massachusetts wish to inquire?
Mr. NEAL. I do. Thank you, Mr. Chairman. Open this up to
either of the panelists. First, I would point out that
virtually all of us on this Committee as is the case with
Members of Congress--and it is really pronounced in a place
like Massachusetts. Hospitals are by far the biggest employers
now. They give you your reputation. They entice people to live
there that tend to demand good services, and in turn, they
support the orchestra and the arts and libraries and museums.
So, it is a great spinoff that comes from the role that
hospitals play. I think one would argue, again, not only is it
first-rate health care, but they drive much of our economic
progress across certainly in New England in the northeast. Let
me be a bit more specific. I also think you could argue that,
or I certainly could argue in my constituency, most of those
hospitals really are not operating on a generous margin. If
these institutions were forced to relinquish their tax-exempt
status and forced to pay corporate taxes, State and local taxes
and even property taxes, I can assure you, most of them really
would go under. Would you both share that view?
Mr. EVERSON. Dave wants me to go first here. There would be
broad ramifications across a number of fronts as you so
indicate. If you just lifted this entirely, of course, there
would be broad ramifications. If you look for the not-for-
profit health care sector, the assets that are reported this
year are about $500 billion. That is the same number as the
gross receipts. That gives you the scale of the whole sector.
You would be talking about very significant ramifications
generally, but when you get into a particular community, they
could be quite pronounced, yes, sir.
Mr. NEAL. Mr. Walker?
Mr. WALKER. Obviously, the loss of tax-exempt status would
have serious potential adverse effects. I don't think anybody
is talking about doing away with tax-exempt hospitals. The
question is that, over time, we have seen that there has not
been much of a difference in certain areas between for-profit
and not-for-profit hospitals. Therefore, what should the
criteria be for conferring that status and how can we make sure
people are meeting that criteria over time?
Mr. NEAL. I will ask you an obvious question: If these
hospitals were required suddenly to pay taxes, what would they
do to come up with the additional revenue? Raise health care
prices? Cut uncompensated care? Scale back community health
programs? In some cases, stop providing unprofitable services?
The emergency room in a big city is something that we all ought
to have a chance to see what happens there on a Friday or a
Saturday night. The truth is, I know, again speaking to my
constituency, nobody is turned away. It might not be the best
health care system, but no one is turned away. The options that
I have outlined really strike me as the alternative if we are
to move down the road, if we are to make any dramatic changes
in their status. Last, are you aware of any good quality
studies in the range of possible consequences if the tax-exempt
status were revoked?
Mr. EVERSON. I am not aware of any studies that address the
sector as a whole, no, sir. There may be some, but I haven't
seen them. If we have them, I will get them to you.
Mr. NEAL. Mr. Walker, are you aware of any?
Mr. WALKER. I am not. I think the issue is not whether or
not there should be not-for-profit hospitals; clearly, there
should be. The question is, based on what criteria and how do
we evaluate whether or not people are meeting those criteria
over time?
Mr. NEAL. Do either of you favor a specific standard that
would determine what charity care is or what the percentage
would be?
Mr. WALKER. I personally believe that the Congress needs to
provide additional guidance above and beyond what it has done
so far. At the same point in time, I don't think it should get
into micro-management.
Mr. NEAL. Congress and micro-management?
Mr. WALKER. It can happen. but there is a sensible center.
Specifically, providing some criteria that IRS must consider,
thereby providing the IRS the ability to provide reasonable
flexibility and to recognize changes that occur over time.
There is the requirement to make sure that there are
performance data that people have to report back on such that
you, the Congress, can oversee this area as an important area
of interest to the public.
Mr. NEAL. Last, the role the teaching hospitals play in the
economy across the northeast, it is astounding.
Mr. WALKER. That would be one of the factors I would
suggest you would want to consider, whether or not it is a
teaching hospital. There are a number of legitimate factors, I
think, you would want to consider.
Mr. NEAL. Thank the Chairman.
Chairman THOMAS. Thank the gentleman. I would tell you, no
matter how imperfect our effort will be, I think it is going to
be a whole lot healthier saying we are trying to make health
policy rather than making IRS rulings and pretending it is not.
Gentleman from California, Mr. Becerra wish to inquire.
Mr. BECERRA. Thank you, Mr. Chairman. Thank you for being
here. Let me ask a general question before I get into
specifics. Under any comprehensive examination of the tax
treatment of health care providers, would the IRS and GAO
ultimately limit their audits to a particular type of health
care provider? Today's hearing focuses on charity hospitals. Or
would you ultimately by force end up having to review the tax
treatment and the tax consequences that apply to for-profit
hospitals, specialty hospitals, the various professions in
health care? Because somewhere, they all touch the Tax Code,
whether it is because they get certain benefits in tax
deductions or tax credits. Just about any health care provider,
whether it is a facility, an institution or individual has the
Tax Code implicated in its or his or her work.
Mr. EVERSON. We do look across all the sectors. The IRS is
organized now into four business units: One is for large and
mid-sized corporations. One is small businesses, self-employed
individuals. One is for bread-and-butter wage earners. The last
is tax-exempt and governmental entities. What happens here is
you have seen some concentration. The Shriners, that is a big
outfit. That is going to have one set of issues. If you are
looking at a small hospital in New Mexico, it has revenues of
$143 million. That is a different kind of audit obviously. If
you are looking at an audit of a hospital that has, or
charitable organization that has, these joint ventures with
profit-making firms, then we will get involved. If we see a
problem potentially, we will ask our people who are in that
large and mid-sized business unit to look at the profit-making
side of it. It all does relate, and we try to follow the string
of transactions.
Mr. BECERRA. Any examination of the health care industry,
it would seem that you would end up not completing the task of
examining how the industry should be treated under the Tax Code
if you examine only the non-profits and charity hospitals. You
have all sorts of hospitals out there. You have all sorts of
facilities, clinics, all sorts of professions and all these
individuals or entities take advantage of or fall within
certain provisions of the Tax Code. I would imagine if you are
going to come and report to us, you may see a need for some
change with regard to the treatment of a charity hospital. At
some point, someone, whether within your shop or our shop is
going to ask, did you look at what has gone on with for-profit
hospitals? We have heard about some scandals, maybe abuse of
the Tax Code. Have you looked at how specialty hospitals are
now beginning to form and operate? Are you looking at how
associations of professional doctors, medical providers are
doing work under their association? Chances are you will have
to report to us on all of these things if we are going to
examine all of these things regarding the Tax Code.
Mr. EVERSON. I think you have to look at a series of
related pieces. Some of that inquiry could be informed by
things that the IRS knows, but there are many other
institutions, GAO and other pieces of HHS, which certainly you
would want to have as a piece of a really truly comprehensive
look.
Mr. WALKER. Congressman, obviously, there are a lot of
aspects of the Tax Code that affect not only not-for-profit
entities, but for-profit entities. For example, today, we are
talking about hospitals. My understanding is the focus today is
whether or not, and if so, on what basis one would confer tax-
exempt status to hospitals as compared to for-profit hospitals.
That is what we are focusing on today. Ultimately, in looking
at audit-type work, whether it is GAO audit work or IRS audit
work, it seems to me you don't want anybody to be off the
table. At the same point in time, you have to recognize you
have a limited amount of resources and therefore you have to
allocate those audit resources to areas based upon risk; where
do you think there is the greatest risk or opportunity for
abuse?
Mr. BECERRA. Let me go to that point. My understanding is
that we have calculations. I think both of you have worked on
this or your shops have worked on this, where we have some $300
to $350 billion of uncollected taxes on an annual basis. We
find that a lot of these taxes, we know the sources. It is
typically a small business that fails to fully report,
underreports for whatever reason. Is there room for us to do
more there to give you the resources to go after those who are
underreporting or not reporting whatsoever and really collect
some dollars before we start going after charity hospitals?
Mr. EVERSON. We recently updated our research on a big
portion of the tax gap to which you refer. The gross tax gap is
estimated to be between $312 and $353 billion, and we get back,
through late payments or enforcement actions, some $55 billion
or more of this. That leaves a net tax gap of over a quarter
trillion a year. It is--80 percent of this is underreporting;
10 percent of it is by people who don't even file. Another 10
percent is people who admit to how much they owe, they just
don't have the money and don't pay. The biggest piece of this
is, as you indicated, in business income for people who are
self-employed or smaller businesses. We are trying to do more
there. We asked for more money, and we are working on the
enforcement procedures. It is a priority within the
administration. I think the Congress is very clearly interested
in this. As I mentioned our four enforcement priorities, they
all intertwine to make some progress on this.
Chairman THOMAS. Thank the gentleman. The gentleman from
Wisconsin wish to inquire?
Mr. RYAN. I do, Mr. Chairman. Most of the questions I want
to ask have already been asked and answered so I want to go
outside the box and ask a broader question. First, let me say,
I am a little puzzled at the reaction to this hearing. This is
what we are supposed to be doing, we are supposed to be
reviewing the Tax Code and conducting oversight on taxpayer
dollars, and this is us just doing our jobs. I am a little
puzzled that that is the reaction by some in this hearing. We
called the part of the Tax Code where exemptions or deductions
occur tax expenditures. It is a notion that I personally am not
a big fan of the concept of. We expend the tax dollars back to
individuals or entities based on reducing their taxes. So, we
need to get a better handle of what the value or the number of
this tax expenditure is. But since most of this hearing has
been talking about uncompensated care, a lot of us work on this
issue. Mr. McDermott, who left, talked about if we could fix
all of these problems with universal health care. Mr. Cantor,
Mr. Hayworth and Mr. Johnson and I recently introduced
legislation to expand health savings accounts, make high-
deductible health plans deductible for individuals, a
refundable income tax credit for the uninsured, a tax credit
for small businesses to provide care for their employees,
basically virtually wiping out the uninsured of this country
through the use of tax credits, a tax expenditure. The score of
our bill is $125 billion over 10 years. Gleaning numbers from
what I have seen from Mr. Walker's testimony and Dr.
McClellan's testimony, having said I know these numbers are
inaccurate. We know we have to do a better job of analyzing
those numbers. Using those numbers, you could pay for this
policy twice over and wipe out the uninsured problem through
tax expenditure policies directly aimed at the patient, the
person, the uninsured individual. Since we have so many
problems with uncompensated care, people coming into the
emergency room without health insurance, they are not doing
preventive medicine. They are not doing disease management and
don't have health insurance. Have there been any studies or
analysis--and, Mr. Walker, maybe this is a question for you--
has anybody analyzed the cost benefit that would be gleaned
from addressing directly the uninsured issue, and what kind of
benefit that would provide to the hospitals through the
uncompensated care area? Has there been any kind of analysis
done comparing or contrasting? Would our dollars would be
better placed in providing insurance to the uninsured, and what
would that effect place upon hospitals who use this current tax
expenditure to meet that need? Would the country be better off
and save more money for the taxpayer by directly aiming these
resources at that uninsured individual?
Mr. WALKER. Mr. Ryan, I am not aware of any study that has
been done focused solely on that issue. I think what you are
raising is a much broader question. The issue you are raising
is the need to ultimately reexamine our entire health care
system. As you properly point out, we have a lot of tax
preferences out there that are not free. I mean, there is a
cost associated with tax preferences, namely foregone revenues.
We need to understand why we are giving it, and who benefits
from it. I would respectfully suggest one of the areas that is
fundamentally in need of reexamination as far as tax
preferences is health care. It is number one. It is the fastest
growing. It is out of control, but again, that may be another
hearing.
Mr. RYAN. I thank you, and I didn't think--this is
something we should do a study on this. I don't know if it
would be easy to do. This is what we are supposed to do on this
Committee. We are supposed to ask these questions and think
outside the box. We are supposed to see if we are serving our
constituents in the best possible way in protecting taxpayer
dollars. It is these kinds of questions we are trying to get
answers to try and acknowledge that the status quo is not
sacred. We have to think about how best to achieve these goals
that prior policies were designed to achieve, especially in
light of the fact that those goals are not now currently being
met. That is basically--I know it is more of a speech than a
question. I just appreciate the witnesses. Thank you.
Mr. WALKER. Can I, Mr. Chairman, in his 25 seconds? Number
one, not only is the current policy unacceptable, it is
unsustainable. There is a fundamental need to reexamine the
base of government, both on the spending side as well as the
tax side.
Mr. EVERSON. Mr. Chairman, if I could add one point, I do
welcome the inquiry on charities, because as you go into tax
reform, you have to draw the right line. It doesn't get
discussed a lot, but it is an important point because of the
size of that sector of the economy.
Chairman THOMAS. We happen to think making health care
policy belongs to us. Gentlewoman from Pennsylvania wish to
inquire?
Ms. HART. Briefly, Mr. Chairman. I have been listening to a
lot of the questions, and I do understand the gentleman's
concern about the tone, but I have a tendency to be concerned
that we not lose sight of some of the hospitals that I think
would close if we didn't offer the opportunity for them to run
as non-profits. I have a district full of tiny little hospitals
in tiny little communities. They are not making a profit. They
are not--they are barely surviving. Some of them have merged,
but not for big profit coming in and setting up a deal with
them. I guess my question is probably mostly for Mr. Everson;
do you think we should further define some of the requirements
or some of the expectations that we have of these not-for-
profits? Is that one way we can help sort of alleviate some of
the concerns that some of my colleagues have had?
Mr. EVERSON. Well, I agree with what the Comptroller
general has said, and I support entirely, again, this avenue of
inquiry, because it is so important within this sector. I
simply suggest that we move as a nation very carefully in this
sector, because it is rapidly changing and growing. We have a
problem in the Tax Code generally where there is always a
temptation to write another bright line into the law. That in
and of itself changes behavior and people try to take advantage
of that as we all know. So, I am simply suggesting that as you
go into this--and I think it is timely, because the policy
hasn't changed for many years--that you look at it, but we do
so carefully with data.
Ms. HART. When I was a State Senator, we actually wrote the
law sort of as a result of a court case that attempted to
remove the status from one of our organizations, and we had a
difficult time with the parameters. But we allowed for an
opportunity to do this case-by-case review, and I am wondering
how burdensome that would be if you look at a situation like
that where we could actually have like a five-part test, which
is what we ended up with as a result of a court case, that we
could really go back and have each one that wants to qualify
actually submit to that sort of a test.
Mr. EVERSON. We do that in the front end. Each year, there
are 80,000 or 90,000 applications for tax exemption that we
receive. In hospitals, we get something like 100 every year.
They have their own extra page of detailed questions that you
go through. They are, once again, there are considerations--
they aren't automatic in terms of one answer doesn't
necessarily knock you, but it says, if the answer is, no,
please explain, and those factors are weighed and then a
favorable determination is made, or we will work with the
organization. Same thing applies in the audits. Frankly, the
problem you get here is you can get drift-over time because
they get accepted, and then they operate for decades if you
will and never get looked at again by us, so that is a problem
of how often we get in there.
Ms. HART. The sheer quantity you have to deal with.
Mr. EVERSON. We are looking at one half of 1 percent of the
population every year and that is not that much.
Mr. WALKER. There is a multi-page questionnaire that is
completed for applicants to grant tax-favored status. So, they
are already looking at a bunch of criteria. On the other hand,
Congress may say, there are five things that are most important
to us. For example, you need to have at least one of these five
things to a certain level. We want to encourage you to do more
than that, but there are five things that are important to us.
If you have one of those five at an appropriate level, you
might get a safe harbor, and therefore, you are okay. We don't
have that. Right now, what we have is a multiple-page
questionnaire where you consider all of it, but there is no
real weighting. Therefore, there can't be really consistency,
and therefore, there can't be appropriate accountability.
Ms. HART. Thank you, I yield back.
Chairman THOMAS. Gentlemen yield on the time she has.
Commissioner Everson, in the last 20 years, how many not-for-
profit hospitals have had their tax-exempt status pulled?
Mr. EVERSON. Just a handful.
Chairman THOMAS. In the last 20 years?
Mr. EVERSON. I have to go back and check that, but in the
last 5 or 10 years, it is fewer than 10. I will get you a
precise number.
Chairman THOMAS. We need to get a profile to see,
notwithstanding the blurriness, whether or not people have
crossed so over the line so far that even despite the
blurriness, you were able to make a decision.
Mr. EVERSON. It is a rare action.
Chairman THOMAS. Gentlewoman from Ohio.
Ms. TUBBS JONES. Thank you, Mr. Chairman. I come from
Cleveland, Ohio, one of the largest non-profit hospitals,
Cleveland clinic. I am interested in--when I was reading
through something--the whole discussion about whether--not
whether the fact that people who are uninsured pay higher rates
than people who are insured because of this contract
relationship. Are you suggesting that a way in which we might
deal with the issue of the uninsured--not deal with the issue
of the uninsured--are you suggesting that the cost should be
the same for the same services in order to deal with the
runaway cost of health care? Mr. Walker.
Mr. WALKER. I am suggesting that it is something the
Congress may want to consider and/or appropriate State
legislators as to whether and to what extent uninsured persons
should be charged more money for the same service or charged at
a certain level for comparable services.
Ms. TUBBS JONES. Why do you think we ought to do that?
Mr. WALKER. I am not proposing you do it. What I am saying
is that, because of the challenges associated with our health
care system, and because of the proliferation of managed care
in ways that create contractual arrangements to control costs--
and there are plusses and minuses to that--that in order to
maximize revenues, what many providers have done--and it is not
just hospitals, it is dentists, it is doctors--what many
providers have done is they have a separate billing schedules.
Ms. TUBBS JONES. I love your explanations, but I don't have
but 5 minutes, so get to the point, please.
Mr. WALKER. I think it bears watching as to whether or not
uninsured individuals end up having to potentially pay more
money merely because of the fact they are uninsured. If they
are indigent, they are not going to be able to pay. However,
there are middle-income individuals who may have to pay a lot
more money for the same services because of billing practices.
Ms. TUBBS JONES. Let me go to something else, according to
the IRS, we give non-profit status to hospitals--based on your
regulations, we give non-profit status to--tax-exempt status to
hospitals. One of the bases is community--what is it called,
community impact?
Mr. EVERSON. Community benefit.
Ms. TUBBS JONES. In light of the fact that, across this
Nation, particularly in Cleveland, hospitals are some of the
largest employers in the Nation, the fact that they are, is
that a community benefit?
Mr. EVERSON. I am not--if you are asking whether we look at
the employment impact of having that entity operate, I don't
think we consider that as a factor itself.
Ms. TUBBS JONES. Should it be a factor?
Mr. EVERSON. That is a policy call, and I think it extends
beyond that definition, because you have got--the not-for-
profit sector of the government is huge. That opens up a whole
different avenue of inquiry, I would suggest.
Ms. TUBBS JONES. Is it an avenue we ought to pursue?
Mr. EVERSON. I think everybody would be not-for-profit by
employing people if that was a factor. Maybe some of our
biggest businesses, Wal-Mart and everybody else, would be not-
for-profit. So, it gets you a different discussion, I would
suggest.
Ms. TUBBS JONES. Wal-Mart doesn't deliver health care, so I
am asking you to consider it in conjunction with the delivery
of the health care not just the fact that they employ.
Mr. EVERSON. I would suggest that is taken into account
indirectly. How often do we lift the exemption? Obviously, if
you go to look at something as significant as lifting that
exemption, if it were to be viewed as resulting in a closure,
of course, we would look at impacts like that at that time.
Mr. WALKER. I would respectfully suggest that if you had a
facility that was that large, that that would therefore mean
there is probably demand for it to be that large, and
therefore, one of the factors one would have to consider is
what is the community need that created the demand for it to be
that large and have that much employment. So, while it is not
expressly addressed, indirectly it is probably considered.
Ms. TUBBS JONES. Finally, are you either of you familiar
with payment in lieu of taxes that is happening in States
across the country with regard to the fact that some non-
profits do not pay taxes? You are not familiar with what they
call pilots?
Mr. EVERSON. No, ma'am. If you could help me understand it,
maybe----
Ms. TUBBS JONES. Unfortunately, I am out of time but I am
going to have my staffer give you background information on
pilots, and maybe you could give me a written response. Because
of the discussion about taxes being waived for so many
institutions in some States and some hospitals are making
payments to the municipality to support the municipality.
Mr. EVERSON. Property and other taxes?
Ms. TUBBS JONES. Yes. I will have somebody give it to you.
Chairman THOMAS. Thank the gentlewoman. The gentleman from
California wish to inquire?
Mr. THOMPSON. Thank you, Mr. Chairman, and appreciate the
opportunity to ask questions and thank you for holding this
hearing. I think it is important and interesting.
Unfortunately, the one witness that left, I wanted to ask him a
specific question. I am hopeful that the Committee can provide
a means by which we can follow up on something in his statement
when he referred to increased funding for community health
centers----
Chairman THOMAS. Submit a written request, and we will get
a written response.
Mr. THOMPSON. We need to just see some analysis as to
whether or not they can accommodate anything that is missed by
the non-profits. As important as this is, I don't think we can
lose sight of the fact that these hospitals that we are talking
about are providing a tremendous service in all of our
communities. I think, Mr. Everson, you said it best when either
the Chairman or Mr. Herger asked about your pulling the tax
status or non-profit status from any hospitals and you said you
would rather work out problems rather than revoke status
because of the serious impact it would have on the community. I
think that is evident probably in everyone's district. I know
in my district, I have got about 19 hospitals. I think three of
them are government hospitals either State or Federal
government. There is one private, and the rest are all non-
profit. If we did anything to disrupt this, the people that I
represent would not have a hospital to rely on. One of you said
that there is little difference between for-profit and not-for-
profit hospitals. I would like to submit that there is one
major difference that I see and that is in rural areas, such as
the one I represent, all there are is non-profit hospitals. I
guess the question is, has anyone done any analysis as to where
these hospitals are? Are there more non-profits in rurals or is
it just medically underserved areas. Can you quantify that
somehow?
Mr. WALKER. I think there has been some work done on that.
I would be happy to provide something to you for the record.
Mr. THOMPSON. I would like to see it. I can only talk about
my district, but I do know there has been a number of attempts
to bring private entities into my rural district. Each time, it
hadn't been a good outcome. Generally what happens, especially
in the HMO areas, they take out the easy pickings, and they
close up, and they leave the people in the area without any
facilities to rely on. Mr. Everson, in your testimony, you
talked about your analysis of this. You said you looked at 375
health organizations, 79 of those being intense examinations.
Of the 79 cases, you found tax exemption problems with about 20
of those. Are you suggesting that we extrapolate on this number
for the remaining?
Mr. EVERSON. That is not what I am saying. What I am
suggesting is that we make our audit selections across all IRS
activities based on risk and where we think there would be
potential problems. If you look at individual examinations, we
end up with a no-change rate of about 15 percent or so. That is
to say, 85 percent of the time, we find something. Obviously,
we just don't want to go out and inquire in areas where we
don't think there is a problem. So, I don't think it is fair to
extrapolate simply based on the half percent of the population
we are doing.
Mr. THOMPSON. Will you be doing a much more intense----
Mr. EVERSON. We want to do more, and we are dedicating
increasing resources to this area. Charities include this
sector in part because as I say these relations with the for-
profit businesses as well.
Mr. THOMPSON. The other thing, you talked about the five
ways to determine the nontax. IRS--those are your measurements,
correct?
Mr. EVERSON. Those are the standards that we have
developed.
Mr. THOMPSON. Should those be redone or updated?
Mr. EVERSON. Again, I think this goes back to the
Chairman's question here. I am comfortable with those standards
based on the law as it exists today. We will certainly update
them if the Congress changes the law.
Mr. THOMPSON. It seems a little difficult to get a good
read using these, and there may be some need to figure it out.
Mr. EVERSON. What we have done, sir, is we have updated
this questionnaire that we talked about, the form 1023 on which
you make an application. We just recently revised that to
provide greater clarity on this subject.
Chairman THOMAS. Tell the gentlemen that, in the past, the
IRS felt comfortable changing the regulations without a change
in the Federal law. I want to thank the commissioner for which
he is carrying the last 60 years of the Internal Revenue
decisions on his shoulders, and he clearly has not been
responsible for them. I appreciate the opportunity in which he
has allowed me to illustrate some of the things that go on
around here when Congress doesn't exercise its responsibility.
Decisions get made anyway. With that, I want to thank both of
you and would request that you be on short string, because we
are going to continue this, not for the sake--and there is some
misinterpretation. We are not in this for the revenue. We are
in this to examine the basis in which people receive
significant tax benefit paid for by someone, and can we better
sharpen the tools to make sure we are getting our money's
worth? We are not in it for the revenue. The Chair would then
request the second panel if they would please come forward. The
Chair thanks the panel's willingness to allow us to examine in
some degree of fullness the testimony. John Colombo, Professor,
University of Illinois College of Law. Stan Jenkins, Chairman,
Champaign County Board of Review. Mr. John Thomas, Baylor
Health Care System. Sister Carol KEEHAN., Sacred Heart Health
System. Gerald Horwitz, University of Michigan Law School.
Nancy Kane of the Harvard Business School. Chair wants to thank
you for your patience. Two, more importantly thanks you for the
testimony. The written testimony you have submitted for the
record will be made a part of the record. The Chair will allow
you in the time you have available to you to address the
Committee in any way you see fit. I will tell you that, as we
begin this process, we are on the verge of having the bells
ring for a series of votes. The Chair would recess for that
period as short a time as possible to accommodate the votes.
Dr. Colombo.
STATEMENT OF JOHN D. COLOMBO, PROFESSOR, UNIVERSITY OF ILLINOIS
COLLEGE OF LAW, CHAMPAIGN, ILLINOIS
Mr. COLOMBO. Thank you, Mr. Chairman and thanks to the
Committee for having me here today. I think it is the first
time in history that two people from Champaign County have
testified before the Ways and Means Committee at the same time.
For me, the debate over tax exemption for non-profit hospitals
can be summarized in one word. That word is accountability or,
more precisely, the lack of accountability that currently
exists in our legal standards for exemption. Ever since 1969
when the IRS abandoned charity care as a requirement for tax
exemption for hospitals and adopted the community benefit
standard for exemption, our legal tests for tax exemption have
not required that non-profit hospitals demonstrate any
measurable difference in behavior from for-profits. The problem
with the community benefit test is that virtually anything can
be a community benefit, even things that we would expect good
for-profit businesses to do. The IRS itself stated in 1983 that
the application of surplus to improving facilities and
equipment could be community benefits. In short, under this
definition, reinvesting in your own business, which for-profits
certainly do, is a community benefit. So, as a legal matter,
what the community benefit test really gets you is simply non-
profit form with the community board. Now if you believe that
non-profit form is inherently better than for-profit form for
the delivery of health services, okay, then you don't need
accountability for non-profits.
I would suggest that there is no good reason to believe
that. Non-profits are not inherently good because they are non-
profit. Both forms have their horror stories of bad behavior.
In addition, the empirical evidence comparing the behavior of
for profits to non-profits does not support the general
proposition that non-profit form is inherently superior to for-
profit form in health care. At best, this evidence shows mixed
results for the non-profit sector, and the data indicates that
geography, size, competitive environment and whether a hospital
is a teaching hospital are all at least as important as non-
profit status in influencing behavior. So, if you are like me
and are skeptical of the proposition that non-profit form is
inherently superior, then you probably would like to see some
level of accountability built into our legal tests for
exemption.
Mr. Rangel earlier asked, what are the alternatives. Okay,
I will bite on that one. I will suggest two. First, we could
reinstitute a charity care standard for exemption. A lot of
commentators favor this approach, and it certainly helps on the
accountability front. There are a lot of technical details that
would have to be worked out to do this, such as how to measure
charity care, how much of it would be enough to justify
exemption, whether bad debt should count as charity care and so
forth. It is important not to view this as a solution to health
care for the uninsured poor. More charity care is better than
less, but I am not sure we want a system in which the only
health care alternative for the uninsured poor is to wait until
they are sick so they can get free care at a hospital.
A second alternative is to try to develop a test for
exemption that is more specific regarding the behavior needed
to qualify for exemption, but more flexible than a strict
charity care approach. One possibility here is my access test
that I describe in my written statement. Require hospitals to
focus on a specific access mission, whether that be charity
care or providing unprofitable services or providing services
to underserved communities, rural communities, whatever, or
maybe a mixture of those and require hospitals to make specific
plans or financial commitments to that mission and then report
on how they are executing that mission.
No matter what we do, however, I think it is time to let go
of the past. Hospitals long ago quit being alms houses for the
poor. Today, they are multimillion or multibillion dollar
businesses. We need to reconsider whether such businesses
should get tax exemption at all and if so, under what
circumstances. Federal and State governments give away billions
in foregone tax revenues each year to non-profit hospitals, and
I believe we should require accountability for those benefits.
We don't have that accountability built into our current
Federal exemption standards and I don't think we should be
happy with that situation. Thank you very much.
[The prepared statement of Mr. Colombo follows:]
Statement of John Colombo, Professor, University of Illinois College of
Law, Champaign, Illinois
Mr. Chairman, Members of the Committee:
My name is John Colombo. I am a professor of law at the University
of Illinois College of Law in Urbana-Champaign, and I have taught about
and written on issues of tax-exempt organizations for the past 18
years, particularly issues of tax-exemption for nonprofit hospitals. I
want to give you some history and context regarding hospital tax
exemption rules and perhaps suggest some alternatives to our current
system.
History of Income Tax Exemption for Hospitals
Hospitals have enjoyed exemption from the federal income tax
virtually since the beginning of the income tax system.\1\ Prior to
1969, federal income tax exemption for hospitals (and presumably other
health care providers) was tied to free care for the uninsured poor
(``charity care''). The official ruling position of the Service was set
forth in Rev. Rul. 56-185, which required a hospital seeking exemption
under Code Section 501(c)(3) to be ``operated to the extent of its
financial ability for those not able to pay for the services
rendered.'' \2\ While the Service never took an official position
regarding how much charity care was ``enough'' or even how to define
charity care for these purposes, if a hospital lacked a substantial
charity care program, auditing agents almost always recommended denial
or revocation of exempt status.\3\ This charity care standard reflected
the long-held stance of the IRS (and centuries of legal precedent in
the charitable trust arena) that the ``relief of the poor'' constituted
a charitable purpose.\4\
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\1\ Administrative rulings recognizing exemption for hospitals date
back to at least 1928. See I.T. 2421, VII-2 C.B. 150 (1928).
\2\ Rev. Rul. 56-185, 1956-1 C.B. 202, 203.
\3\ While the ruling recognized that this test would be applied on
all the facts and circumstances (and that a low charity care record
would not necessarily bar exemption), IRS auditing agents often denied
or revoked exempt status if a hospital's charity care was less than 5%
of gross revenues. Robert S. Bromberg, Charity and Change: Current
Problems of Tax Exempt Health and Welfare Organizations in Perspective,
in Tax Problems of Nonprofit Organizations 149, 256 (1970); see
Hospital Charity Care and Tax-Exempt Status 1990: Restoring the
Commitment and Fairness, Hearings Before the U.S. House of
Representatives, Select Committee on Aging, 102d Cong., 1st Sess. 58
(1990) (Statement of James J. McGovern, IRS Assistant Chief Counsel).
\4\ E.g., Treas. Reg. 1.501(c)(3)-1(d)(2), listing ``relief of
the poor and distressed'' as a charitable purpose. Historically, relief
of the poor has been viewed as a charitable purpose at least since the
Elizabethan Statute of Charitable Uses enacted by the English
Parliament in 1601. The preamble to that statute, which is generally
viewed as the ``headwaters'' of charitable trust law, listed ``relief
of aged, impotent and poor people'' as an appropriate charitable
purpose. See John D. Colombo and Mark A. Hall, The Charitable Tax
Exemption 34 (1995).
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Concurrent with Congressional consideration of the Medicare and
Medicaid legislation in the mid-1960's, however, exempt hospitals began
pushing the IRS for reconsideration of exemption standards.\5\ The
common complaint (almost hilarious, in retrospect, for its inaccuracy)
was that between private medical insurance and the ``new'' Medicare and
Medicaid programs, there simply would not be enough of a demand for
charity care to satisfy the IRS, and hence exemption standards should
become more flexible in order to maintain exempt status for
hospitals.\6\ One wonders, of course, why the most appropriate response
to these arguments was not ``well, if there isn't any need for charity
care, then there isn't any need for exemption,'' but young staff
attorney with the IRS, Robert Bromberg, apparently took the complaints
of the hospital industry seriously and began work on a new exemption
standard.\7\
---------------------------------------------------------------------------
\5\ Daniel M. Fox & Daniel C. Schaffer, Tax Administration as
Health Policy: Hospitals, The Internal Revenue Service & the Courts, 16
J. Health Pol., Pol'y & Law 251, 269-70 (1991).
\6\ Id. at 261-62.
\7\ Id. Bromberg was not the only lawyer taken with the circular
reasoning advocated by the hospitals (the circularity being that if
hospitals could no longer meet charity care standards of exemption,
those standards needed to change in order to keep hospitals from losing
exemption). The D.C. Circuit Court of Appeals was equally duped. In
Eastern Kentucky Welfare Rights Organization v. Simon, 506 F.2d 1278
(D.C. Cir. 1974), the Court opined that exemption standards needed to
be more flexible because ``the rationale upon which the limited
definition of `charitable' was predicated has largely disappeared.'' It
apparently never occurred to the court that exemption ought to
disappear, as well, ``Gone with the Wind'' of charity care.
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This new standard appeared in Rev. Rul. 69-545,\8\ which quickly
became known as the ``community benefit'' standard. This ruling
abandoned charity care as the touchstone of exemption. Instead, citing
the law of charitable trusts, the IRS held that the ``promotion of
health'' for the general benefit of the community was itself a
charitable purpose, even though some portion of the community, such as
indigent patients, were excluded.\9\ Factors that indicated that a
hospital met the community benefit test included a community board, an
open medical staff, treatment of Medicare and Medicaid patients, and
operation of an emergency room that provided emergency treatment to
charity patients.\10\ Charity care other than emergency treatment,
however, was not required, and in a 1983 ruling, the IRS held that even
hospitals without emergency facilities could qualify for exemption
under the community benefit approach.\11\
---------------------------------------------------------------------------
\8\ 1969-2 C.B. 117.
\9\ Id. at 118.
\10\ Id.
\11\ Rev. Rul. 83-157, 1983-2 C.B. 94. This ruling noted that
specialty hospitals, such as cancer treatment hospitals, generally
could qualify for exemption under the community benefit approach even
though they did not operate emergency facilities as long as there were
other indicia of community benefit ``including a broad of directors
drawn from the community, an open medical staff policy, treatment of
persons paying their bills with the aid of public programs like
Medicare and Medicaid, and the application of any surplus to improving
facilities, equipment, patient care, and medical training, education,
and research, indicate that the hospital is operating exclusively to
benefit the community.''
---------------------------------------------------------------------------
Though Rev. Rul. 69-545 implied that offering health services to
all paying patients was sufficient to earn tax exemption, the IRS
subsequently took the position in a series of cases dealing with HMO's
that that providing health services to all paying patients (including
Medicare/Medicaid patients) is insufficient to justify exemption;
rather, some additional ``plus'' is needed, such as charity care,
health education programs or health research programs. Courts have
recently agreed. The most recent case on this front involved HMO's
formed by Intermountain Health Care in Utah.\12\ The 10th Circuit
adopted this ``health care plus'' formula, denying exemption to an HMO
whose membership was open to everyone in the community, because the HMO
did not have any significant ``plus'' such as a charity care program,
medical research program or health education program. What ``plusses''
will satisfy this test (and more importantly, the amount of resources
that must be dedicated to the ``plus'') is still an open question,
however.
---------------------------------------------------------------------------
\12\ IHC Health Plans, Inc. v. Comm'r, 325 F.3d 1188 (10th Cir.
2003).
---------------------------------------------------------------------------
Problems with Community Benefit
In retrospect, the community benefit standard for exemption has
proven to be an unmitigated disaster both as tax law and as health care
policy. As law, the main problem with the standard is that it lacks
accountability; the standard simply does not require any measurable
difference in behavior from a for-profit entity. Under the 1969 and
1983 rulings, a hospital is eligible for tax exemption if it has a
community board, open medical staff, and treats Medicare/Medicaid
patients. None of these criteria, however, focus on actual performance
differences between exempt and for-profit hospitals--for example, even
for-profit health care providers treat Medicaid patients.\13\ This lack
of substantive criteria to differentiate an exempt nonprofit hospital
from a for-profit one is undoubtedly what led the IRS to litigate the
meaning of the standard in HMO cases--after all, if simply treating
paying patients is a charitable purpose, then any for-profit health
care provider is a ``charity'' under this standard. Yet the recent
``health care plus'' formulation of the 10th Circuit doesn't really add
much to what we already knew. Perhaps it is now clear from the IHC case
that simply treating paying patients isn't enough to get exemption, but
even in 1983 the IRS opined that ``the application of any surplus to
improving facilities, equipment, patient care, and medical training,
education, and research, indicate that the hospital is operating
exclusively to benefit the community.''\14\ In short, virtually
anything a nonprofit hospital does with surplus funds might be a
community benefit, and even supporters of the community benefit
standard have admitted that definitions of community benefit remain
``inconsistent, narrow, fragmented and only loosely related to the ways
in which communities actually affect the health of their residents.''
\15\
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\13\ See, e.g., General Accounting Office Study 04-167, Report On
Specialty Hospitals to the Honorable Bill Thomas, Chairman, Committee
on Ways and Means, House of Representatives, and the Honorable Jerry
Kleczka, House of Representatives, available on-line at http://
www.gao.gov/atext/d04167.txt (last viewed 6/14/2004). This study
reported that for-profit specialty hospitals treated significant
numbers of Medicaid patients, though at generally lower numbers than
similar acute-care general hospitals in the same geographic areas.
\14\ Rev. Rul. 83-157, 1983-2 C.B. 94.
\15\ Mark Schlesinger & Bradford Gray, A Broader Vision for Managed
Care, Part 1: Measure the Benefit to Communities, 17 Health Affairs
152, 155 (1998).
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What we do know is that many of the behaviors touted by the
nonprofit hospitals community as ``community benefits'' are really
nothing more than what any good business would do to lure paying
customers or stay in tune with their customer base. Hospitals, for
example, claim that community needs assessments and community health
education programs are ``community benefits.'' But a community-needs
assessment is analogous to market research regarding what services are
in most demand; if a local automobile dealer did a ``community needs
assessment'' for transportation services, we'd call this a marketing
study. Similarly, many health education and screening programs, such as
a pre-natal care program, are also good business--women who enroll in a
particular hospital's pre-natal education program are very likely to
choose that hospital for delivery services--which the hospital will
make money on.
Finally, the community benefit standard ignores the fact that taxes
paid by for-profit hospitals themselves constitute a major community
benefit. In fact, one academic study noted that if we included the
taxes paid by for-profit hospitals as a community benefit, for-profit
hospitals actually provide more community benefits than their nonprofit
counterparts.\16\
---------------------------------------------------------------------------
\16\ Gary Claxton, et. al., Public Policy Issues in Nonprofit
Conversions: An Overview, Health Affairs, Mar.-Apr. 1997 at 18.
---------------------------------------------------------------------------
So we are entitled to ask, I think, ``What are we getting for the
billions per year that we lose in tax revenues as a result of
exemption?''\17\ The answer to this is that as a legal matter, we are
getting nothing specific other than nonprofit form and a community
board. Community benefit does not provide us with a benchmark against
which we can hold nonprofits accountable for their performance; instead
we simply trust nonprofits to do a better job by virtue of their form.
---------------------------------------------------------------------------
\17\ Estimates of the revenue loss from tax exemption for nonprofit
hospitals vary somewhat. James Copland and Gabriel Rudney estimated
aggregate tax subsidies to nonprofit hospitals at $8.5 billion annually
in 1990. James Copland & Gabriel Rudney, Federal Tax Subsidies for Not-
for-Profit Hospitals, 26 Tax Notes 1559 (1990). These estimates include
not only federal income tax revenues, but also state income and
property tax revenues. In the mid-1990's William Gentry and John Penrod
estimated the value of tax subsidies for nonprofit hospitals at close
to $8 billion. William M. Gentry & John R. Penrod, The Tax Benefits of
Not-for-profit Hospitals, in The Changing Hospital Industry: Comparing
Not-for-Profit and For-Profit Institutions 286 (David M. Culter, ed.,
2000).
---------------------------------------------------------------------------
Now we might be happy with this ``trust us'' approach if we really
believed that nonprofit form was inherently superior to for-profit form
for the delivery of health services, so that no accountability was
needed. If we believed this, we might simply say that tax-exemption is
a way to ``buy'' the superior nonprofit form. But there is no reason to
believe that is the case. Empirical studies on quality of care, costs
of care, and free care for the poor show decidedly mixed results, with
some studies finding in favor of nonprofits and others finding in favor
of for-profits.\18\ These studies certainly do not prove that nonprofit
form is better than for-profit form; at best, all we can conclude is
that nonprofits in some markets in some measures outperform for-
profits, and that in other markets on other measures, for-profits
outperform nonprofits. It is far more likely that geography, size and
market competition affect behavior than simply nonprofit form. So if we
are looking to empirical evidence to justify the ``trust me'' approach
of community benefit, the evidence simply isn't there.
---------------------------------------------------------------------------
\18\ One recent summary of the empirical studies is Jack Needleman,
The Role of Nonprofits in Health Care, 26 J. Health Politics, Policy &
Law 1113 (2001). Recent empirical work by Professor Jill Horwitz at
Michigan suggests that nonprofit hospitals are more likely to provide
unprofitable services, such as burn centers or AIDS treatment centers.
Jill R. Horwitz, Why we need the Independent Sector: The Behavior, Law
and Ethics of Not-for-Profit Hospitals, 50 UCLA L. Rev. 1345 (2003).
Professor Horwitz admits, however, that she cannot draw a causal
connection between tax exemption and the observed behavior; it is
possible, for example, that her results reflect the historical fact
that hospitals were dominated by the nonprofit form, so that
historically all services were provided in that form. In fact, some
empirical work on nonprofit conversions (e.g., transactions in which
nonprofit hospitals convert to for-profit form) suggest that ownership
form is not the controlling factor in service mix, since service mixes
remain stable (e.g., no decline in unprofitable services) post-
conversion. See, e.g., Duke University Center for Health Policy, Law
and Management, A Guide for Communities Considering Hospital Conversion
in the Carolinas (May 1998) at 19. Moreover, Prof. Horwitz's report of
data in this article does not indicate what percentage of unprofitable
services are offered by private nonprofit academic medical centers,
which would be exempt as educational institutions even if the community
benefit test were repealed. If this percentage is significant, it would
suggest that a primary mission of teaching/research is a more important
factor than ownership form in determining service mix.
---------------------------------------------------------------------------
As health policy, this lack of accountability also leads to the
inevitable horror stories. In my own back yard, the Illinois Department
of Revenue recently revoked state property tax exemption for Provena-
Covenant Hospital in Urbana, Illinois. The reason was that for some
period of time, Provena essentially hid its charity care program from
patients; instead, it had a policy of billing all patients for services
rendered, instituting bill collection proceedings against them (which
in Illinois, permitted the use of ``body attachments''--arresting
people if they missed a court date on an uncollected debt), and then,
after all that, if collection efforts were exhausted and the person
still couldn't pay, the hospital would write off the bill and call it
``charity care.'' The most distressing thing about Provena-Covenant for
me as an expert on federal tax exemption is that throughout this entire
ordeal, Provena kept touting in the press reports that even though the
State of Illinois had revoked its property tax exemption, it still met
the standards for exemption under federal tax law--and Provena's
statement on this point was absolutely correct. From a federal tax
perspective, I think we should be both embarrassed and horrified that
an organization operating the way Provena did nevertheless could
legitimately claim it had met federal exemption standards under the
community benefit test.
Alternatives to Community Benefit
If community benefit isn't the answer, then the next question
concerns what alternatives are available. I think there are three
possibilities, each of which admittedly carry some drawbacks but any of
which are better than our current law.
A. A Strict Charity Care Standard
One alternative to the community benefit standard is to return to a
charity care formula for hospital tax exemption. At least one state,
Texas, has enacted specific charity care standards for exempt
hospitals. A strict charity care approach certainly would provide an
administrable standard of accountability for nonprofit hospitals. In
crafting such a standard, however, a number of practical issues would
have to be resolved. These issues include whether to measure charity
care on the basis of costs or charges, and if on costs, whether to use
marginal or average costs; \19\ what the minimum level of charity care
would be to justify exemption; whether that minimum level would have to
be in excess of what for-profits write off each year in bad debt (since
presumably this is the baseline of ``free care'' that is being provided
by the for-profit providers without tax exemption); and whether
nonprofits should have to separate ``true'' charity care from bad debt
in making a charity care measurement (e.g., whether the measurement
should be total uncompensated care or a more narrow subset of
uncompensated care involving up-front decisions that a patient is a
``charity'' patient and will not be charged for service).\20\ These
issues are simply matters of policy choices and certainly can be
resolved, but they in fact must be resolved in order for a charity care
standard to work.
---------------------------------------------------------------------------
\19\ See generally, John D. Colombo and Mark A. Hall, The
Charitable Tax Exemption 55-56 (1995). Compare Gary Claxton, et. al.,
supra note 16, at 16 (arguing for average costs) with David A. Hyman,
The Conundrum of Charitability: Reassessing Tax Exemption for
Hospitals, 16 Am. J. L. & Med. 327, 361 (1990) (arguing for marginal
costs). Using charges as a measure of charity care is patently
ridiculous, since hospitals can simply raise their ``rack rate'' for
hospital services in order to increase their charity care numbers,
knowing that virtually no one would ever pay that rate given the
discount arrangements with insurers.
\20\ Several academics point out that while some bad debt may not
be related to the economic inability of the patient to pay their bills,
some certainly is so related. Gary Claxton, et. al., supra note 16;
Nancy M. Kane & William H Wubbenhorst, Alternative Funding Policies for
the Uninsured: Exploring the Value of Hospital Tax Exemption, 78
Milbank Quarterly 185, 190 (2000). At least some bad debt, therefore,
probably should be included in charity care measurements but how much
is open to debate.
---------------------------------------------------------------------------
In addition, there are some more general policy questions with
respect to a charity care approach. First, since free care has to be
provided by reallocating revenues from other sources, some commentators
argue that this essentially involves a ``hidden tax'' on paying
patients and 3d-party and government insurers. Moreover, this ``tax''
is being assessed by private actors (hospitals) instead of through
normal democratic processes.\21\
---------------------------------------------------------------------------
\21\ M. Gregg Bloche, Health Care Below the Waterline, 80 Minn L.
Rev. 299 (1995).
---------------------------------------------------------------------------
Second, whether charity care is available and how much is available
will be dictated by the local market and the success (or lack thereof)
of hospitals in that market in reallocating revenues from other
sources. Thus availability of care may vary enormously depending on
geographic location.
Third, while a strict charity care standard is a viable solution to
the accountability problem with tax exemption, it should not be viewed
as a total solution to health care for the uninsured poor. Standing
alone, a charity care system administered at the hospital level
virtually assures that the uninsured will not engage in much, if any,
preventive care, and instead will wait until a serious illness compels
hospitalization which then would be ``free'' under this system.\22\
This behavior would be exactly contrary to the emphasis put on
preventive care by most (if not all) health policy experts. Certainly,
having more charity care is better than having less, but it is not a
complete solution to health care for the uninsured.
---------------------------------------------------------------------------
\22\ Bloche, supra note 21; Peter Schuck, Designing Hospital Care
Subsidies for the Poor, in Uncompensated Hospital Care: Rights and
Responsibilities (Frank A. Sloan, et. al., eds. 1986).
---------------------------------------------------------------------------
B. Replacing Community Benefit with a More Accountable Standard
A second possibility is to replace the community benefit standard
with something more flexible than the strict charity care approach, but
which has more specific behavioral guidelines that would provide more
accountability than the community benefit standard. For example, the
Catholic Hospital Association once promulgated guidelines for its
members limiting ``community benefits'' to behavior that would not
duplicated by the for-profit sector.\23\ Another approach along these
lines is my recent suggestion that we require exempt hospitals to focus
on a mission of ``enhancing access.'' \24\ This test would permit
exemption when individual health care entities develop a specific plan
for enhancing access to services and demonstrate actual financial
commitment to and execution of such a plan. ``Enhancing access'' would
encompass not just free or expanded care for the poor, but could also
involve providing usual health services to a medically-underserved
population (e.g., an HMO formed to bring health services to a
medically-underserved area) or providing services to the general
population that were previously unavailable or under-provided. Thus a
particular entity that formulated a plan to provide expanded AIDS
treatment (a service identified in empirical work as unprofitable and
hence under-provided) and met minimum financial commitments to such
treatment might be rewarded with exemption. The downside of this
approach is that it provides less clarity and therefore less stringent
accountability than a strict charity care standard. In effect it
introduces some ``fuzziness'' as compared to a strict charity care
standard in order to achieve more flexibility.
---------------------------------------------------------------------------
\23\ The CHA developed five criteria for these kinds of community
benefits. These criteria were (1) they must be financed through
philanthropic contributions, volunteer efforts or endowment; (2) they
must respond to a particular or unique health problem in the community;
(3) they generate low or negative margin; (4) they respond to the needs
of special populations, such as minorities, the poor, the elderly, the
disabled, those with AIDS, etc.; and (5) the service or program likely
would be discontinued if the decision were made on a purely financial
basis. See Kane & Wubbenhorst, supra note 20, at 196.
\24\ John D. Colombo, The Role of Access in Charitable Tax
Exemption, 82 Wash. U.L.Q. 343 (2005).
---------------------------------------------------------------------------
C. Repeal the Community Benefit Standard
The final possibility would be to repeal the community benefit
test. Under this alternative, a few hospitals that met other
traditional standards of charity could remain exempt--for example,
academic medical centers would remain exempt as an educational
institutions under Code Section 501(c)(3); and a few organizations such
as the Mayo Clinic might be able to make the case that they are
primarily engaged in medical (scientific) research and hence would be
exempt for that purpose. Similarly, a clinic whose primary purpose was
to serve the poor would be exempt as a poor relief charity. Most
private nonprofit hospitals, however, would lose exemption under this
approach, because their primary purpose would not be education,
research or poor relief (rather, their primary purpose is to provide
health services for a fee), but that is not necessarily a bad thing. A
number of commentators argue that our health care system would be
better served by taking the money saved from tax exemption and using it
for entity-neutral, direct financial incentives for certain
behavior.\25\ For example, if the problem is health care access for the
uninsured poor, the system might be better off eliminating exemption
and taking the revenues resulting from that decision to expand
Medicaid. Or if we believe there is a problem of access to unprofitable
services, we could use the money to provide direct incentives to all
hospitals to provide more such services.
---------------------------------------------------------------------------
\25\ See, Robert C. Clark, Does the Nonprofit Form Fit the Hospital
Industry?, 93 Harv. L. Rev. 1416, 1418; Hyman, supra note 19, at 380.
---------------------------------------------------------------------------
Of course, the downside of such entity-neutral incentives is that
such incentives would be complicated to enact and administer, requiring
agreement by Congress or a duly-delegated agency on the exact policy
initiatives that this approach would subsidize. Because of the need for
national political agreement, the direct incentives approach in the
long run may be less desirable than an approach focused on more
specific local community needs--for example, a particular community
might need charity care more than it needs a burn unit.
Summary
One of the hardest things for human beings to do is to let go of
the past. Prior to WWII, hospitals were essentially homeless shelters
for the poor, often run by religious orders and staffed with
volunteers. Today they are multi-million or in many cases multi-
billion-dollar fee-for-service businesses. The reasons that justified
exemption for hospitals in 1928 simply don't exist any more, and I
think that this Committee should carefully reconsider whether multi-
billion-dollar fee-for-service businesses should be eligible for tax
exemption at all. At the very least, shouldn't we replace community
benefit with some specific behavioral standard that will provide
accountability and enable us to answer with certainty the question
posed earlier, ``What are we getting for our money?''
Chairman THOMAS. Thank you, Professor Colombo. Mr. Jenkins.
STATEMENT OF STAN JENKINS, CHAIRMAN, CHAMPAIGN COUNTY BOARD OF
REVIEW, URBANA, ILLINOIS
Mr. JENKINS. Thank you, Mr. Chairman. I appreciate the
opportunity to be here and your staff has been most gracious in
welcoming us. Like most local boards of review around the
United States, we consider the exemption from property taxes to
be a privilege conferred by State law. It is not an inherent
right just because an organization is a hospital or because it
is tax exempt under Federal law. The burden of proof is always
on a hospital to demonstrate that it deserves exemption for
paying taxes by virtue of the charitable benefits it returns to
a community.
In our opinion, not only did our two local hospitals in
Champaign County not meet this burden of proof, in many
aspects, they fell far short. A few particular areas stood out.
The hospitals were charging uninsured patients higher prices
than they were charging anyone else for exactly the same care
or service. An uninsured person could be charged two to five
times as much as an insured person for the very same Band-Aid,
same aspirin and the same hospital room. People who are without
insurance are usually in that situation because they can't
afford to have insurance in the first place. It is not by
choice. To then force these very same people to pay higher
prices than anyone else has to pay is not befitting a
charitable institution and, in my mind, is just plain wrong.
Too often, instead of working on reasonable payment plans
with uninsured patients, the hospitals were using onerous
collection practices including suing hundreds of their own
patients. We considered these practices to be contrary to what
a charitable organization should be doing. In one case, the
level of actual charity care provided was less than one half of
1 percent of total revenues, and this was at a time that this
institution posted a $32 million profit. In our opinion, that
was no where near the legal level required under Illinois law.
Finally, we found that both of these not-for-profit
institutions had intimate business relationships with for-
profit entities directly related to their own corporate
organizations. This included, but was not limited to, the
transfer of millions of dollars from a not-for-profit hospital
to a for-profit subsidiary and then still claiming the hospital
to be not-for-profit. This just didn't make sense to us. In
following other hospitals' practices across the United States,
we have learned that these practices of our two hospitals in
relation to pricing, collections and charity care are very
common.
Common practice does not make something right and it
certainly does not make these hospitals charitable as defined
by law. In my opinion, many of the these hospital practices
simply do not make sense from the standpoint of their own
financial interest. James Unland of from the Health Capital
Group recently surveyed several hundred patient account
representatives across the United States. He concluded that the
hospitals could actually increase their revenue from uninsured
patients through fair pricing and fair payment terms. I would
have to agree. This should come as no surprise to anyone. Fair
pricing and fair payment terms are good business practices in
any business.
From a public policy standpoint, we are beginning to see a
class of citizens who are afraid to go to hospitals for being
charged prices they can't afford to pay in the first place and
then being hounded for that payment through the court system. I
consider this dangerous for hospitals and society. People who
stay away from hospitals until what otherwise might be a
relatively low cost ER visit becomes a life threatening
extremely high cost medical episode. Having the uninsured
afraid of their own hospitals helps no one.
I believe there are some constructive steps that could be
taken at the Federal level to address these practices before
the situation worsens. First, I would suggest established
pricing payment and collection standards with respect to the
uninsured and underinsured, require all tax-exempt hospitals to
provide charity care within their respective financial means,
review the proliferation of for profit businesses in an
industry that is dominated by 501(c)3 organizations and finally
compel hospital executives and boards to be accountable to
their missions as the charitable organizations they profess to
be.
In closing, I would like to make one other comment.
Locally, Provena covenant hospital in Urbana, Illinois, we
looked at their activities for the 2002 tax year. In 2003, they
had a new chief executive officer come on board and also had a
new CFO come on board. Prior to the new administration coming
in under Mark Wiener, Provena covenant had been suing hundreds
of patients. Last year under his leadership in 2004, there was
one lawsuit filed against a patient. Change can be made by
these administrators if they choose to make them, and he is a
prime example of that happening. Thank you very much. I
appreciate the time. Again, I appreciate the welcome we
received from your staff and from your Committee.
[The prepared statement of Mr. Jenkins follows:]
Statement of Stan Jenkins, Chairman, Champaign County Board of Review,
Urbana, Illinois
I am the Chairman of the Champaign County, Illinois Board of
Review. In Illinois, local boards of review are charged with the
responsibility to review applications for exemptions from property
taxes, including applications filed by not-for-profit `charitable'
hospitals.
In 2001 both hospitals in Champaign County, Illinois were exempt
from paying property tax. Today both are on the tax rolls. In each case
the Champaign County Board of Review recommended to the Illinois
Department of Revenue that tax-exempt status be denied.
THE LEGAL BASIS FOR TAX-EXEMPTION
In Illinois (as well as in many other states) a property must be in
``exempt ownership'' and ``exempt use'' to be exempt from property tax.
The Illinois constitution, the statutes, and Illinois case law
going back nearly a hundred years address what qualifies as a
``charitable'' institution. The constitution states that an institution
must be ``exclusively'' used for charitable purposes to be exempt from
property tax. The statues go on to say that the property cannot be
``leased or otherwise used with a view to profit''.
Again and again case law has upheld the standard that ``exclusively
used'' means the primary purpose for which the property is used be
charitable and ``not by any secondary or incidental purpose.'' As
recently as December of 2004 the Illinois Supreme Court affirmed this
standard.
THE TAX-EXEMPTION APPLICATION PROCESS
The burden of proof to receive a determination of exempt status is
always on the applicant, in that exempt status is not automatically
conferred just by virtue of the fact that a hospital, for example, may
be a federally qualified 501(c)(3) organization. Any institution
seeking exemption from property tax must submit an application to the
local Board of Review. The Board of Review has a statutory obligation
to make ``a full and complete statement of all the facts in the
case''--including submitting appropriate interrogatories to the
applicant--and to send a ``recommendation'' to the Department of
Revenue. The Department of Revenue then grants or denies that exempt
status.
THE BASIS FOR THE RECOMMENDATION
The issue of how exempt organizations treat those they serve is
crucial to whether or not they deserve exempt status. Prior to our
beginning to review the hospitals' exempt status, in a completely
unrelated matter, an official at the Illinois Department of Revenue
told me in relation to a housing project, ``if the organization evicts
people it is not charitable, if they sue people they're not
charitable.''
The issue of these two hospitals suing patients was common
knowledge, due in part to the work of a very active community group. A
related issue was the issue of hospitals charging their highest `list
prices' to the uninsured.
When the hospitals applied for property tax-exemption is where the
long journey began that culminates in my appearance here today. We did
not enter into this lightly. We knew we would likely ruffle some very
well placed feathers in our community. We spent countless hours
researching the law. We sifted through hundreds of court records. We
dug into numerous public records, newspaper articles and Internet
documents. To characterize that what we discovered as appalling would
be an understatement.
First, let me address ``exempt ownership''. A determination must be
made if the institution is ``charitable'' as defined by the law.
Three main issues clearly emerged from our research:
1. Pricing to the Uninsured
2. Billing and Collection Practices
3. Availability of Charity Care
Pricing to the Uninsured And Billing/Collection Practices
As we sit here today, it is a common practice in the hospital
industry to charge an uninsured patient higher prices for the same care
or procedure than an insured patient. If you and I both go into the
hospital for exactly the same thing and you have insurance and I don't
have insurance, I will be charged two to five times more for exactly
the same thing. Insurance companies and government payers have the
luxury of negotiating lower rates. The uninsured has no one as an
advocate.
It is safe to say that people who do not have insurance have not
made a willful decision to forego insurance coverage. It's because they
can't afford it. They are the poorest among us. Yet these same people
are charged higher prices than anyone else and when they are unable to
pay these inflated prices they are sued.
This is discriminatory pricing; it is fundamentally wrong; it is
indefensible and it is particularly egregious when practiced by a
``charitable'' institution. More than that, as at least one leading
hospital industry insider has concluded: unfair pricing is just bad
business in that hospitals will actually collect more money if people
feel their hospital pricing is fair.
Here are but a few examples of what we found in court records:
One patient who was taken to court had ``medical
disabilities'' and was later admitted to ``a facility in Chicago due to
a break down.'' The defendant's husband was then added as a co-
defendant. Ultimately the defendant filed for bankruptcy.
Another defendant was ``ordered to be incarcerated
immediately.''
One judgment against a patient was for an amount of
$140,626.32. Another judgment against a patient was for $10.00. No
amount seemed to be too small or too large to be pursued through the
legal system.
One defendant was ordered ``not to disburse or spend any
money he may receive from said tax returns.'' The defendant was also
threatened with incarceration. There was also a ``body attachment''
(arrest warrant) was issued with bond set at $5000.00.
Yet another patient ``appears personally and represents
to the Court he is undergoing cancer treatment and he works as a hired
person.''
Another judgment in favor of the hospital and against the
patient was in the amount of $578.62. Yet there was an ``immediate body
attachment (arrest warrant) ordered to issue with bond set in the
amount of $2,500.00.''
The list goes on and on. Wages were garnished, mental health
records were ordered for inspection, interpreters were required.
These examples are not isolated. Our Board of Review did not and
does not believe these are the acts of a charitable institution.
The Availability of Charity Care
I would also like to address the availability and amount of actual
charity care provided. In 2003 Carle Foundation Hospital (using its own
figures) provided approximately $1.3 million in ``charity care''.
However, when this is compared to total assets, total revenues or total
patient revenues that amount is in fact less than one half of one
percent (
Looking at ``exclusively'' used for charitable purposes on one end
of the spectrum and ``secondary or incidental'' charitable use on the
other end of the spectrum, its obvious that less than one half of one
percent (
Countless thousands of for-profit businesses across this nation
contribute more than one half of one percent to various charities every
year. They do so out of a sense of community obligation and good
citizenship. However, they neither expect nor receive the benefits of
tax-exemption.
Tax-exemption is a gift bestowed upon certain institutions in
exchange for the benefits returned to our society and our communities.
From property tax alone, on just five parcels of property, Carle
Foundation benefits to the tune of $2,000,000. However, exemption from
sales tax, federal and state income tax saves them many more millions
of dollars. The $1.3 million in actual charity care provided isn't even
a dollar for dollar trade off.
Our Board of Review asked the logical question: ``What is our
society getting in return for extending the privilege of tax-
exemption?''
Now for a moment let's examine the issue of ``exempt use''. The
standard has been established and upheld; the property cannot be
``leased or otherwise used with a view to profit.''
It is common practice in the hospital industry today to employ
outside service providers and physicians groups to fulfill certain
functions within a hospital. These groups are for-profit entities with
leases and/or agreements with the hospitals.
In the case of Provena Covenant Hospital there were thirteen such
entities functioning inside a tax-exempt hospital.
Carle Foundation Hospital is somewhat different. Carle Foundation
Hospital is a not-for profit institution and Carle Clinic Association
is a for-profit entity. By lease agreement Carle ``Clinic and its staff
are to have access to all of Foundation's hospital, accessory
buildings, property and facilities, including full rights of ingress
and egress to the Clinic, its staff, employees, patrons, visitors and
persons furnishing services to Clinic.''
Carle Clinic provides all radiology and laboratory services and
equipment in Carle Hospital. Carle Hospital ``leases'' hospitalists
(doctors) from the Clinic through Carle Foundation Physician Services,
LLC, which is comprised entirely of Carle Clinic doctors.
Patients go to Carle Foundation Hospital, a tax-exempt, charitable,
not-for profit hospital, only to be assigned a Carle Clinic Number,
treated by Carle Clinic doctors and x-rayed by Carle Clinic equipment.
Those x-rays are read by Carle Clinic radiologists, tests run in the
Carle Clinic Lab and then the patient is separately billed by Carle
Clinic Association, a for profit company that has no charity care
policy or any obligation to provide any charity care whatsoever. And,
Carle Clinic has its own history of suing patients over medical debt.
There is a glaring juxtaposition of a ``charitable'' hospital
allowing doctors complete, unfettered access to and use of their
``exempt'' facilities to pursue private gain while this same
``charitable'' hospital continues an unfair policy of overpricing and
suing the uninsured. This juxtaposition can not be ignored, and it
violates one's sense of fairness and what is right. It is my view that
any institution that permits these unfair practices to exist can not be
considered ``charitable'' or tax-exempt.
I want to be very clear . . . like any other business, a hospital
deserves to be paid for its goods and services. A hospital has every
legal right to pursue collections through the court system like any
other business. But they can't have it both ways. They can't act like
any other business yet expect to enjoy tax-exempt status unlike any
other business, especially if they hold themselves out to be
`charitable' organizations under either federal or state law.
OTHER ISSUES
While compiling information regarding Provena Covenant's Tax-
exemption Application, more questionable practices were discovered.
Provena Covenant is comprised of both for-profit entities and not-for
profit entities. In a two year period of time Provena Hospitals and
Provena Senior Services (both not-for profit entities) transferred
$159.7 million to the parent corporation, Provena Health. Provena
Health, in turn, transferred $23.1 million to Provena Ventures, a for-
profit affiliate.
The Board of Review viewed this as little more than a corporate
``shell game'' that raised serious questions regarding the not-for
profit status of ProvenaHospitals and Provena Senior Services.
At the time of our review, Provena Covenant Medical Center patients
were provided with very few payment options. The patient could agree to
pay in full at the time of discharge, pay with insurance, pay Provena
Covenant Medical Center 10% of the total balance on a monthly basis or
agree to get a loan through a lending company and then repay the
lending company, with interest.
Capstone Bank was the lending company that Provena Covenant Medical
Center patients were referred to. A patient using Capstone's financing
plan, agreed to pay a minimum of $40 per month and finance charges of
12.9% interest on their outstanding balance. When a ``credit line'' was
established by the patient, funds borrowed against that credit line
were subject to ``APPROVAL BY PROVENA HOSPITALS . . .'' and could ONLY
be used to pay Provena.
Under federal statute it is unlawful to charge Medicare patients
interest on their Medicare-related health care bills. By encouraging
patients (including Medicare patients) to obtain loans from Capstone,
Bank, Provena was, in effect encouraging Medicare patients to incur
those same finance charges on Medicare related bills, only payable to a
different entity.
Executive compensation is another area deserving serious scrutiny.
Minnesota Attorney General Mike Hatch recently testified before the
Senate Finance Committee regarding this issue. He cited abuses that are
not unique to the State of Minnesota.
In reviewing Carle Foundation Hospital's 990 Form for 2002, it
appears that approximately $40 million of investments are cited. All
but approximately $400,000 is for deferred compensation.
The Board of Review was also informed that executive bonuses were
paid based on the financial performance of the hospital. If this is the
case, it would prove to be a direct conflict of interest in light of
the charity care actually dispensed to those in need of it.
REASONS FOR OVERSIGHT
Since the time the Board of Review began reviewing these hospitals'
tax-exemption applications it has become increasingly clear that local
officials and county governments are ill equipped to adequately deal
with these matters.
Typically a hospital is one of the largest employers in the area.
They often have access to greater financial resources than does a
municipal or county government. The typical response to inquiries or
scrutiny of any kind is to immediately ``lawyer up.''
The issues at hand are complex. In most cases there simply is not
enough time, resources or technical knowledge to mount a challenge to
the inappropriate conduct of some of these institutions.
Many local officials are simply too intimidated to take on such
tasks.
I recently addressed a meeting of Illinois Assessment Officers
regarding these charitable institutions. After that meeting, in a
private setting, several of these officials made comments to me, such
as, ``You may be right. But I have three years until I retire and I'm
not going to touch this.'' Others simply said they were worried they
would not be reappointed or reelected if they challenged a local
hospital, regardless of the conduct of that hospital.
The Champaign County Board of Review, while conducting our
research, requested that the hospitals provide us with certain
information to enable us to carry out our statutory obligation to make
``a full and complete statement of all the facts in the case.'' In each
case the hospitals simply refused.
Both hospitals made a unilateral decision that they simply would
not respond to the legitimate, lawful requests of local authorities.
It's now clear that many of our nation's hospitals and their
attorneys have doggedly clung to the notion that they have the
inalienable legal right to overcharge uninsured patients, who most
often are the poorest citizens among us. When these same people are
unable to pay the inflated prices (prices that no one else is required
to pay), they are then hounded through the court system. Needless to
say, these patients are least able to afford legal advice and are left
to fend for themselves in the face of the hospitals' attorneys and a
legal system they are unfamiliar with.
Moreover, the behavior of the many hospitals, as one leading
industry analyst has pointed out, is contrary to their own best
financial interests. After interviewing several hundred patient account
representatives at hospitals, he concluded that the patient account
people are convinced that fair pricing is good business. People who
believe they are treated fairly will actually take their hospital bills
more seriously and, if given fair repayment terms, will pay more money
into hospitals.
This principle of fair pricing being good business should not
surprise anyone in any business.
HOW CONGRESS CAN HELP
Here are some thoughts on possible federal legislation that would
be fair to both hospitals and consumers:
Require in a national standard that hospitals price their
services to the uninsured at a level no higher than their `most favored
commercial payor' pays, similar to what the Minnesota Attorney General
persuaded the large hospital systems there to do. However, make it
known to the private insurance industry that such repricing is not a
pretext for throwing out and renegotiating private payor contracts.
Require that each hospital provide a level of charity
care commensurate with its financial ability to do so, without in turn
jeopardizing its financial viability or ability to obtain credit.
Require that form 990s be redesigned to encompass
individual hospitals' information in the case of hospital systems. It
is almost impossible to discern information from some form 990s at the
individual community hospital level in the case of multi-hospital
systems.
Require that hospitals set up reasonable medical debt
repayment plans with repayment structured correspondingly to the
individual's income level and credit situation. In this regard,
hospitals should be required to take all reasonable steps before
sending any patient account to collection agencies.
Require that hospital executives and board members
establish judicious ground rules on the use of collection agencies,
that those collection agents abide by very specific standards and that
the top executives of the hospitals know exactly what accounts the
collectors are pursuing and why.
Conduct an explicit, separate review of the proliferation
of for-profit businesses that are affiliated with not-for-profit
hospitals and pose the question: are all these spin-off businesses
necessary, are they truly part of the core hospital business and, if
so, why can't they be not-for-profit?
Review the possibilities in regards to the IRS assisting
hospitals to verify adjusted gross income and number of dependents
pursuant to those patients applying for charity care assistance. The
so-called `charity care applications' are often highly burdensome on
patients and not accurate from the point of view of hospitals.
Chairman THOMAS. Thank you very much, Mr. Jenkins. Is the
board of review an elected or an appointed position?
Mr. JENKINS. We are appointed part-time county employees.
Chairman THOMAS. I was curious because many of us are
accused of being amateur hot air balloonists. I notice that you
are a commercial hot air balloon pilot.
Mr. JENKINS. That was in a previous life.
Chairman THOMAS. I appreciate professionalism in any area.
Gentleman from Baylor, welcome back, Mr. Thomas.
STATEMENT OF JOHN THOMAS, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, BAYLOR HEALTH CARE SYSTEM,
DALLAS, TEXAS
Mr. THOMAS. Thank you, Mr. Chairman. My name is John
Thomas, senior Vice President and general counsel of Baylor
Health Care System. It is my pleasure to be with you to
describe the Texas non-profit hospital community benefits law.
Baylor is experienced with that law and the impact that law has
had on the provision of indigent and other health care in the
State of Texas. In sum, Baylor and Texas non-profit hospitals
are accountable. Baylor is a faith-based institution with
strong ties to the Baptist general convention of Texas. We are
more than a century old with a history rich in innovation. Last
fiscal year, we provided more than $240 million in community
benefits by a very specific definition. We are a leading
medical education facility and conduct some of the world's
cutting edge research. Baylor Health Care System is the
corporate sponsor of 13 non-profit hospitals with our flagship
Baylor University Medical Center located in downtown Dallas.
Baylor University Medical Center is a 1,000-bed teaching
hospital with a level one trauma center that provides more care
to penetrating trauma victims than Dallas County's tax-
supported Parkland hospital.
More than 35 percent of the patients who come to our trauma
center have no ability to pay for their care. Baylor has the
largest neonatal ICU in the southwest and one of the five
largest organ transplant programs in the country. Charity care
is provided under the most generous charity care financial
assistance policy among all Dallas Fort worth hospitals
including Parkland. Operating income and philanthropy have
funded bench research that has produced a vaccine that has
cured melanoma in early clinical trials. We train over 185 post
graduate physicians each year in almost every specialty. Since
1993, Texas has had a formalized mechanism for non-profit
hospitals to demonstrate their commitment to the mission.
Hospitals supported the 1993 effort and acknowledged that the
Texas legislature did a good thing in raising public awareness
to the many contributions non-profit hospitals make to their
communities and in formalizing that process.
Baylor and Texas non-profit hospitals consistently have
complied with and frequently far exceeded the requirements
despite a dramatic change in the health care environment.
Today, approximately 30 percent of the State's population is
uninsured. Under the Texas law, Texas non-profit hospitals are
required to meet one of three standards. By providing charity
care and government sponsored indigent health care and other
community benefits. Baylor and most non-profit hospitals report
under the requirement to provide charity care and government-
sponsored indigent health care and other benefits equal to at
least 5 percent of the hospital's net patient revenues with
charity care and government-sponsored indigent health care
equal to at least 4 percent of the hospital's net patient
revenues. Last year as I mentioned, Baylor provided over $240
million in total community benefits over 15 percent of our net
patient revenue. Hospitals that do not meet the requirement
risk having their State capital, property and sales tax
exemptions revoked, but are given the opportunity to remedy
their shortfall in the following year and/or make contributions
to charitable institutions to satisfy that obligation.
Charity care is strictly defined generally as the
unreimbursed costs to providing health care services to the
poor, financially indigent and medically indigent. People with
incomes with less than 200 percent of the Federal poverty level
are considered pure charity care under this law. For example,
at Baylor, an individual at the 200 percent of Federal poverty
level gets free care, period. Government-sponsored indigent
health care means the unreimbursed cost of the hospital
providing health care service to recipients of Medicaid and
other Federal benefits--Federal indigent health care benefits.
Costs for these purposes are defined by GAAP. Bad debt is not
considered unreimbursed care for these purposes. To our
knowledge, all of the States' non-profit hospitals have been in
compliance with this law for most reported years. The amount of
charity care being provided by nonprofit hospitals has
increased over time, as reflected in the chart that is in my
written testimony.
But, to summarize, in 1994, the first year of that law,
there was over $573 million of charity care reported, about 6.4
percent of the net patient revenue reported by the State's
nonprofit hospitals. By 2003, the amount of charity care had
tripled to $1.6 billion, 9.65 percent of charity care provided
of net patient revenue of the nonprofit hospitals in Texas.
While net patient revenue during that period of time only
doubled, charity care tripled. In conclusion, the Texas
community benefit law provides an objective tool for
determining whether nonprofit hospitals are satisfying the
respective obligations to the communities they serve. Baylor
has found the Texas community benefit law to be a fair and
helpful measure to ensure nonprofit hospitals in the
communities we serve are meeting, at a minimum, the required
level of community benefits and charity care. Mr. Chairman, may
I have 15 more seconds?
Chairman THOMAS. Sure.
Mr. THOMAS. Finally, there is a huge difference between the
community benefit of Baylor and the for-profit hospitals in our
community. In 2003, Baylor University Medical Center provided
more charity care alone than HCA's Medical City Hospital, its
charity and bad debt combined. Medical City has a cost-to-
charge ratio of 25 percent, compared to Baylor's 50 percent;
and that same year they had net income of $158 million, a 52
percent margin, compared to Baylor University Medical Center's
10 percent margin, which produced $65 million of income to roll
back into the inner city level one trauma center, charity care,
medical education and research. We do not begrudge HCA. We will
compete with them on quality patient service, patient
satisfaction and cost all day long. But there is a clear
difference in the nonprofit service and commitment, and their
for-profit purpose. Thank you, sir.
[The prepared statement of Mr. Thomas follows:]
Statement of John T. Thomas, Senior Vice President and General Counsel,
Baylor Health Care System, Dallas-Fort Worth, Texas
Mr. Chairman, Ranking Member Rangel, Mr. Johnson, members of the
Committee, my name is John T. Thomas, Sr. Vice President, General
Counsel, Baylor Health Care System, Dallas-Fort Worth, Texas. It is my
pleasure to be with you today, to describe the Texas Nonprofit Hospital
Community Benefits Law, Baylor's experience with that law, and the
impact that law has had on the provision of indigent and other health
care in the state of Texas.
Baylor is a faith based institution, with strong ties to the
Baptist General Convention of Texas. We are more than a century old,
with a history rich in innovation, quality care, and providing
charitable services. Last fiscal year we provided more than $240
million in Community Benefits (15% of net patient revenue). We are a
leading medical education facility and conduct some of the world's
cutting edge research.
Baylor Health Care System is the corporate sponsor of 13 non-profit
hospitals, with our flagship--Baylor University Medical Center--located
in downtown Dallas. BUMC is a 1,000 bed quadenary teaching hospital,
with a Level I trauma center that provides care to more penetrating
trauma victims than Dallas County's tax-supported Parkland hospital.
BUMC has the largest Neonatal ICU in the Southwest, and one of the five
largest organ transplant programs in the Country. Baylor Health Care
System is deeply committed to its mission as a non-profit hospital.
Charity care is provided under the most generous Charity Care/Financial
Assistance policy among all Dallas-Fort Worth hospitals, including
Parkland.
Texas Nonprofit Hospital Community Benefits Law (Texas Health and
Safety Code Sections 311.041 et. Seq.)
Since 1993, Texas has had a formalized mechanism for nonprofit
hospitals to demonstrate their commitment to mission through the
reporting of charity care and community benefits. By conducting formal
community needs assessments and submitting annual reports detailing the
amounts of charity care and community benefits provided, nonprofit
hospitals became more accountable to their communities. The Texas
Attorney General was given broad power to enforce the charity care
statute, and has the appropriate authority to audit any nonprofit
hospital to ensure compliance with the law.
Hospitals supported the 1993 effort, and acknowledge that the Texas
Legislature did the right thing in raising public awareness of the many
contributions nonprofit hospitals make to their communities, and in
formalizing the process by which local communities and hospital
governing boards determine community health priorities and set goals to
achieve them.
Baylor and Texas' nonprofit hospitals consistently have complied
with--and frequently have exceeded--the requirements, despite a
dramatic change in the health care environment. Today, approximately 30
percent of the state's population is uninsured.
Charity Care Requirements Under Texas Law
Under the Texas law, Texas nonprofit hospitals are required to meet
one of three standards, by providing:
Charity care and government-sponsored indigent health
care at a reasonable level in relation to community needs, available
resources and the tax-exempt benefits received by the hospital (the
``Reasonableness Standard''), or
Charity care and government-sponsored indigent health
care equal to 100 percent of the hospital's tax-exempt benefits,
excluding federal income tax (the ``100% of Tax-exempt Benefits
Standard''), or
Charity care and community benefits equal to at least 5
percent of the hospital's net patient revenues, with charity care and
government sponsored indigent health care equal to at least 4 percent
of the hospital's net patient revenues, and at least 1 percent in other
community benefits (the ``Charity Care and Community Benefits Mix'').
Nonprofit hospitals that are ``disproportionate share'' Medicaid
hospitals, as determined by the Texas Medicaid program are deemed to
satisfy the requirements of this law.
The law also requires nonprofit hospitals to conduct a community
needs assessment, and based on the assessed needs, develop a plan and
budget for addressing the charity care and other community benefit
needs.
Hospitals that do not meet their requirement risk having their
state capital, property and sales tax exemptions revoked, but are given
an opportunity to remedy their short-fall in the following year and/or
make payments to other charitable institutions.
How Charity Care is Calculated
``Charity care'' means the unreimbursed costs to the
hospital of providing, funding or otherwise financially supporting
health care services to the financially or medically indigent.
Hospitals may establish eligibility criteria for their applicable
charity care policies, but ``financially indigent'' criteria may not
exceed 200% of the federal poverty law, for consideration as ``charity
care'' for purposes of calculating compliance with the law.
``Government-sponsored indigent health care'' means the
unreimbursed cost to a hospital of providing health care services to
recipients of Medicaid and other federal, state, or local indigent
health care programs, eligibility for which is based on financial need.
Originally, ``cost'' was calculated using the Medicare
cost report. In 1995, the Texas legislature recognized the Medicare
cost report calculation was not a complete reflection of a hospital's
``cost'' so they changed the formula to reflect ``unreimbursed costs''
as determined under generally accepted accounting principles (GAAP).
GAAP is standardized, has a broader focus, and reflects more accurately
costs and expenses on all types of patients.
Bad debt is not considered ``unreimbursed care'' for the
purposes of determining the amount of Community Benefit, but it is
considered an expense when calculating the cost to charge ratio of the
hospital under GAAP.
Other important defined terms include:
``Community Benefit'' generally means unreimbursed cost to a
hospital of providing charity care, government-sponsored indigent
health care, donations, education, research and subsidized health
services. It does not include any taxes or government assessments paid
by the hospital.
``Net Patient Revenue'' is an accounting term calculated in
accordance with GAAP for hospitals. Essentially Gross Revenue less
contractual adjustments.
Baylor and Texas Hospitals Meet or Exceed Requirements
Under the law, all of the state's nonprofit hospitals were in
compliance with one of the three alternative requirements for 2003, the
most recently available data.
The amount of charity care being provided by nonprofit
hospitals has increased over time, as reflected in the Chart below
(which includes only Texas Nonprofit Hospitals)
Baylor Health Care System files three separate reports
each year--one each for Baylor University Medical Center and Our
Children's House at Baylor, two facilities that satisfy the requirement
as a result of their heavy Medicaid ``disproportionate share''
utilization. The third, is a ``consolidated'' report for the other
Baylor hospitals, who report on a consolidated basis. In 2003, Baylor
Health Care System's Total Community Benefit was $190 million, which
grew to $240 million in 2004.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Bad Debt as Charity as
Net Patient % of Net % of Net
Year Revenue Bad Debt Patient Charity Patient
Revenue Revenue
--------------------------------------------------------------------------------------------------------------------------------------------------------
1994 9,500,347,808 502,527,431 5.29% 573,760,164 6.04%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995 9,504,914,516 503,355,365 5.30% 631,950,218 6.65%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996 9,944,720,361 576,725,934 5.80% 702,196,293 7.06%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997 10,467,197,285 671,766,095 6.42% 764,662,344 7.31%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1998 11,195,490,162 761,715,643 6.80% 943,564,737 8.43%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1999 11,691,125,703 892,525,552 7.63% 897,514,122 7.68%
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000 12,570,707,023 1,097,354,780 8.73% 1,015,280,788 8.08%
--------------------------------------------------------------------------------------------------------------------------------------------------------
2001 14,232,736,653 1,156,159,672 8.12% 1,189,049,039 8.35%
--------------------------------------------------------------------------------------------------------------------------------------------------------
2002 16,309,834,839 1,351,918,193 8.29% 1,455,199,704 8.92%
--------------------------------------------------------------------------------------------------------------------------------------------------------
2003 17,068,038,721 1,416,284,606 8.30% 1,647,681,372 9.65%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Conclusion
In conclusion, the Texas Charity Care Law provides an objective
tool for determining whether nonprofit hospitals are satisfying their
respective obligation to the communities they serve. Baylor has found
the Texas Charity Care Law to be fair, and a helpful measure to ensure
the nonprofit hospitals in the communities we serve are meeting, at a
minimum, the required level of Community Benefits and Charity Care.
I have attached to my written testimony, a copy of the Law and
supplemental information about the Texas Charity Care Law.
Thank you.
Chairman THOMAS. Thank the gentlemen. The Chair will
consider the extra minute twang time. Sister Keehan.
STATEMENT OF SISTER CAROL KEEHAN, BOARD CHAIR, SACRED HEART
HEALTH SYSTEM, PENSACOLA FLORIDA; AND CHAIRPERSON, BOARD OF
TRUSTEES, CATHOLIC HEALTH ASSOCIATION OF THE UNITED STATES
Sister KEEHAN. Thank you, Mr. Chairman. Good afternoon to
you and the members of the Committee. I am pleased to be with
you today as the Chairperson of the Catholic Health Association
of the United States. Today, while contemporary Catholic health
care and other not-for-profit health care institutions excel in
quality, innovation, and technology, they remain community
benefit organizations, founded and sustained because of
community need. Some of our community benefit activities
include our outreach to low-income and other vulnerable
persons, charity care for people unable to afford services,
health education, illness prevention, free or low-cost clinics,
training for physicians and nurses, subsidizing under or
unreimbursed services such as palliative care teams and
pastoral care.
Let me give you one example that you can see from the
windows of this beautiful building. In a few blocks from here
is the neighborhood in Washington known as Northwest #1. You
may have read about it in the Washington Post, the drug deals,
the murders there. The Post contended in one of its articles
that even the police were afraid to go into this neighborhood.
If you looked at the health indices of this neighborhood, you
would think you were looking at the Third World. The neighbors
asked Providence Hospital here in Washington to please give
them a clinic, and today some of the finest health
professionals in our community go into that neighborhood to
provide over 12,000 health care visits a year.
I would like to emphasize that Catholic hospitals do not
provide these services to justify continued tax exemption. We
provide them because serving our communities in this way is
integral to our history, our identity, and our mission. It is
what we have always done. I am pleased to report that community
benefit activities in not-for-profit health care organizations
are provided in an organized, deliberate way. This was first
described nearly 20 years ago in CHA's social accountability
budget, which presented guidelines to plan, monitor, report and
evaluate community benefit activities and services. They have
since been revised, updated and strengthened with the input of
others.
Over the past years, to achieve greater standardization in
reporting community benefits, we have published with the VHA.
This community benefit reporting, updated, contains guidelines
and standard definitions. With the American Hospital
Association, we are encouraging wide use of these guidelines so
that not-for-profit hospitals throughout the Nation are
reporting how they serve their communities in a more
standardized way. We are often asked how much charity care and
community benefit not-for-profit organizations should provide,
and we have concluded that at least nationally there is no
common benchmark. However, many Catholic and other not-for-
profit health care organizations set benchmarks specific to
their communities and carefully examine their contributions to
the same.
My organization, Sacred Heart Health System, reported that,
in 2004, $2 were spent on charity care and community benefit
for every dollar in terms of operating income. A large Catholic
system that I am familiar with has determined that, on average,
the community's return on investment in exchange for the tax-
exempt status they enjoy is, on average, $1.76 for every dollar
they would have paid in taxes. I understand that one of the
purposes of this hearing is to examine whether there is a
difference between the behavior of for-profit investor-owned
and not-for-profit health care organizations. I believe the
fundamental distinction between the not-for-profit and for-
profit health care sectors is their essential purpose, their
mission. I realize that most for-profit health care facilities
provide excellent quality of care, but the ultimate purpose of
for-profit health care is to be profitable. The purpose of the
not-for-profit facility is healing, teaching, research and
committing all its resources to its community. In essence, our
stakeholders are not individual investors but the community as
a whole.
Continued tax exemption is vital in allowing and
encouraging our service to these communities. It allows
hospitals the ability to access tax-exempt financing for new
technology and equipment, as well as providing exemption from
certain Federal and State taxes on supplies and drugs we
purchase and access to government grant programs. Without tax
exemption, the philanthropic activity that is essential for
not-for-profit hospitals would be severely curtailed. We are
committed to our mission of service even without tax exemption.
But, without it, communities would experience increased costs,
there would likely be fewer investments in new technology, and
there would be increased reliance on the already over burdened
public hospitals.
In conclusion, Mr. Chairman, the community benefit
tradition in Catholic and other not-for-profit health care
organizations is thriving and being reinforced by efforts to
better account for these activities and to evaluate their
effectiveness. Our long-term commitment to the people in our
communities is being demonstrated every day. But we strive to
do better. We believe that the not-for-profit health care
sector and the communities we serve continue to deserve tax
exemption and that it is the responsibility of our
organizations to demonstrate this to you and to the communities
we serve. Over a decade ago, Senator Daniel Moynihan said, a
distinguishing feature of American society is the singular
degree to which we maintain an independent sector, private
institutions and public service. This is no longer true in most
of the democratic world. It never was so in the rest. It is a
treasure, a distinguishing feature of American democracy. It is
important to us in Catholic health care that we continue that
tradition of service. That is our mission. That is our
commitment to you and, most importantly, to the communities we
serve. Thank you.
[The prepared statement of Sister Keehan follows:]
Statement of Sr. Carol Keehan, Board Chair, Sacred Heart Health System,
Pensacola, Florida, and Chairperson, Board of Trustees Catholic Health
Association of the United States
Good morning, Mr. Chairman and Members of the Committee, I am Sr.
Carol Keehan, a Daughter of Charity and chair of the board of Sacred
Heart Health System in Pensacola, Florida. I am pleased to be here with
you today as chairperson of the Catholic Health Association of the
United States (CHA). I would like to discuss the community benefit role
of Catholic health care and other not-for-profit health care
organizations.
Catholic health care began a tradition of community service in this
country in 1727, when 12 Ursuline sisters arrived in New Orleans from
France to nurse the sick, care for orphans, teach school, and open a
hospital in the territory that would later become the United States.
Our tradition of service continued as America's newly formed
communities invited religious sisters to establish health care
facilities, wanting the values the women religious represented to
flourish in their towns: compassion, dedication to service, and concern
for persons who are poor or sick. Providence Hospital, here in
Washington, DC, where I served as chief executive officer until last
year, was established at the request of President Abraham Lincoln to
care for wounded from both sides of the Civil War.
Today, while contemporary Catholic health care and other not-for
profit health care institutions excel in quality, innovation and
technology, they remain community benefit organizations, founded and
sustained because of community need. Our doors are open to everyone
regardless of faith, ethnic background or ability to pay. We treat all
patients--uninsured and insured--with the same dignity, respect, and
compassion.
Community Benefit Mission
We provide benefit to communities because it is our mission to
serve our communities. As Catholic health care institutions, we are a
healing ministry of the church. Our mission includes special attention
to low-income and minority populations, and we reach out to fill the
void that exists for many of our disabled, elderly, and chronically ill
neighbors.
Our facilities also are committed to pursuing the common good.
Therefore we pay particular attention to promoting health and
preventive care for all who reside in our communities.
The essence of our community benefit role and that of other not-
for-profit community benefit organizations is providing services to
disadvantaged persons and improving the health of all. By utilizing our
resources to provide programs, staff, and equipment for our
communities, we help to make them healthy places to live, work, and
raise families.
Community benefit activities include outreach to low-income and
other vulnerable persons; charity care for people unable to afford
services; health education and illness prevention; special health care
initiatives for at-risk school children; free or low-cost clinics;
training for physicians and nurses, and efforts to improve and
revitalize our communities. These activities are very often provided in
collaboration with community members and other community organizations.
In fact, in many cases, not-for-profit hospitals are able to be
catalysts in helping to organize community health resources to improve
access to health care and improve community health.
Another type of community benefit is subsidizing services such as
mental health and hospice programs, and trauma units that are truly
needed but are high cost and provide low reimbursement. Our
organizations routinely open or sustain these needed services, even if
they result in a financial loss.
The categories of community benefit include:
Community Health Services: clinics, support groups,
support services, and health prevention and promotion activities.
Health Professional Education: training for physicians,
nurses, and other health professionals to address unmet community
needs.
Subsidized Services: trauma services, hospice and
palliative care programs, and behavioral health.
Health Research: clinical research, and studies on
community health and health care delivery.
Donations: cash, grants, and in-kind services.
Community-Building Activities: neighborhood improvements,
housing programs, coalition building, and advocacy for community health
improvement.\1\
---------------------------------------------------------------------------
\1\ For additional information see Community Benefit Reporting:
Guidelines and Standard Definitions for the Community Benefit Inventory
for Social Accountability Catholic Health Association, St. Louis, 2004.
Let me give you one example that is happening just a few blocks
from here. In sight of this very building there is a Washington, DC
neighborhood known as Northwest #1. You may have read about the drug
trafficking and murders there in the Washington Post. In the Post
article, it was claimed that even the police are reluctant to go into
that neighborhood. The health indices for residents of the area look
like the third world. The neighborhood asked Providence Hospital to
provide them with care, and every day some of the finest health care
practitioners go into that community to provide over 12,000 visits a
year. Because we made a commitment to anchor a health facility in a
historic building that was the first African American high school in
the District following the Emancipation Proclamation, it has become a
vibrant community center. A nursery school, job and computer training
programs, dance and karate classes are among the many services now
available in the heart of the neighborhood. I am sure you can
appreciate how helpful it is for the low-income, working mothers of
that neighborhood to have a day care center in the same building with
the pediatrician.
I would like to emphasize that Catholic hospitals do not provide
these services to justify continued tax exemption. We provide them
because serving our communities in this way is integral to our history,
our identity, and our mission--it is what we always have done.
It also is important for you to understand the broad scope of
community benefit. It is more than providing charity care, although for
members of our communities unable to afford needed services, free and
discounted care (especially emergency care) is indeed important. We
look beyond charity care to even more important community benefit
programs. Often some of the most efficient programs cost little but can
make a huge difference for persons in our communities. For example,
relatively low-cost programs supporting pregnant teenagers can make
huge differences in the health and well-being of these mothers and
their babies, and save potential costly services related to premature
birth or developmental disability. Often our very presence,
collaborating with others and acting as facilitators for community-wide
activity, can have far reaching effects that cannot be measured
completely or accurately just in dollars. Yet none of these community
benefits are included when we look only at uncompensated care.
How our Organizations Provide Community Benefits
Community benefit activities in not-for-profit hospitals and other
health care organizations are provided in an organized, deliberate way.
Since the last time this committee examined health care tax exemption,
and in part because of the work of the committee, not-for-profit
hospitals have improved the way they plan and report community benefit
programs.
In the late 1980's and early 90's, with the growth of for-profit
hospitals, Congress and state legislatures embarked on examinations of
whether there was a difference between for-profit and not-for-profit
health care, and whether not-for-profit health care organizations
continued to deserve the privilege of tax exemption. Interestingly,
women religious who sponsor Catholic organizations were asking similar
questions: they wanted to know if their health care organizations
continued to be mission-driven, dedicated to serving the poor and
improving health in our communities.
As a result of these discussions the Catholic health ministry
developed a systematic approach to plan, monitor, report, and evaluate
the community benefit activities and services they provide to their
communities in order to reinforce our community benefit role and to
document that we are, indeed, community benefit organizations.
This systematic approach was first described in CHA's Social
Accountability Budget, which has been revised, updated, and adapted for
use by non-Catholic facilities as well. Hundreds of Catholic and other
health care organizations throughout the country use these resources.
The steps involved in the social accountability community benefit
process include:
Reaffirming the commitment: assuring that governing
boards, managers and all staff understand and act upon the
organization's mission, and affirming that policies and procedures
support that mission.
Planning and budgeting for community benefit programs:
partnering with the community to assess needs and available assets to
determine community priorities, and developing a comprehensive
community benefit plan; and establishing a detailed community benefit
budget.
Monitoring services and outcomes: tracking various
community benefit programs and activities and assuring that they are
addressing identified needs and priorities. Over 800 health
organizations track their community benefit programs using a software
program, designed to complement the book, The Community Benefit
Inventory for Social Accountability (CBISA).
Reporting community benefits: showing accountability to
the communities served and to others, and demonstrating that we
continue to fulfill our charitable mission.
Evaluating community benefits: determining if the right
steps are being taken to serve an identified community need and provide
maximum value; adjusting programs accordingly to ensure that they
reflect a high standard of quality; and carefully monitoring results to
accurately report the community impact.
Over the past year, we have accelerated efforts to achieve greater
standardization in reporting community benefits. With VHA, we published
Community Benefit Reporting: Guidelines and Standard Definitions for
the Community Benefit Inventory for Social Accountability. This
comprehensive document spells out what should and should not be
considered community benefits. It directs community benefit programs to
measure benefits in terms of cost, not charges; not to include bad
debt; and recommends not including the shortfall from Medicare.
With the American Hospital Association, we are advocating
widespread use of these guidelines so that not-for-profit hospitals
throughout the nation are reporting how they serve their communities in
a more standardized way. We also are working with our organizations'
chief financial officers, the Healthcare Financing Management
Association, and the American Institute of Certified Public Accountants
to develop accounting guidelines for more consistent reporting of
community benefits.
Budgeting is an important part of this social accountability
process. We discovered early on that, in times of fiscal constraint,
community benefit services must be proactively assigned a budget, to
ensure they are not vulnerable to being reduced or eliminated. We, like
every household, must work within a budget that covers expenses,
maintenance, and future plans. So, like a typical family having many
competing needs, unless they plan in advance to donate to charities
important to them, there will be nothing left over at the end of the
year. Therefore, as we develop our operational plans and budgets, our
facilities assess community need and determine the budget amounts that
must be allocated to respond to those needs. The resources for budgets
come from various sources. While we are able to raise some funds
through foundations and other philanthropic efforts, community benefit
is provided to a great extent by utilizing the resources of the
organization.
Benchmarks
We are often asked how much charity care and community benefit not-
for-profit organizations should provide. Our facilities, systems and
national association struggle with this issue and we have concluded
that at least nationally, there is no common benchmark. The key issue
is that all our resources are earmarked for the community. Some are in
charity care, some in community programs, some in technology, and some
held in reserve as prudent stewards of a major community asset.
Community need differs from state to state and from community to
community. What is sufficient community benefit in one area may be
insufficient in another. In states where the Medicaid programs cover
most low-income people there may be minimal need for charity care, but
hospitals must make up the difference between what Medicaid pays and
the cost of care. In other states where low-income families and persons
may not be covered through Medicaid, there will be a large need for
charity care.
Another reason we are unable to come up with a benchmark is that we
believe asking how much is spent on community benefits is in many cases
the wrong question. As I mentioned earlier, low-cost programs often can
have more far reaching impact than higher cost programs. Increasingly,
our facilities are looking at how they can improve the health of
uninsured persons and avoid high-cost charity care in their emergency
rooms and their hospitals by reaching out to them before their
conditions reach a dangerous stage, managing chronic illness, and
preventing episodes or acute illness. For example, teaching children
and their parents how to deal with asthma and ensuring that the child's
asthma is being well managed can prevent expensive trips to the
emergency room and emergency hospitalizations. A numeric benchmark
looking only at how much is being spent would not capture this cost
saving, let alone the improved health and quality of life for the
parents and child.
A better question to ask is: what is the value we are providing to
our communities? This is the most pressing issue for community benefit
professionals today. They are expending considerable effort to assess
the return on investment from community benefit activities and to
evaluate the impact their services are having.
A final reason why benchmarks cannot be assigned is that, despite
efforts to improve standardization in reporting community benefits,
there are still major challenges in how health care organizations
account for and report community benefits. This is due in part to
competing requirements from state governments and other agencies. Our
social accountability materials advise organizations to report only
those services that meet specific requirements. We recommend, for
example, separating bad debt from charity care, although we realize
much bad debt represents care given to persons who cannot afford to
pay. In most situations we do not consider the shortfall from Medicare,
which can be considerable, to be counted as community benefit. So when
an organization following our guidelines is compared with another that
counts activities that we do not count, including bad debt and the
Medicare shortfalls, the comparison is neither fair nor instructive.
Therefore, we are pleased that there are major efforts under way in the
hospital and accounting industries to improve reporting standards.
Still, we firmly believe that our organizations should be
accountable for the community benefit services they provide. We
recommend that the executive and governing leadership of our
organizations ask:
Are we maximizing the use of resources consistent with
the community needs we have identified?
Are we providing our share of community benefit
consistent with the resources available to us?
How does it compare with past levels and capacities?
Does our spending on community benefit exceed the value
of our tax exemption?
There are several indications that these guideposts are being
widely and successfully used. An informal survey of CHA and VHA members
indicates that over the past four years, despite fiscal pressures, the
amount of community benefit being provided increased. Furthermore,
witnesses at the Committee's last hearing agreed that most hospital
community benefit spending exceeds the value of their tax exemption.
Many Catholic and other not-for-profit health care organizations
set benchmarks and carefully examine their contribution to the
community. My organization, the Sacred Heart Health System, reports
that in 2004 two dollars was spent on charity care and community
benefit for every dollar made in terms of operating income.
In the summer of 2004, a large multi-hospital Catholic system in
the mid-west undertook to estimate the value of its tax exemption, to
determine if it could validate a favorable community benefit being
provided for the tax exemption received. The system discovered that
there is no established or agreed-upon methodology or formula for
making such an estimate. Additionally, many community benefit programs
are difficult to value precisely, as intangible and social health and
community benefits are often difficult to quantify.
They reviewed the methodology and components of the approach to
estimate the value of their tax-exemption with their independent
auditors. The auditors provided comments that were incorporated to the
extent it was feasible to do so. The system has created an estimate
that is reasonably believed to be as accurate as is presently possible.
The components of tax exemptions that were included in their
estimate are:
Reduced interest paid from tax-exempt financings
Reduced federal/state unemployment taxes
State and local sales taxes on all purchases of supplies
and equipment
Real estate taxes
Personal property taxes
Corporate franchise taxes
City, state and federal income taxes
Estimated value of 2003 tax exemption as compared to 2003 Community
Benefit \2\ or care for the Poor \3\
------------------------------------------------------------------------
Representative
Health System Hospital Region
------------------------------------------------------------------------
Care for the Poor $137M $ 9.2M
------------------------------------------------------------------------
Community Benefit (includes Care $202M $13.5M
for the Poor + benefits to the
broader community)
------------------------------------------------------------------------
Value of Tax Exemption $115M (est.) $ 6.0M (est.)
------------------------------------------------------------------------
Estimated ratio of return to the 1.76:1 2.25:1
community of the value of
Community Benefit compared to
the value of tax exemption
------------------------------------------------------------------------
Estimated ratio of return to the 1.19:1 1.53:1
community of the value of Care
for the Poor compared to the
value of tax exemption
------------------------------------------------------------------------
Note: The Health System ratios are aggregates for a 29 hospital system.
The ratios for hospital regions vary considerably, due to the many
unique factors in individual communities, but in all instances, the
Community Benefit provided exceeded the value of tax exemptions
received.
\2\ Community Benefit includes Care for the Poor, plus the unreimbursed
cost of health professional education, unreimbursed cost of research,
and the cost of programs that benefit the health of the broader
community (e.g., stop smoking groups, nutrition classes, etc.) It does
not include bad debt expenses or losses on the cost of providing
Medicare services.
\3\ Care for the Poor includes the cost of charity care, the
unreimbursed cost of Medicaid and the costs of programs that
specifically focus on the poor (e.g., free immunization programs).
Standards for Community Benefit
For almost twenty years, CHA has worked to improve the standard of
planning and reporting of community benefit. In 1992, we established a
set of community benefit standards. These call for Catholic health care
organizations to ensure that:
Mission statements reflect a commitment to community
benefit;
Governing bodies adopt, make public, and implement a
community benefit plan;
Community benefit services provided to the materially
poor and broader community are designed to improve health status in the
community and access to health care services; and
Annual community benefit reports describe the scope of
services and collaboration with others.
Health Care and Not-for-Profit Organizations
I understand that one of the purposes of this hearing is to examine
whether there is a difference between the behavior of for-profit,
investor-owned, and not-for profit health care organizations. I believe
there are clear similarities and clear differences between the two. To
understand the not-for-profit sector and how it differs from the for-
profit sector, the committee cannot rely on a single, one dimensional
measurement such as uncompensated care. Rather, it is important to look
at the organization as a whole and the benefits it provides to the
community.
The fundamental distinction between the not-for-profit and for-
profit health care sectors is their essential purpose, their mission. I
realize that most for-profit health care facilities provide excellent
quality of care, but the ultimate purpose of for-profit health care is
to be profitable. The purpose of the not-for-profit sector is healing,
teaching, research, and community service.
Our institutions are not ``for-profit'' in the sense that revenue
surpluses may not enrich any individual. Rather, the not-for-profit
sector health care provider uses surpluses to expand health care
services, meet future capital needs, invest in technology and
innovation, cover future deficits, and to provide community services.
Not-for-profit organizations must earn a surplus when circumstances
permit because failure to do so would result in at least a gradual
degradation in the quality and a decline in services.
Not-for-profit health care providers also are less market sensitive
and more likely to remain within a community and to continue necessary
clinical programs in times of economic distress. That long-term
commitment to our communities, and our efforts to remain in them
through good times and bad, also distinguishes not-for-profit health
care.
In 1995, Cardinal Joseph Bernardin in a speech before the Harvard
Business School Club of Chicago said, ``The not-for-profit structure is
better aligned with the essential mission of health care delivery than
is the investor-owned.'' He argued that health care's purpose is to
serve human need, not to promote economic ends. This primarily non-
economic goal, he said, is best advanced in the not-for-profit health
care system because that structure is best suited to promoting access,
a patient-first professional ethic, and attention to community-wide
needs.
Community Benefit and Tax Exemption
The Catholic Health Association commends the Committee for
reexamining the tax exemption for all types of federally tax-exempt
organizations and asking whether the community benefit standard, now 36
years old, continues to be the appropriate standard for the Internal
Revenue Service to apply in determining a health care facility's
entitlement to exemption. Although Catholic hospitals and other not-
for-profit health care providers are motivated by far more than just
IRS expectations in serving their communities, it is also true that
continued tax exemption is vital in allowing or encouraging our
community service role.
Tax-exempt hospitals would lose the ability to access tax-exempt
bond financing for new facilities and equipment in the event they were
no longer exempt. While taxable debt and equity capital may be
available for investment in hospital activities during favorable times
of the nation's economy, that is not always so. Moreover, the ability
to use tax-exempt financing allows facilities to borrow at lower costs,
thereby allowing them to make the necessary capital investments to
replace or update the facilities and equipment to fulfill their
mission. That ability to update facilities and technology in health
care is closely tied to quality and healthy outcomes.
Other benefits of continued exemption include not having to pay
federal income tax on net income or federal unemployment tax; state and
local tax exemptions on income, sales and use, and real property;
access to favorable pricing on drugs and medical supplies and mailing
rates; and access to certain government grant programs.
The value of tax exemption varies from facility to facility,
depending on its net income, the value of its property and local tax
rates, and the value of its outstanding tax exempt bonds. A recent
study by PricewaterhouseCoopers' Health Research Institute estimates
that the total tax benefit of exemption (federal, state, and local) for
a 300-bed average community hospital equals about $6.5 million
annually. This amount is twice the hospital's surplus, and would take
the hospital from a small positive margin to a loss if the facility had
to pay all taxes.
While we agree that a review of the standards for exemption and the
charity care and community benefit activities of hospitals is valuable,
we also want the Committee to be aware that Catholic hospitals and
other not-for-profit providers are already themselves reevaluating
their charity care policies and reexamining their pricing and the
availability of discounts for the uninsured. The
PricewaterhouseCooopers study points out that 70 percent of hospitals
reported a voluntary revision of charity care and pricing policies for
the uninsured over the last year.
Sponsors, governing boards, and executive leaders continue working
to assure ready access to charity care by simplifying and strengthening
charity care policies and procedures. One advantage of the flexibility
of the current IRS community benefit standard is that hospitals can
make needed changes to their policies and practices that reflect the
unique characteristics of the communities they serve and adjust them
according to experience within that standard.
Conclusion
In conclusion, Mr. Chairman, the community benefit tradition in
Catholic and other not-for-profit health care organizations is thriving
and being reinforced by efforts to better account for these activities
and to evaluate their effectiveness. Our long-term commitment to the
people in our communities is being demonstrated every day, but we
strive to do better. We believe that the not-for-profit health care
sector and the communities we serve continue to deserve tax exemption,
and that it is the responsibility of our organizations to demonstrate
this to their governing bodies, staff and communities.
Over a decade ago, Senator Daniel Moynihan said, ``A distinguishing
feature of American Society is the singular degree to which we maintain
an independent sector--private institutions in the public service. This
is no longer true in most of the democratic world; it was never so in
the rest. It is a treasure, a distinguishing feature of the American
democracy.'' It is important to us in Catholic health care that we
continue that tradition of service. That is our mission. That is our
commitment to you and to the communities we serve.
Chairman THOMAS. Thank you, Sister. Dr. Horwitz.
STATEMENT OF JILL R. HORWITZ, PH.D., ASSISTANT PROFESSOR,
UNIVERSITY OF MICHIGAN LAW SCHOOL, ANN ARBOR, MICHIGAN; AND
FACULTY RESEARCH FELLOW, NATIONAL BUREAU OF ECONOMIC RESEARCH,
CAMBRIDGE, MASSACHUSETTS
Dr. HORWITZ. Mr. Chairman, Mr. Rangel, members of the
Committee, in its review of the tax-exempt sector, this
Committee is considering questions that are particularly
important for the hospital industry, where nonprofit, for-
profit, and government institutions operate side by side. In my
written testimony, I discussed two questions about the
implications of the mix of hospital types: first, do hospitals
act differently; and, second, are there significant competitive
issues raised by having different hospital types competing in
the same markets together? I confine my oral remarks to the
first question. There is good reason to expect nonprofits and
for-profits to behave alike. They are all hospitals. They treat
sick people with the same doctors, nurses and medical
equipment. Superficially, as Chairman Thomas mentioned earlier,
they resemble each other so much that a patient admitted to a
hospital is unlikely to be able to tell whether it is a for-
profit or a nonprofit, even with the blindfold off. However,
whether you find differences depends on where you look. Most
research on hospital ownership has found little difference by
looking at financial measures such as costs, margins, capital
sources and non chief executive officer salaries. These
financial measures, however, provide an incomplete picture of a
hospital. Because they are first and foremost providers of care
for the sick and the injured, to evaluate whether nonprofit
hospitals earn their keep we must also know how they differ in
terms of the medical care they provide.
In my research on medical services, I have found large,
systematic and longstanding differences among hospital types.
For-profit hospitals are more likely than their nonprofit
counterparts to offer the most profitable services and less
likely than either nonprofits or government hospitals to offer
unprofitable services, some of which are valuable, even
essential. Let me offer a few examples. Psychiatric emergency
care is considered an extremely unprofitable service, both
because of low reimbursement and because patients tend to be
poor and uninsured. It is easiest to see how much service
provision depends on ownership on a chart. Comparing hospitals
that are similar in terms of size, teaching status, markets,
and location, for-profits are 7 percentage points less likely
than nonprofits and 15 percentage points less likely than
government hospitals to offer this kind of care. Compare these
results to open heart surgery, a service that is so profitable
it is often referred to as the hospital's revenue center. For-
profits are predicted on average to be 7 percentage points more
likely than similar nonprofit hospitals and 13 percent
percentage points more likely than government hospitals to
provide open heart surgery. Perhaps what is most striking is
how large and quick the for-profit response is. Post-acute
services like home health care, whose profitability changed
sharply over time, offer the best illustration of this. While
profitability potential increased, for-profit entry more than
tripled. Other types increased their investment, but they did
so at a much lower rate. When these services became
unprofitable in 1997, for-profits were also quick to exit the
market, roughly five times quicker than nonprofits.
In sum, for-profit and nonprofit hospitals act quite
differently in service provision. For-profits are considerably
more responsive to financial incentives, not just in service
provision decisions but also in their willingness to operate at
all. When they come under financial pressure, for-profit
hospitals are more likely to close or restructure than are
nonprofits. In addition, nonprofits are more willing than for-
profits to offer services even though they happen to be
unprofitable--not just psychiatric emergency care but also
child and adolescent psychiatric care, AIDS treatment, alcohol
and drug treatment, emergency rooms, trauma services, and
obstetric care. There are a few clear implications of these
findings for whether nonprofits provide valuable benefits for
society. First, if the mix of medical services available in a
community is strongly determined by the profitability of those
services, this is potentially worrisome for all patients, rich
and poor, insured and uninsured. Patients need what they need
depending on their medical condition, not on how much the
service pays. Second, extreme responsiveness to financial
incentives can be quite costly to the government. For example,
during that period of ramped-up provision of home health
services, visits per Medicare beneficiary increased by nearly a
factor of seven, and payment for those services ballooned. It
wasn't that patients were getting better care but that
hospitals were double-dipping in terms of payments.
This responsiveness has even lead to fraudulent billing
through a practice known as ``up-coding,'' which occurs when a
hospital shifts a patient's diagnosis to a higher reimbursement
group. For example, a hospital may identify a case of pneumonia
as a case of pneumonia with complications and get about $2,000
extra on a patient treatment. For-profit hospitals have been
found to do this more than nonprofits. In conclusion, what you
find depends on where you look; and looking only at charity
care provision or other financial measures does not give a
complete picture of differences among hospital types. If you
look at medical treatment, you will find some striking
differences of the sort that need to be included in any
thorough discussion of nonprofit benefits. Thank you.
[The prepared statement of Dr. Horwitz follows:]
Statement of Jill R. Horwitz, Ph.D., Assistant Professor, University of
Michigan Law School, Ann Arbor, Michigan; and Faculty Research Fellow,
National Bureau of Economic Research, Cambridge, Massachusetts
MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE, thank you for the
opportunity to speak with you today. My name is Jill Horwitz. I am an
Assistant Professor of Law at the University of Michigan and a Faculty
Research Fellow at the National Bureau of Economic Research, although
the opinions I offer today are my own.
Mr. Chairman, in its review of the tax-exempt sector, this
Committee has heard many distinguished witnesses discuss the legal
requirements governing nonprofit organizations, the advantages that
come with nonprofit status, and whether nonprofit organizations provide
sufficient public benefits to justify these advantages. These are
particularly important questions for the hospital industry, where for-
profit, nonprofit, and government hospitals operate side by side.
In my testimony, I will discuss two questions about the
implications of the mix of hospital types: First, do different types of
hospital act differently? Second, are there significant competitive
issues raised by having different hospital types competing in the same
market together?
Medical Service Provision
Underlying many of the policy questions about the legal treatment
of nonprofit hospitals is one basic issue: do they act the same as for-
profit hospitals--and if not, what are the differences and are they big
enough to matter?
There are good reasons to expect hospitals of different ownership
status to act alike. They all share common goals of treating sick
people; they all employ large numbers of doctors and nurses, using
medical technology; they contract with the same employers and insurance
companies, and are subject to the same health care regulations.
Superficially, they resemble each other so much that a patient admitted
to a hospital is unlikely to be able to tell whether it is a for-profit
or a nonprofit.
However, whether you find differences between nonprofit and for-
profit hospitals depends on where you look. Most studies of hospital
ownership have examined financial measures, and have found little
difference among hospital types.\1\ For example, research has shown
that nonprofit and for-profit hospitals are quite similar in their
costs,\2\ sources of capital,\3\ exercise of market power,\4\ and
adoption of certain types of technology.\5\ Although for-profit
hospitals pay higher wages and offer incentives to top managers,
nonprofits are increasingly using performance-based pay as well.\6\
Finally, during the early 1990s for-profit hospitals and nonprofits had
similar margins, although for-profit margins were higher than those of
nonprofits by the late 1990s.\7\ There is some evidence that in the
most recent years the average nonprofit hospital had a negative income
per admission, while the average for-profit had a positive income per
admission.
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\1\ F. Sloan, ``Not-for-profit Ownership and Hospital Behavior,''
in Handbook of Health Economics Vol. 1 eds. A.J. Culyer and J.P.
Newhouse (Amsterdam:Elsevier Science B.V., 2000): 1141-1174.
\2\ T.S. Snail and J.C. Robinson, ``Organizational Diversification
in the American Hospital,'' Annual Review of Public Health 19,
(1998):417-453, F.A. Sloan, et al., ``Hospital Ownership and Cost and
Quality of Care: Is There A Dime's Worth of Difference?,'' Journal of
Health Economics 20, no. 1, (2001):1-21.,
\3\ M.A. Laschober and J.C. Vertrees, eds. Hospital Financing in
the United States (Washington, D.C.: Office of Technology Assessment,
1995).
\4\ M. Gaynor and D. Haas-Wilson, ``Change, Consolidation, and
Competition, in Health Care Markets,'' Journal of Economic Perspectives
13, no. 1, (1999):141-164.
\5\ F.A. Sloan, et al., ``Hospital Ownership and Cost and Quality
of Care: Is There A Dime's Worth of Difference?,'' Journal of Health
Economics 20, no. 1, (2001):1-21.
\6\ M.J. Roomkin and B.A. Weisbrod, ``Managerial Compensation and
Incentives in For-Profit and Nonprofit Hospitals,'' Journal of Law,
Economics, and Organization 15, no. 3, (1999):750-781, B. Erus and B.A.
Weisbrod. Objective Functions and Compensation Structures in Nonprofit
and For-Profit Organizations: Evidence from the ``Mixed'' Hospital
Industry. In: E.L. Glaeser, ed. The Governance of Not-For-Profit
Organizations. Chicago: University of Chicago Press; 2003:117-142.
\7\ R. Frank and D. Salkever. Market Forces, Diversification of
Activity, and the Mission of Not-for-Profit Hospitals. In: D.M. Cutler,
ed. The Changing Hospital Industry: Comparing Not-for-Profit and For-
Profit Institutions. Chicago, Illinois: University of Chicago Press;
2000:195-215..
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Such financial measures, however, provide an incomplete picture of
a hospital. Because they are first and foremost providers of care for
the sick and injured, to evaluate whether nonprofit hospitals earn
their keep we must also know how hospitals differ in the medical care
they provide.
In my research on medical services, I have found large, systematic,
and long-standing differences among hospital types. For-profit
hospitals are more likely than their nonprofit counterparts to offer
the most profitable services, and less likely than either nonprofits or
government hospitals to offer services that are unprofitable yet
valuable, even essential.
I will offer a few examples. Psychiatric emergency care is
considered an extremely unprofitable service, both because of low
reimbursements and because its patients tend to be poor and uninsured.
Comparing hospitals that are similar in terms of size, teaching status,
location, and market characteristics, for-profit hospitals were 7
percentage points less likely than nonprofits and 15 percentage points
less likely than government hospitals to offer psychiatric emergency
services.
Probability of Offering Psychiatric Emergency Services
[GRAPHIC] [TIFF OMITTED] T6414A.007
SOURCE: Jill Horwitz, ``Making Profits and Providing Care:
Comparing Nonprofit, For-Profit, and Government Hospitals,'' Health
Affairs, v.23, n.3 (2005): 790-801.
NOTES: Controlling for size, teaching status, location, and market
characteristics.
Compare these results to open heart surgery, a service so
profitable that is often referred to as the hospital's ``revenue
center.'' For-profit hospitals are over 7 percentage points more likely
than similar nonprofit hospitals and 13 percentage points more likely
than government hospitals to provide open-heart surgery.
Probability of Offering Open Heart Surgery
[GRAPHIC] [TIFF OMITTED] T6414A.008
SOURCE: Jill Horwitz, ``Making Profits and Providing Care:
Comparing Nonprofit, For-Profit, and Government Hospitals,'' Health
Affairs, v.23, n.3 (2005): 790-801.
NOTES: Controlling for size, teaching status, location, and market
characteristics.
Perhaps what is most striking about for-profit hospitals is how
strongly and quickly they respond to changes in financial incentives.
The best illustration of this comes from a set of post-acute care
services, such as home health-care and skilled nursing services, whose
profitability changed sharply over time. These services became highly
profitable in the early 1990s, then reversed and became less profitable
with the 1997 Balanced Budget Act. All three types of hospitals
increased their offerings of home health care when it became
profitable, but for-profits did so to a striking degree. From 1988 to
1996, the probability of a for-profit hospital offering home health
services more than tripled--from 17.5 percent to 60.9 percent. During
the same period, nonprofit and government hospitals increased their
investment at a much lower rate (nonprofits went from 40.9 to 51.7
percent, government hospitals went from 38.1 to 51.9 percent). When
these services became unprofitable, for-profits were also quick to exit
the market, roughly 5 times quicker than nonprofits. This finding
provides evidence that for-profits move quickly and strongly in
response to financial incentives.
Probability of Offering Home Health Service
[GRAPHIC] [TIFF OMITTED] T6414A.009
SOURCE: Jill Horwitz, ``Making Profits and Providing Care:
Comparing Nonprofit, For-Profit, and Government Hospitals,'' Health
Affairs, v.23, n.3 (2005): 790-801.
NOTES: Controlling for size, teaching status, location, and market
characteristics.
In sum, for-profit and nonprofit hospitals act quite differently.
For-profit hospitals are considerably more responsive to financial
incentives than nonprofits, not just with respect to their decisions to
offer services but also in their willingness to operate at all. Under
financial pressure, for-profit hospitals are more likely to close or
restructure than nonprofits.\8\
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\8\ R. Zeckhauser, J. Patel and J. Needleman, The Economic Behavior
of For-Profit and Nonprofit Hospitals: The Impact of Ownership on
Responses to Changing Reimbursement and Market Environments: The Robert
Wood Johnson Foundation, 1995).
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The most important aspect of these findings is that nonprofits are
more willing than for-profits to offer services even though they happen
to be unprofitable. These services include not just psychiatric
emergency care, but also child and adolescent psychiatric care, AIDS
treatment, alcohol and drug treatment, emergency rooms, trauma
services, and obstetric care.
There are a few clear implications of these findings for the
question of whether nonprofits provide valuable benefits to society.
First, if the mix of medical services available in a community is
strongly determined by the profitability of the services, this is
potentially worrisome for all patients--rich and poor, insured and
uninsured. Patients need what they need, depending on their medical
condition not on the price of a service. Even rich and insured patients
sometimes need services that it are unprofitable for hospitals to
offer.
As I noted above, nonprofits are more likely to offer a trauma
center than for-profit hospitals with similar characteristics. One
hopes never to be in a serious car crash. But survivors are more likely
close to a trauma center if the accident takes place just outside a
nonprofit hospital.
Second, extreme responsiveness to financial incentives can be quite
costly to the government. Medicare spending per patient and increases
in spending rates are higher in for-profit hospital markets than
others.\9\ This can be explained by investments such as home health.
For example, during that period of ramped up provision of home health
care services, home health visits per Medicare beneficiary increased by
nearly a factor of seven, and payments for those services ballooned.
Government spending on post-acute care went from 3 percent of Medicare
hospital payments to 26 percent.\10\ This increase was not patients
getting better care, but hospitals double-dipping--receiving two
reimbursements for the same treatment.
---------------------------------------------------------------------------
\9\ E. Silverman, J. Skinner, and E. Fisher, ``The Association
Between For-Profit Hospital Ownership and Increased Medicare
Spending,'' New England Journal of Medicine 341, no. 6, (1999):420.
\10\ J.P. Newhouse, ``Medicare,'' in American Economic Policy in
the 1990s, eds. J.A. Frankel and P.R. Orszag (Cambridge, Massachusetts:
MIT Press, 2002), 899-955.
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Perhaps more troubling is evidence that the relative responsiveness
to financial incentives has led to fraudulent billing through a
practice known as ``up-coding.'' Up-coding occurs when a hospital
shifts a patient's diagnosis to one that receives higher reimbursement
from Medicare. For example, a hospital may label a case of pneumonia as
a case of pneumonia with complications, at increased cost to the
government of about $2,000 per discharge. Although all types of
hospitals have done this, for-profit hospitals have done this more than
nonprofit hospitals.\11\ Moreover, up-coding is contagious. Nonprofit
hospitals are more likely to up-code when they have for-profit hospital
neighbors than when they do not.
---------------------------------------------------------------------------
\11\ E. Silverman and J. Skinner, ``Medicare Upcoding and Hospital
Ownership,'' Journal of Health Economics 23 (2004): 369-389.
---------------------------------------------------------------------------
As a final point on differences in hospital behavior, let me say a
word about charity care. Over the past fifty years, the legal
requirements for nonprofit hospitals seeking tax exemption have
increasingly shifted from narrow requirements that hospitals relieve
poverty to broader demonstrations of charitable benefit. Yet, public
attention to the provision of what is called ``charitable care'' has
remained robust. Whether nonprofit and for-profit hospitals differ in
their provision of charity care is difficult to say--in large part
because what is typically measured is overall uncompensated care.
Uncompensated care provided by hospitals represents items that most of
us would not consider charitable. These include bills left unpaid by
patients who have the ability to pay or discounts to insurance
companies. Given these measurement difficulties, credible evidence
shows that hospital types do not differ much in the provision of
uncompensated care.\12\ Even these results are hard to interpret
because for-profit hospitals locate in relatively better-insured
areas.\13\ My main point in discussing charity care is that although
free care for those who are unable to afford it is important, other
differences--in services, in quality, in medical innovation--are
valuable to all members of society.
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\12\ F. Sloan, ``Commercialism in Nonprofit Hospitals,'' Journal of
Policy Analysis and Management 17, no. 2, (1998):234-252, G.J. Young,
K. Desai and C.V. Lucas, ``Does the Sale of Nonprofit Hospitals
Threaten Health Care for the Poor?,'' Health Affairs 16, no. 1,
(1997):137-141.
\13\ E.C. Norton and D. Staiger, ``How Hospital Ownership Affects
Access to Care for the Uninsured,'' RAND Journal of Economics 25,
(1994):171-185.
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Hospital Competition
Do nonprofit hospitals have anti-competitive effects, or represent
unfair competition to for-profits? The arguments about competition boil
down to the idea that the nonprofit tax exemption is either unfair or
distortionary. An older generation of research claimed, for example,
that the tax exemption gives nonprofits an extra financial boost that
makes it difficult for for-profits to compete. Newer research has
dismissed this notion by demonstrating that income tax exemptions do
not lower input prices. Furthermore, as an empirical matter, if there
were anti-competitive effects we would not see mixed markets with both
for-profit and nonprofit hospitals, but we do.
Some argue that nonprofits are less efficient than for-profits and
are able to stay in business because they use their surpluses,
including tax savings, to offset higher production costs. This idea,
too, has little foundation. In determining whether an organization is
efficient, it is centrally important to answer the question ``efficient
at what?'' For-profits are more efficient at earning profits. In the
hospital sector, we care about efficiency in providing health care.
Overall, empirical evidence shows no appreciable differences in
efficiency at providing health care between for-profit and nonprofit
hospitals.
A final idea is that tax savings leads nonprofits to produce too
many goods of too little value. That is, nonprofits use their financial
savings to lower costs and, therefore, patients will buy too much
health care. This argument implies that the health care provided by
nonprofit hospitals is too cheap. The idea that health care is too
inexpensive is generally not of great concern, particularly when annual
medical inflation rates are back on the rise at 4 percent per year.
The best evidence shows that nonprofit hospitals, rather than using
their financial savings to offset inefficient management or lower
prices to drive for-profit competitors out of business, provide
unprofitable and essential services that are valuable to society. These
come not only in the form of more valuable medical services like trauma
care, but also in training physicians and nurses. It is the vigorous
competition among nonprofit hospitals that has produced virtually all
the medical innovations on which we rely. Imagine where we would be
without the first small pox vaccination developed at the nonprofit
HarvardMedicalSchool or the first brain surgery at Johns Hopkins. We
can thank nonprofits for robotic surgery, pacemakers, artificial skin,
kidney transplants, and new technology to save premature infants.
Finally, along with the competition among nonprofit hospitals, having
for-profits in the mix provides another dimension of competition,
competition between organizational types.
An important lesson of the research I have summarized today is that
what you find depends on where you look. If you look at financial
behavior, you will find few differences that justify tax exemption. If
you look at medical treatment, you will find some striking differences
of the sort that need to be included in any thorough discussion of
nonprofit benefits.
Thank you for the opportunity to testify today.
Chairman THOMAS. Thank you. Ms. Kane.
STATEMENT OF NANCY M. KANE, PROFESSOR OF MANAGEMENT, DEPARTMENT
OF HEALTH POLICY AND MANAGEMENT, HARVARD SCHOOL OF PUBLIC
HEALTH, BOSTON, MASSACHUSETTS
Ms. KANE. Thank you. I just want to correct, again, for the
record, that I am from the Harvard School of Public Health, not
the Harvard Business School. But thank you, Mr. Chairman and
the Committee, for inviting me to speak.
Chairman THOMAS. I am not familiar with the local turf, but
I assume that was a major concern otherwise.
Ms. KANE. It is a minor issue. In any case, I just wanted
to address the question that I have understood to be before the
Committee, which is should nonprofit hospitals retain their tax
exemption. I think, as many of you heard from my last
testimony, I am one of the most severe critics of the way
nonprofit hospitals--some nonprofit hospitals have discharged
their charitable obligations. From some of the studies I have
done, I concluded that many clearly do not provide charity care
that is commensurate with the value of their tax-exempt
benefits; and some are behaving increasingly distinctly
uncharitably toward patients who cannot afford their care, as
previous witnesses have described. However, we have to be
honest. Federal tax-exempt standards of behavior are minimal
and really do not require that hospitals provide charity care,
and I think that is part of what we are talking about today. I
think it is also important to understand why nonprofit
hospitals are increasingly perceived as uncharitable and more
commercial than they used to be in the past. Perhaps some of
those issues need also to be addressed when one discusses what
kind of behavior one would like to see.
One of the things that is very important, I think, is that
hospitals have a charitable mission, but they have Wall Street
financing. The newest mantra I have heard many times over is
``no margin, no mission.'' Unfortunately, I am afraid some of
that has translated into no mission but a very healthy margin;
and it is concerning a lot of people in terms of the priorities
of hospitals, nonprofit hospitals. Another issue is that
competitive markets have been reducing the availability of
subsidies from insured patients, which hospitals used to
support the uninsured, and that is because we believe in
competitive markets and in pricing systems that allow
competition but don't recognize the social obligations of our
hospitals. Another issue I think is that hospitals, in order to
compete or deal with managed care, and financing methods, have
gone on extremely expensive, extremely unprofitable and often
unwise acquisition and expansion sprees that have not resulted
in value added but have cost a lot of money and that detracted
from the hospital system's ability to finance their
uncompensated care.
I guess, finally, and one of the issues I am most concerned
about, is that many nonprofits--not all, but many--have very
weak governance structures. They are different, from investor-
owned boards for sure. I think boards are too often chosen for
their wealth, their social connections and/or their
compatibility with the senior management, instead of actively
exercising their duty of oversight. I think those are all
issues that we might want to consider trying to strengthen in
the nonprofit form, rather than tossing the nonprofit form out
the window. I am not supportive of revoking Federal tax
exemption. I think we brought the issues about that out pretty
well in the testimony to date.
First of all, you are punishing everyone for the sins of a
few--not necessarily a few, but some. I think you will lose
more value than you will gain in certainly Federal tax revenue
because of the philanthropy, the grants, the community
prestige, the trust and the State and local tax exemptions, all
of which may no longer go toward supporting health care. I
think we don't want to push our nonprofit hospitals toward the
investor-owned sector, which has even higher incentives to
cherry-pick services and service areas, to provide unnecessary
care and to exploit loopholes in our very complex tax and
payment systems that are hard to detect and cost a lot just to
provide oversight for those types of activities.
I do recommend that we should strengthen our standard for
Federal tax exemption. I agree with several of the witnesses
today, that we should require some of the types of things that
have been requested by many parties, including the Catholic
Health Care Association, and the Champaign County Board of
Assessors and other parties who have suggested that there
should be requirements of eligibility standards for charity
that should be tied to income and that should relate the
magnitude of a payment to the person's income, and that
patients should be informed of the availability of charity
care. For those who are not eligible, the amount that they have
to pay should be related to their ability to pay and a
reasonable timeframe to pay it in, that harmful collection
practices that ruin people for life should be stopped, and that
hospitals should partner with community groups to focus on
indigent populations to improve their care and access.
Finally, I think that hospitals should be encouraged to
publicly report on the costs of charity, bad debt and other
community benefits in ways that will meaningfully inform the
public. I encourage the Committee to consider reducing some of
the incentives that have encouraged uncharitable behavior.
Perhaps there should be other things such as grant programs,
rather than loans for capital requirements, that are deemed
essential to the community. I had the opportunity to attend a
seminar by a fellow who helps critical access hospitals find
loans. However, he said he could only find loans for things
like imaging centers and not for obstetric services, even
though the community really needed obstetric services. So, I
think there is a need to look at the capital distribution and
the access to capital and when it should be a loan and when
perhaps it should be a grant, and I think there may also be
other issues around governance, encouraging boards to self-
evaluate and report on their compliance with good governance
practices. I think a board should have a permanent Committee
that reviews its charitable policies and monitors and reports
on them annually to the board and makes that available to the
public. Thank you for inviting me to testify, and I am happy to
respond to any questions.
[The prepared statement of Ms. Kane follows:]
Statement of Nancy M. Kane, Professor of Management, Department of
Health Policy and Management, Harvard School of Public Health, Boston,
Massachusetts
Mr. Chairman, Members of the Committee:
I am here to comment on the question of whether or not nonprofits
hospitals should remain tax-exempt, and if so, under what standards of
behavior. As I have mentioned in previous testimony to this
committee,\1\ my prior research indicated that many nonprofit hospitals
do not provide charity care at amounts that would justify the value of
their tax-exempt benefits. As recent events indicate, many exempt
hospitals are actively engaged in avoiding the provision of charity
care and instead are aggressively billing and collecting from patients
who cannot afford to pay their bills. Unfortunately, the federal
standard for tax-exemption does not prohibit this kind of activity, and
most states have followed the federal definition of exempt behavior as
the basis for state and local tax exemption. Some states have attempted
to strengthen the standard for state and local exemptions, with limited
success.\2\ Still ambiguous state standards of community benefit,
coupled with limited resources for monitoring and enforcement, have
hampered state efforts to increase the provision of charity care by
exempt hospitals.
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\1\ ``Statement to the Subcommittee on Oversight, Committee on Ways
and Means, June 22, 2004'', Nancy M. Kane
\2\ See, for instance, Noble A, Hyams AL, and Kane NM. ``Charitable
Hospital Accountability: A Review and Analysis of Legal and Policy
Initiatives,'' in Journal of Law, Medicine, and Ethics, 26 (1998): 116-
37.
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However I do not support efforts to revoke the federal tax
exemption for nonprofit hospitals. I strongly urge Congress to
strengthen the standard and tie it more specifically to the provision
of charity care. Uncharitable behavior is due to a number of forces in
the hospital market place that will not go away with the loss of tax-
exemption; but the loss of exemption will reduce the already weak
incentives in place for hospitals to maintain social as well as
economic goals.
Why are Nonprofit Hospitals Behaving Uncharitably Toward Patients
Unable to Pay All or Part of Their Bills?
I see at least four major forces that encourage tax-exempt
hospitals to behave uncharitably in the face of a weak standard for tax
exemption and a growing number of individuals and employers who can no
longer afford to buy comprehensive health insurance:
One is the need to obtain and repay tax-exempt debt. Bond
rating agencies pressure nonprofit hospitals to produce high profit
margins and very high cash balances. For instance, Moody's ``Aa'' rated
nonprofit hospitals in 2003 reported a median total margin in 2003 of
7.3% and a median of 225 days of cash on hand.\3\ This median level of
profit and cash is higher than what HCA, a major investor-owned chain,
achieved in 2003 (6% profit margin and 1.2 days cash on hand).
---------------------------------------------------------------------------
\3\ Moody's Industry Outlook and Medians, Not-for-Profit
Healthcare. August 2004.
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Two is the gradual loss of opportunities to cross-
subsidize the uninsured and losing services. Private insurance-
negotiated rates have reduced the ability of hospitals to subsidize
losses from uninsured patients; also, the loss of profitable lines of
business to freestanding ambulatory sites and specialty hospitals owned
by others erodes the availability of cross--subsidies for losing
services that are still needed in a community.
Three is the competitive response of hospitals to the
market power of insurers; nonprofit hospitals over the last decade have
made very expensive strategic investments in other hospitals, physician
practices, long-term care, managed care and other businesses, at least
partly in order to create a strong market presence when faced with high
market-share private insurers.
Four is the unfettered hubris of health system executives
who are overseen by boards chosen more for their social connections and
business achievements than for their appreciation of the needs of
vulnerable members of the community or their willingness to challenge
the chief executive's business assumptions.
Why Not Revoke Hospital Tax Exemption?
It would be very dangerous to address a broken system such as ours
by simply revoking the federal tax-exempt status of nonprofit
hospitals. Revocation of tax status is the policy equivalent of
applying a blunt instrument when surgical precision is more
appropriate. First, it would punish the many hospitals that have done a
good job of balancing margin with mission. Second, a blanket revocation
of federal tax-exempt status would revoke more benefit than the tax
revenue stream it would produce to support the uninsured. That is
because federal tax-exempt status is tied to philanthropic support,
loan insurance, research grants, and reputation in the community, all
of which add value to the exempt hospital. Furthermore, the dollar
value of the federal income tax exemption is relatively small compared
to the value of state and local exemptions; it constituted only 27% of
the value of tax-exemption in the study I did of 507 hospitals in 1994-
95; this would not go very far toward supporting the cost of the
uninsured. If hospitals also lost state and local exemptions, the
larger dollar value produced would go to cities and states for purposes
other than supporting vulnerable populations.
In addition, I would be concerned to see more nonprofit hospitals
convert to investor-owned status; two of the largest investor-owned
chains have a long history of violating the ethical standards and legal
constraints of our healthcare system in their pursuit of profit and
rapid earnings growth. HCA, for instance, paid out close to $1.5
billion to the Department of Justice, CMS, and others in 2000-2002 to
settle claims of DRG upcoding, inappropriate Medicare billing,
violations of anti--kickback laws, and other actions. Tenet, which
emerged in 1993 from another investor owned company associated with
serious legal problems (NME), is once again facing a series of legal
action regarding prices for prescription drugs, outlier payments, and
unnecessary cardiac procedures. The hospital industry presents multiple
opportunities to violate the public trust; putting our entire nonprofit
hospital sector under quarterly earnings pressure and the possibility
of private gain encourages more widespread abuse.
A Better Idea is to Define a Higher Standard for Tax Exemption and
Governance
I support instead policies that raise the standard for charitable
exemption, as well as policies that might address some of the factors
mentioned earlier that contribute to uncharitable hospital behavior.
Many of the features that would improve the charitable standard have
been articulated by others, including the Champaign County Health Care
Consumers \4\ and recommendations by lawyers from McDermott, Will and
Emery.\5\ These include:
---------------------------------------------------------------------------
\4\ Champaign County Health Care Consumers, ``Community Leadership
Standards for Nonprofit Hospitals'', memo by Claudia Lennhoff, August
25, 2004.
\5\ ``Federal Tax Exemption Developments and Strategies'',
Bernadette M. Broccolo, McDermott Will and Emery, Chicago, Illinois;
presented to the American Bar Association Health Law Section: ``Charity
Care Under the Microscope: The Threat to Tax-Exempt Healthcare
Providers,'' April 28, 2004
hospitals' having official charity care policies with
criteria tied to federal poverty levels and the magnitude of bills
relative to income;
a process to inform patients of the availability of
charity care at multiple stages in the admission and collection
process;
partnering with community groups focused on the indigent
to develop programs to assist these populations in accessing
appropriate types of care at the right time;
discounted rates for uninsured patients not eligible for
charity care, and reasonable terms of repayment that reflect the income
and circumstances of the debtor;
ceasing harmful legal, financial, and credit practices
against patients;
consistent and accurate disclosure of charity care, bad
debt, and other community benefit costs, using the IRS Form 990 and new
Medicare reporting opportunities.
Other recommendations more broadly addressing the four forces
mentioned earlier include:
develop mechanisms that reduce the level of security
currently demanded by tax-exempt creditors
require nonprofit hospital boards to give effective voice
to vulnerable populations
require a standing committee of the board devoted to
monitoring and reviewing the charity care and bad debt pricing and
collection practices of the hospital
encourage good governance practices such as those
recommended by the Governance Institute \6\
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\6\ The Governance Institute, ``Fundamental fiduciary Duties of the
Nonprofit Healthcare Director,'' Summer 2002.
www.governanceinstitute.com.
---------------------------------------------------------------------------
Thank you.
Chairman THOMAS. Thank you very much. The Chair is sorry to
announce we have no vote to control our own destiny. We have
two votes in a row. We then have debate on a motion to
recommit, which is only 10 minutes; and then we have a 15- and
a 5-minute vote following. The Chair will try to, after
responding to this initial vote, get some determination of
those members who would like to come back during that interim
on the recommit vote to ask our witnesses questions; and if
anyone is willing to accommodate the Chair in providing an
opportunity to question during that time the Chair is certainly
willing to respond. So, as we go in to vote, I will look for
individuals; and I will come back to try to make sure that we
have an opportunity for those who can fill in a 15- or 20-
minute period. The Chair apologizes to the witnesses. I know
there are going to be some very interesting questions. I thank
you for your testimony and want to underscore the fact that the
initial response to an inquiry in this area is not an attempt
to pull the tax exempt status. It is an attempt to clarify,
understand, and focus. With that, the Committee will recess for
20 minutes; and then we will be back.
[Recess.]
Mr. WELLER. [Presiding.] The Chairman requests the
witnesses to resume their place at the table, and we will
resume the hearing to allow members during this series of votes
to return for questioning. Otherwise, we will proceed forward.
Since several of the witnesses are in place that I wish to
direct my questions to, I will take the courtesy of allowing
myself to begin. First, I want to commend Chairman Thomas for
conducting this hearing and focusing on the role of not-for-
profit community hospitals. As I look at the district I
represent in the south suburbs and central Illinois, not-for-
profit hospitals are the service providers in the area that I
represent. All but one hospital serving the 11th congressional
district is a not-for-profit. One is a municipal hospital.
Provena Saint Joe's, Provena Saint Mary's are two constituent
hospitals serving Kankakee and Joliet; and, as Sister Keehan.
pointed out in her testimony, the role they play not only in
providing service but helping revitalize older industrial
areas--I think of Silver Cross Hospital in Joliet and the role
it has taken in helping to revitalize the east side of Joliet,
an area that has been neglected and is now coming back, thanks
to the leadership of Silver Cross. I would also note that
Illinois hospitals provided by $1.2 billion in uncompensated
care in Illinois. So, not-for-profits are important in my
district and, frankly, in many cases, second to the schools,
they are sometimes ahead of our public schools, are the biggest
employers in communities that I represent. Mr. Jenkins, my
colleague, Tim Johnson, sends his regards; and I just want to
pass that on to you. I mentioned to him that you were before
our Committee today, and Tim and I are friends going back to
our days in the State legislature.
Mr. JENKINS. Thank you.
Mr. WELLER. So, it is good to have two Illinoisans before
us here; Professor Colombo, too, as well. Mr. Jenkins, you had
indicated, as a member of the Board of Review, that you are a
part-time appointee of the county board or the county
commissioners of Champaign County. Is that the case?
Mr. JENKINS. County board, yes.
Mr. WELLER. The county board. How long have you been on the
board?
Mr. JENKINS. Seven years.
Mr. WELLER. Seven years. How long as chairman of the board
of Review?
Mr. JENKINS. Two years.
Mr. WELLER. In your testimony you had said you had done
extensive research. Did you do that personally or were you
provided with staff for that purpose?
Mr. JENKINS. We don't have a staff.
Mr. WELLER. So, you did this personally?
Mr. JENKINS. Yes. Well, myself and the other two members of
the Board of Review.
Mr. WELLER. I assume you are appointed the same way they
are in Grundy County, my home county. Usually whoever the top
vote getter is for the county, on the county ticket, their
party gets to select who their board of review member is for
that particular election cycle and the county board makes that
appointment.
Mr. JENKINS. That is correct.
Mr. WELLER. That has been my experience, though I never
served on the board. That is what I recall on the process,
having been precinct Committeeman one time. Have other
counties--you had made a decision to revoke the charitable tax
exemption for Provena, Covenant Medical Center in Urbana as
well as the Carle Clinic and--as a graduate of the University
of Illinois--and led the first in--and Gregory in Champaign for
4 years, so I certainly am familiar with those institutions
personally. But have any of other counties in Illinois followed
your lead in revoking the charitable tax exemption?
Mr. JENKINS. The short answer to your question is not that
I am aware of, no, but I need to just clarify a couple of
things that you have said. First of all, in Illinois, the local
board of review only makes a recommendation to the Department
of Revenue. The Department of Revenue actually grants or denies
exempt status. In both cases, we recommended denial. Also, in
terms of Carle, it was not Carle Clinic, which is a for-profit
entity. This was on Carle foundation, under that umbrella, a
Carle Foundation hospital.
Mr. WELLER. Does the Illinois Department of Revenue have a
history of reversing the recommendations of the local board of
review?
Mr. JENKINS. Oh, frequently. But not in this case.
Mr. WELLER. Not in this case. In the case of Champaign
County has there ever been a case during the 7 years that you
have been on the Board of Review where they have disagreed with
you?
Mr. JENKINS. Oh, sure.
Mr. WELLER. Now, Professor Colombo has advocated
essentially removing the Federal tax exemption for most not-
for-profit hospitals. Do you share that view?
Mr. JENKINS. Not necessarily. If I could wave a magic wand
and make things the way Stan Jenkins thinks they should be in
the world, I wouldn't want $1 of tax revenue from any of those
organizations. I would like them to fulfill their mission and
provide charity care to the extent that they should be
providing charity care.
Mr. WELLER. According to your testimony, you argue that
essentially their exemption should be discontinued, revoked,
basically because they were pursuing debt collection and you
believe that they were overcharging their patients?
Mr. JENKINS. Well, they were charging their patients higher
rates than anybody else was paying. Some of the debt collection
policies were rather draconian. There was a Wall Street Journal
article published here a couple of years ago about people who
actually wound up being incarcerated indirectly as a result of
having unpaid hospital debt.
Mr. WELLER. Now, is the Champaign County Board--do they go
on record for or against the position you have taken?
Mr. JENKINS. No.
Mr. WELLER. So, they have taken no position on this. As
elected officials in the county, they solely look to you and
there is no----
Mr. JENKINS. Well, a local board of review has a lot of
latitude. We are appointed. We cannot be appointed at their
discretion when our term is up. But they take no position on
this. Typically, boards of review in Illinois have a lot of
latitude in what they do, as long as it is within the confines
of the statutes.
Mr. WELLER. Thank you, Mr. Jenkins. You know, Sister Keehan
and Mr. Thomas, you have heard the recommendations of the two
gentlemen to your right, one advocating essentially removing
for most not-for-profits Federal tax exemption and the other
saying that, in the case of his local not-for-profits, they
overcharge and they pursue debt collection. I would just like
to hear from the standpoint of the not-for-profit community
your response to those charges and your point of view regarding
what the impact would be on your individual institutions if you
were to lose that not-for-profit status. Sister?
Mr. THOMAS. Well, on the impact, obviously, it would be
devastating----
Mr. WELLER. I always say sister is first, but----
Mr. THOMAS. She pointed to me. Obviously, it would be
devastating for Baylor and for the Dallas community, in
particular the Dallas-Fort Worth community. Baylor was started
a hundred years ago by the head of the local Baptist church and
a philanthropist, and we still sit on the land the cattle baron
at the time gave to the church to start the hospital.
Mr. WELLER. That was Mr. Baylor?
Mr. THOMAS. It was Colonel Slaughter. We didn't think---I
wasn't there 100 years ago. I think they decided Slaughter was
not the best name for a hospital. But to my knowledge--or not
to my knowledge, in reality, the only hospital that has added
capacity and is expanding capacity in the inner city of Dallas
is Baylor, a nonprofit hospital that is not tax supported. As I
mentioned in our testimony, 30 percent of the population of
Texas is uninsured, much higher than that in the City and
County of Dallas, with over a million undocumented aliens, many
of whom use our hospital, our emergency room, and our
hospital's general services.
Mr. WELLER. What percent of your operating revenues are
generated by for-profit ventures within the confines of your
medical center?
Mr. THOMAS. We have joint ventures with physicians; and,
frankly, we need those to help further our mission. About 25
percent of our net, net income, if you will, is our
distributions from the joint ventures.
Mr. WELLER. So, essentially for the privilege of using
space that you have on your medical campus, they share their
profits with you or their----
Mr. THOMAS. No, sir. It is the opposite. We control those
joint ventures, in most cases, and they help us add capacity,
and they commit in those joint ventures to the same charity
care policy that our nonprofit facilities do. So, they help us
meet the mission and provide care more efficiently and cost
effectively.
Mr. WELLER. So, they provided a community benefit?
Mr. THOMAS. They provide a community benefit, and the
community benefit they provide is not counted toward the $240
million that I have already of reported.
Mr. WELLER. Thank you, Mr. Thomas. Sister Keehan.
Sister KEEHAN. I think it is really important not to look
at so much of what we do to our hospitals to revoke the tax
exempt status but what it would do to our communities. Clearly,
we have the world's strongest health care system because years
ago we made a commitment to put all the resources from it into
our health care. So, we have technology sooner, we have better
technology, we have better staffing, we have more outreach to
the poor. We are able--and you heard one of the members earlier
say all of the hospitals in his rural district were not-for-
profit. You know, those things dry up very quickly. So, the
philanthropy that we depend on, the grant partnerships that we
depend on would go away. Most of those are designed to make
services available in the community either sooner or services
that would not be available without the grants, and they are
also designed to help us in our outreach. The Perry School I
talked to you about had five foundations joined with Providence
Hospital to make that possible. If we were not tax exempt, they
couldn't have done it. So, quite honestly, there would be huge
ramifications for the communities we serve that would all be
negative.
Mr. WELLER. Recognizing that Mr. Stark and I have 7
minutes, just a quick follow-up on that, very short, Sister,
and I appreciate your time. You had mentioned in your testimony
the role that your institution has played on revitalizing the
neighborhood.
Sister KEEHAN. Yes.
Mr. WELLER. Would losing your not-for-profit affect that?
Sister KEEHAN. Absolutely.
Mr. WELLER. Additional item you have taken on.
Sister KEEHAN. Absolutely. We rely on friends and donors
and foundations to help us afford to be there. It is the first
African American high school since after the Emancipation
Proclamation. It was all boarded up. It is now a huge community
center with day care, all kinds of services for that community
that they never had, as well as health care. We are the anchor.
We would have to close. If we closed, they wouldn't be able to
stay open.
Mr. WELLER. Thank you, Sister; and recognize my colleague
from California, Mr. Stark, for 5 minutes.
Mr. STARK. Thank you, Mr. Chairman; and I thank the
witnesses for their patience as we run around about our poorly
scheduled duties here. I wanted to touch just on a couple of
things. Mr. Jenkins, I was intrigued by your testimony, but I
have to ask Mr. THOMAS. Do you know Gary D. Brock?
Mr. THOMAS. Yes, sir.
Mr. STARK. Baylor is a Baptist institution, is it not?
Mr. THOMAS. That is correct.
Mr. STARK. Well, Mr. Brock may have told a fib to our
Committee back in March; and, of course, that would be--he
would end up down where I am and not where good Baptists should
go. I believe that is a tenet in the Baptist Church, to not
tell fibs. He told us in answer to one of my colleague's
questions on a hearing in March that all cardiac patients for
the medical center would be treated at the new Baylor Hamilton
Heart and Vascular Hospital. But we did find out that it is
the--what the hospital says on their Web site is that the new
hospital accepts only inpatient stays of not more than 72 hours
and that major heart and vascular procedures such as heart
transplant and bypasses will continue to be performed at Baylor
University Medical Center, the not-for-profit part. I wrote to
him and asked him please to have a chance to correct the
record; and I hope you will return so I don't have to keep
thinking that a good Baptist chief operating officer would be
apt to tell something to the Committee that wasn't the straight
skinny. Would you carry my message to Mr. Brock and ask if he
would be kind enough to respond to our letter? I would deeply
appreciate that.
Mr. THOMAS. Mr. Stark, may I reply?
Mr. STARK. Sure.
Mr. THOMAS. We did send a letter in response to your
letter. It was delivered April the first, and I have another
copy that I can also hand to you. He did not intentionally
misrepresent all the services provided by the Baylor Heart and
Vascular Hospital that are provided. They are the only--is the
only location on our campus that provides those services. The
cardiac surgery and transplants were left in the larger
academic medical center because of all the ancillary and
supporting services required to provide those services. It was
not a good stewardship of assets as we expanded capacity to
move those to the new hospital.
Mr. STARK. Okay, and I guess my concern is that Baylor
would be a poster child for a combination of profit and for-
profit entities all mixed together. I think Mr. Jenkins
referred in his testimony that that creates a situation in
which not-for-profit institutions might be used to shelter
transactions and shift them where they would provide the most
profit, and I don't know that. But it is an area that I suspect
we ought to think about, and I know that it has been suggested
by the IRS as something that concerns having both profit and
nonprofit entities, changing back and forth, and allocating
revenues back and forth as I suspect were the more revenues to
those areas where they would write off the expenses. Yet it is
an area that we don't know much about, and maybe we ought--it
would be interesting to talk about that at some upon off the
record, where we could all be somewhat more candid about what
happens. Sister Keehan., thank you for your testimony. Ms.
Kane, I have a hunch we are going to be seeing more of you, and
I am delighted to note that you are not at the business school.
Mr. WELLER. Gentleman's time has expired.
Mr. STARK. Dr. Horwitz, thank you for your testimony today.
I am told my time has expired. Thank you again.
Mr. WELLER. I thank the gentleman from California and ask
the witnesses if you could continue to exercise some patience.
We have to return for a vote, and the Committee will be
returning shortly. There are other members that have requested
the opportunity to ask questions of the witnesses. So, again,
thank you for your courtesy; and we will suspend the hearing
until the Chairman returns. Thank you for your time, and this
hearing will be adjourned.
[Whereupon, at 1:58 p.m., the hearing was adjourned.]
[Submissions for the record follow.]
Statement for the Record of Alliance for Advancing Nonprofit Health
Care
Mr. Chairman, Ranking Member Rangel, and distinguished Members of
the Committee, the Alliance for Advancing Nonprofit Healthcare is
dedicated to preserving and enhancing the abilities of nonprofit
healthcare organizations to serve society and their individual
communities. Through research, public education, and advocacy, the
Alliance seeks to provide a strong, cohesive and persistent ``voice''
for a wide range of nonprofit healthcare organizations sharing many
common goals and challenges--hospitals, health insurers, nursing homes,
malpractice liability insurers, home care providers, and others. In
addition, through education and other types of programs, the Alliance
seeks to enhance the performance of nonprofit healthcare organizations
in carrying out their unique roles and responsibilities in their
communities.
Background on the Alliance for Advancing Nonprofit Healthcare
Started in mid-2003, the Alliance is a unique blend of nonprofit
healthcare enterprises, all dedicated to a two-fold mission of
advancing and improving the performance of nonprofit healthcare in the
United States. The Alliance also serves as a forum for colleagues on
both the nonprofit financing and delivery sides of healthcare to
explore how at the regional and local levels they can establish more
effective value-based relationships focused on community benefit,
including quality, access, and affordability of health care.
To assist nonprofit health care organizations in carrying out their
special missions, the Alliance for Advancing Nonprofit Healthcare has
developed guidance documents on community benefits and governance. The
community benefit guidance incorporates the excellent work previously
done by the Catholic Health Association (CHA) and VHA, Inc.
The Alliance commends the Committee for examining the issue of tax-
exempt status in the health care community, and hopes that this
examination will reaffirm the widespread commitment of nonprofit
hospitals and other nonprofit health care organizations to serving
their communities. In the face of some well publicized reports in the
media that have highlighted some alleged inappropriate behaviors by a
very small percentage of nonprofit heath care providers, we hope that
these hearings will help publicize the much more prevalent story of the
great benefits that the vast majority of nonprofit heath care
organizations provide to the communities they serve, as well as to
broader society. The Alliance is very willing to explore with you
whether some additional reporting or oversight mechanisms may be
necessary to further ensure that the public trust is maintained, and
that all are serving as good stewards of their community's resources.
However, we urge the Committee to carefully consider any alterations to
the existing law or regulations to avoid unintended consequences. Each
community is different, and each nonprofit hospital tries to address
the needs of its community in targeted ways designed to attend to those
needs in the most effective manner. It is the flexibility inherent in
the current system that is its greatest strength, allowing the
government to monitor and work with nonprofit hospitals as they seek
the best ways to serve their communities.
Background on Tax-Exemption of Hospitals
Nonprofit hospitals have played a vital role throughout our
nation's history in delivering health care services to their
communities. According to the latest available data from the American
Hospital Association (AHA), there are 2,984 private nonprofit hospitals
in the U.S., representing 61% of all of the short-term acute care
hospitals (4,895) in the U.S. Another 1,121 hospitals are owned by
state or local government (23%), and 790 (16%) are for-profit/investor-
owned. 787 (26%) of the private nonprofit hospitals are religiously
sponsored.
In order to qualify for tax exemption as a charitable organization
under the Internal Revenue Code, an organization must be organized and
operated exclusively in furtherance of a charitable purpose, and must
not be operated, directly or indirectly, for the benefit of private
interests. However, the activities of organizations carrying on many
vital charitable functions, notably education and the promotion of
health, are at least superficially similar to the activities of
commercial organizations, i.e., for-profit schools and hospitals. In
addition, educational organizations and hospitals both impose charges
(with exceptions) for their services and may operate with an annual
surplus of receipts over disbursements. While nonprofit health care
organizations must operate under the adage, ``No money, no mission'',
they do not face the demands of the equity markets to maximize earnings
for investors. Nonprofit earnings need not be as high, or as constant,
and all that they are able to earn is ``plowed'' back into facilities,
programs and services benefiting the community in a variety of ways.
The IRS has appropriately recognized that a nonprofit hospital may
qualify for exemption as a charitable organization even though it
operates at an annual surplus of receipts over disbursements. Thus, in
Revenue Ruling 69-545, the IRS concluded that the promotion of health,
like the relief of poverty and the advancement of education and
religion, was one of the purposes in the general law of charity that is
deemed beneficial to the community as a whole even though the class of
beneficiaries eligible to receive a direct benefit from its activities
does not include all members of the community, so long as the class
that is benefited is not so small that its relief is not of benefit to
the community.
In Revenue Ruling 69-545, the IRS approved the exemption of the
hospital considered in that Ruling in large part because, by operating
an emergency room open to all persons and by providing hospital care
for all those persons in the community able to pay the cost thereof
either directly or through third party reimbursement, that hospital was
promoting the health of a broad class of persons and thus providing a
benefit to the community. The favorable conclusion in Revenue Ruling
69-545 also reflected the fact that control of the hospital rested with
a board of trustees, which was composed of independent civic leaders;
that the hospital maintained an open medical staff, with privileges
available to all qualified physicians; and that all members of its
active medical staff had the privilege of leasing available space in
its medical building.
While the conclusion of Revenue Ruling 69-545 rested in part on the
fact that the hospital considered in that Ruling operated an emergency
room open to all persons, the IRS has characterized the presence of an
``open'' emergency room only as ``strong evidence'' of a charitable
purpose, and has never made the operation of an ``open'' emergency room
either a sufficient or a necessary condition to tax exemption. For
example in Revenue Ruling 69-544 which was published concurrently with
Revenue Ruling 69-545, the IRS denied tax exemption to the hospital
considered in that Ruling even though that hospital also operated an
emergency room open to all persons.
The basis for the denial of exemption in Revenue Ruling 69-544 was
the conclusion of the IRS that the hospital considered in that Ruling,
which had initially been established as a proprietary institution
operated for the benefit of its owners and later transferred to a
nonprofit organization, had continued to operate for the private
benefit of its original owners who exercised control over the hospital
through the board of trustees and the medical committee. Revenue Ruling
69-544 concluded that this group had used their control to restrict the
number of doctors admitted to the medical staff, to enter into
favorable rental agreements with the hospital, and to limit emergency
room care and hospital admission substantially to their own patients.
More recently, the IRS has also concluded that, in appropriate
cases, a nonprofit hospital could qualify for tax exemption even though
it did not maintain an ``open'' emergency room. For example in Revenue
Ruling 83-157, the IRS concluded that a nonprofit hospital that was not
required to operate an emergency room where a state or local health
planning agency had found that this would unnecessarily duplicate
emergency services and facilities that were adequately provided by
another medical institution in the community could still qualify for
exemption as a charitable organization based on other significant
factors, including a board of directors drawn from the community, an
open medical staff policy, treatment of persons paying their bills with
the aid of public programs like Medicare and Medicaid, and the
application of any surplus to improving facilities, equipment, patient
care, and medical training, education, and research, indicate that the
hospital is operating exclusively to benefit the community.
More generally, Revenue Ruling 83-157 also noted that certain
specialized hospitals, such as eye hospitals and cancer hospitals,
offer medical care limited to special conditions unlikely to
necessitate emergency care and do not, as a practical matter, maintain
emergency rooms. Revenue Ruling 83-157 stated that these organizations
may also qualify for exemption as a charitable organizations based on
other significant factors that demonstrate that the hospitals operate
exclusively to benefit the community.
Tax-Exemption and Community Benefit
The fact that nonprofit hospitals typically find themselves in
competitive markets does not mean that they are principally commercial
enterprises like for-profit hospitals. To be sure they are often
competing for patients who are beneficiaries of large government
financing programs like Medicare and Medicaid or who are members of
private health plans. They also often face intense competition for
private philanthropic support from a variety of other types of
national, state and local nonprofit organizations. Despite competition,
nonprofit hospitals continue to play a unique and critical role in our
society.
The difference between nonprofit and for-profit hospitals has
recently been called into question, but the difference is really quite
simple: nonprofit hospitals exist to serve their communities, while
for-profit ventures exist primarily to serve their investors. While it
may seem elementary, this distinction is not a simple one that can be
easily quantified through the cursory examination of charity care or
other numbers. The community benefits provided by nonprofit hospitals
extend far beyond the number of Medicaid patients they treat, their
annual amount of charity and discounted care, and even the offering of
typically unprofitable services like emergency care or burn care. The
true community benefit of a nonprofit hospital is all of these things
and more that come together to form a total composite of value for the
community.
Nonprofit hospitals also engage in community outreach activities
and programs in a variety of ways to promote wellness and improve the
health status and well-being of their communities. Community benefit
outreach efforts are not sought out for marketing purposes, or
increasing potential patient visits for profitable services. Nonprofit
hospitals seek ways to address these needs as part of their essential
mission to serve the community. These outreach efforts are not
typically uniform to all parts of the nonprofit hospital's geographic
service area,, but instead are often specific to the mix of people in
the communities they serve. Some hospitals provide culturally sensitive
services targeted to underserved immigrant populations in their region,
others provide preventive care services in their community such as
childhood fitness and screening in conjunction with school districts,
others provide free car seats and training on their use, day care
services, and outreach and counseling to the elderly. While the costs
of such activities in actual dollars may vary widely, the effects and
benefits they have in their communities can be immense, albeit very
difficult to measure.
An additional challenge to determining the true community benefit
of a nonprofit hospital centers around defining exactly what is the
community in question. While most people define a community solely by
the geographic region or catchment of the hospital, that is an
oversimplification of the larger roles that nonprofit hospitals play.
Nonprofit hospitals are heavily engaged in medical and health
professions education, which serve the entire health care sector, as
well as their specific geographic regions. Nonprofit hospitals are
often at the forefront of research, not just in the clinical
applications of new techniques and technology, but also research into
improving patient outcomes, creating new efficiencies, preventive
medicine and wellness activities, innovative access demonstration
projects, and reducing medical errors. Through the extensive and
intensive research being performed everyday by nonprofit hospitals, the
entire healthcare industry benefits from the sharing of this knowledge,
and achieves even greater degrees of efficacy and efficiency.
Another important type of community benefit is where a nonprofit
hospital can demonstrate superior operating performance compared to
other hospitals operating in its community with respect to one or more
measures of cost, quality and/or patient satisfaction. Some nonprofit
hospitals may also have, and be sharing with others, innovations in
medical management or in other areas of operations. Excellent
performance in various performance dimensions represents a benefit to
current and potential future patients and can ``raise the bar'' for
others, resulting in benefits for the broader community. The Alliance
has conducted its own review of the research literature and has posted
on its Web site, www.nonprofithealthcare.org, a summary of findings
which strongly suggests overall superior performance by nonprofit
hospitals on various cost, quality and service indicators that were
studied.
In addition to this tapestry of community services, nonprofit
hospitals also provide more intangible benefits. One essential
assurance that for-profit enterprises can never guarantee with the same
degree of certainty--nonprofit hospitals are typically permanent
fixtures and health care providers in the community, and will not sell,
close or move due to short-term fiscal pressures. One cannot put a
price tag on community trust that the organization will stay to serve
the community through thick or thin, that the organization's business
practices will be ethical, and that energies will be expended on a
sustained basis by the organization to advocate public policies to
improve
One final point requires emphasis. Tax exemptions and other special
tax treatments are essential for ensuring that nonprofit hospitals have
reasonable access to capital so that they can compete on a fairly level
playing field with for-profit hospitals having access to the equity
markets.
Observation on Proposed Alternatives
While some observers have chosen to focus their attention solely on
the cost benefit analysis of charity care dollars provided in relation
to the estimated dollar value of the tax-exempt benefit, the forgoing
discussion is intended to underscore that this is not an accurate or
appropriate measure of a nonprofit hospital's community benefit
performance. If charity care dollars were to become the sole or primary
measure of a hospital's community benefit, the system would then be
encouraging a ``lowest common denominator'' approach that would force
the hospital to shun unprofitable medical education and research, and
shun innovative outreach efforts that could indeed help to reduce the
very need for charity care, often provided in emergency rooms and other
expensive care settings as a result of a lack of preventive, early
detection and early treatment services. Moreover, the demographics of
some communities are such that charity care would be far down the list
of community health care priorities.
This model would also not encourage hospitals to apply funds back
into their facilities, new technologies, research, and the provision of
high level specialized care. The ultimate result could be that a
charity care-only model of determining community benefit would
encourage hospitals to provide emergency triage services, and scale
back their efforts to innovate and invest in better facilities and
technology.
Accordingly, it is essential that any modifications to the current
system of determining community benefit allow nonprofit hospitals the
flexibility necessary to address fluctuating health needs in their
communities in relation to their operational needs and their financial
capabilities at any point in time.
Very few observers have advocated the total elimination of tax-
exemptions for hospitals, or for only allowing the exemption in the
case of academic medical centers and research intensive hospitals. Can
one really imagine what our health care system would be like without a
strong hospital sector that puts communities ahead of profits? Can one
imagine the consequences of the loss of the predominately nonprofit
hospital sector which, together with physicians and other health care
practitioners, have made our system the best in the world, despite its
shortcomings?
The Alliance for Advancing Nonprofit Health Care strongly urges the
Committee to ask the appropriate Federal agencies and bodies to
undertake a far more detailed study if any changes to the current model
are to be seriously contemplated.
Conclusion
The Alliance for Advancing Nonprofit Health Care would be pleased
to work with the Committee to determine which areas, if any, of the
current system of reporting and oversight may need to be strengthened
The Alliance strongly believes that the current system is not
broken, and that the flexibility inherent in the community benefit
model is its greatest strength. The IRS has done a commendable job of
working with the nonprofit health care sector to preserve the focus on
their community benefit mission, and the flexibility needed by
hospitals to address their individual community health needs. While the
IRS might benefit from a wider array of options in providing corrective
guidance and measures to hospitals, we would encourage the Committee to
work with them to avoid implementing bright-lines that could have
unintended adverse consequences.
We commend the Committee for taking the time to examine this
important sector of health care, and would be happy to work with the
Committee throughout its deliberations, and to try and answer any
questions it might have. The Alliance would also be pleased to discuss
with you the voluntary guidance that we have already developed for our
members on community benefits and governance and any ways in which such
guidance might be embellished. Thank you.
MEMBERS OF THE ALLIANCE FOR ADVANCING NONPROFIT HEALTHCARE
Alabama Blue Cross Blue Shield
Alliance of Catholic Health Care
Cleveland Clinic
Colorado Physicians' Insurance Company
East Alabama Medical Center
Fallon Community Health Plan
Florida Blue Cross Blue Shield
Geisinger Health System
Group Health Cooperative
Henry Ford Health System
Illinois Blue Cross Blue Shield
Jewish Guild for the Blind
Kaiser Permanente
Latrobe Area Hospital
The Lifetime Healthcare Companies
Massachusetts Blue Cross Blue Shield
Metropolitan Jewish Health System
Michigan Blue Cross Blue Shield
Michigan Health and Hospital Association
Minnesota Blue Cross Blue Shield
Rehabilitation Institute of Chicago
Riverside Healthcare
Rocky Mountain Health Plan
Sacred Heart Health System
Santa Fe Healthcare
Tennessee Blue Cross Blue Shield
UMass Memorial Health Care, Inc.
Visiting Nurse Service of New York
Statement of the American Hospital Association
The American Hospital Association represents 4,800 hospitals,
health care systems and other health care organizations. Our members
are of all ownership types: state and local government, not-for-profit,
and for-profit. In 2003, 61 percent of hospitals were operated as not-
for-profit tax-exempt institutions, 23 percent by state and local
governments, and 16 percent as for-profit investor owned-institutions.
AHA strongly supports the continued tax exemption of hospitals that
choose to operate under the strictures and conditions that come with
exemption.
Tax Exempt Status_Key to Community Care
Exemption is longstanding
Since the enactment of the first income tax law in the United
States, hospitals have been accorded tax exemption as charitable
institutions. Society and government have long recognized that
hospitals provide an indispensable public service. The underpinning for
charitable tax exemption is public support for activities that serve
the larger good--a concept that encompasses the broadest range of
public purposes. The governing body of a charitable organization is
based in the local community, and has a duty to see that the
organization is organized and operated to fulfill its charitable
mission.
Not-for-profit hospitals are the cornerstone of community health care
In 2003, 2,984 non-government, not-for-profit hospitals in the U.S.
cared for more than 450 million patients. If these not-for-profit
hospitals ceased to exist, society would demand that hospital care be
supplied by the government itself, which would require an enormous
increase in taxes. For this reason alone, all hospitals operated on a
nonprofit basis should be encouraged in their mission, and should be
granted exemption from tax.
Since 1969, the promotion of health has explicitly been recognized
as a purpose meriting tax exemption. Health care organizations may be
awarded tax-exempt status by demonstrating that they promote health in
a manner that benefits the community as a whole. The premise underlying
this community benefit standard is that the promotion of health in a
manner that benefits the larger community serves a public purpose. The
promotion of health alone is not sufficient, however; how it is done,
when, and for whom are important factors. Tax exemption requires more.
The focus is not on what the hospital does but whether those actions
respond to community need. Providing charity care has been only one way
to demonstrate that benefit.
The community benefit test is still a sound and viable basis for
awarding tax-exempt status to hospitals. It places the focus at the
local level and examines the merits of individual situations against
the community environment in which the hospitals serve. The issue has
been and should continue to be whether those hospitals are providing
public benefit. Exemption is given in return for responding to the
community's needs.
Hospitals are open 24 hours a day, seven days a week. The women and
men who work there--on the day shift, the swing shift or the night
shift--provide compassionate care and help bring new life into the
community. They provide medical care both within their four walls and
in other community settings. Hospitals provide emergency department
care to all, regardless of their ability to pay. Hospitals'
uncompensated care, as well as Medicare and Medicaid payment
shortfalls, are costs that are absorbed so that communities can
continue to receive the care they need.
But hospitals also provide a wide-range of services for the benefit
of those who don't seek care from the emergency department, the
pediatric unit or any other hospital department. Instead, they take the
care to those who need it, delivering charity care and offering special
non-compensated services and programs, including community education
and outreach programs, health screenings, and subsidized medical
education and research.
Most hospitals work with local providers and organizations to
assess community status and needs. These assessments help them
determine what programs and services should be targeted at various
populations, such as minority, elderly or low-income people, as well as
to the broader populations.
Tax exemption is key to not-for-profit hospital viability
If society and government have deemed the provision of hospital
care to be a fundamental good, and private markets fall short of
meeting the needs of all members of society, the case for public
assistance becomes compelling. Tax subsidies are one way to provide
that assistance. Tax exemptions, tax-deductible contributions, and tax-
exempt financing serve the public purpose by subsidizing the
availability of health care.
There are nearly 45 million Americans whom the Census Bureau
estimates have no health insurance coverage, although as many as 82
million, according to a recent report, lack health insurance coverage
at some point during a year. Millions more are underinsured. We lack a
social policy in America that provides health care coverage for all. In
the meantime, hospitals are asked to fill the gap, and they try to, for
everyone who walks through their doors. In fact, in 2003, hospitals
absorbed almost $25 billion in uncompensated care for patients who
couldn't pay for the services they needed.
A significant portion (estimated by the Joint Committee on Taxation
to be $8.6 billion in 2004-2008) of the tax subsidy is for capital
acquisition and construction. This subsidy is essential to meet patient
care needs where facilities are in short supply or unavailable.
Charitable contributions from a hospital's community and beyond are
also an important source of hospital revenue ($23.9 billion in 2004-
2008). Public financial support of an organization through tax-exempt
contributions is an indicator that it is publicly accountable and
providing a needed community benefit.
While tax-exemption offers important resources to help hospitals
meet these needs, more is required, especially with Medicare and
Medicaid under funding in the face of soaring demand for hospital
services as America ages and gets sicker. Hospitals cannot solve this
problem on their own, especially with one-third of hospitals losing
money overall, and another third on the financial brink.
Requirements
A hospital qualifies for charitable exemption if it is organized as
a nonprofit corporation and complies with the community benefit
standard, the prohibitions on private inurement and private benefit.
Community benefit standard
In applying the community benefit standard, the Internal Revenue
Service (IRS) considers whether the hospital operates an emergency
department that is open to all regardless of ability to pay, accepts
Medicare and Medicaid patients on a nondiscriminatory basis, has a
governing board that represents the community at large, is open to all
medical staff who wish to use it, or conducts medical research and
education programs.
Prohibition on private inurement
The rules regarding private inurement stipulate that no part of an
institution's net earnings may benefit members of the board, officers,
managers, staff, employees, or other individuals associated with the
hospital. The function of the rules is to ensure that income and assets
serve a public purpose, and to prevent their distribution to insiders.
The purpose of the prohibition against private benefit is to ensure
that an exempt hospital is organized to serve the community as a whole
and not individuals or groups.
Compensation arrangements
Strict rules govern not-for-profit hospital compensation
arrangements with physicians and senior executives. Areas of scrutiny
include recruiting incentives, incentive compensation, loans and
leases, hospital purchase of physician practices, and levels of
compensation of hospital senior executives.
Unrelated business tax
Tax-exempt hospitals are subject to the unrelated business income
tax on income derived from a trade or business regularly carried on by
the organization that is not substantially related to the performance
of its tax-exempt purpose.
Annual reports
Tax-exempt hospitals are required annually to report their gross
income, information on their finances, functional expenses,
compensation, activities, and other information required by the IRS.
This enables the IRS to determine whether the hospital continues to
meet the statutory requirements for exemption. This information should
be publicly available to the communities they serve.
Government Special Payments to Hospitals
Some have claimed that special payments made through the Medicare
Prospective Payment System (PPS) and through the Medicaid program and
other government programs are taxpayer-provided ``subsidies'' for the
uncompensated care provided by hospitals--care for which no payment is
received. While hospitals in every community serve patients who are
unable to pay for their care, not all hospitals receive these special
payments; they are targeted only to specific hospitals or other
providers. A recent study prepared for the Kaiser Commission on
Medicaid and the Uninsured showed that, in 2004, the Medicare program,
the federal portion of the Medicaid program and several other
government programs together provided $23.5 billion in additional
payments to care providers. However, these payments are not intended to
offset or subsidize the actual costs of uncompensated care that
hospitals incur.
Medicare disproportionate share (DSH) payments.
Medicare disproportionate share payments are made to some, but not
all, hospitals that serve low-income patients. While all hospitals
provide uncompensated care, 2,724 hospitals, or 55 percent, receive DSH
payments. In 2004, according to the Kaiser Commission report, hospitals
received $7.6 billion in DSH special payments. There is a minimum
threshold that a hospital must meet to receive this special payment and
a formula that calculates the amount a hospital receives. The formula
combines two measures: the percentage of inpatient hospital days
attributable to Medicare patients in the Federal Supplemental Security
Income (SSI) program, and the percentage of inpatient days attributable
to Medicaid patients. There is currently no measure for uncompensated
care in the DSH payment formula.
In the Balanced Budget Refinement Act of 1999 (P.L. 106-113),
Congress directed the HHS Secretary to collect data from hospitals on
costs incurred in both the inpatient and outpatient settings for which
the hospitals are not compensated, including non-Medicare bad debt and
charity care. This is the first year that hospitals' data will be
available for analysis.
Medicare Indirect Medical Education (IME) payments.
The Medicare program makes special payments to teaching hospitals
under the inpatient PPS. A portion of these payments, directed to the
1,112 hospitals (23 percent of all hospitals) that train our future
physicians, was $2.9 billion in 2004, according to the Kaiser
Commission report. Indirect medical education payments compensate
teaching hospitals for the costs they incur in training physicians. As
a result of their education and research missions, teaching hospitals
must offer expensive, specialized, and sophisticated services that may
not be utilized optimally. Often, teaching hospitals care for the most
medically complex and costly patients in our health care system. The
Medicare inpatient payment system does not adequately measure and
compensate teaching hospitals for these additional patient care costs.
The IME payment adjustment is designed to account for patients'
severity of illness and the inefficiencies of operating a hospital
where teaching and research occur. For example, physicians-in-training
may order extra lab or other diagnostic tests because they are
inexperienced in practicing medicine. They may also ask questions and
rely on other health care personnel in the hospital for help, thus
making professional staff less efficient in delivering patient care.
IME payments are calculated using a formula that is based on an
individual hospital's resident-to-bed ratio. It does not include a
measure of uncompensated care.
Today, even including the targeted payments mentioned above,
Medicare pays only 98 cents for every dollar of care provided by
hospitals to Medicare beneficiaries. If Medicare DSH and IME funds were
to somehow be redirected to cover hospitals' uncompensated care costs,
rather than their current purpose of helping hospitals provide care to
Medicare beneficiaries, the Medicare reimbursement would drop to an
estimated 91 cents for every dollar of care provided by hospitals.
Conclusion
Mr. Chairman, the people of America's hospitals work very hard,
every day, to get high-quality care to all who come through their
doors. They do it with caring and compassion that extends from the
bedside to the billing office. And they do it in the face of mounting
challenges. They are a key reason why our nation has the best health
care in the world. But ensuring that all Americans can take advantage
of that health care when they need it is a huge challenge. We can take
a giant step forward by working together to address the problem of the
uninsured. We look forward to working with you to help solve that
problem, and helping all Americans get the health care they need, when
they need it. Continuation of hospital tax exemption is an essential
ingredient in meeting this goal.
Healthcare Financial Management Association
June 3, 2005
Dear Mr. Chairman:
The Healthcare Financial Management Association (HFMA) is pleased
to submit comments for the record of the May 26, 2005 hearing, ``A
Review of the Tax-Exempt Hospital Sector.''
About HFMA
HFMA is the nation's leading membership organization for more than
34,000 healthcare financial management professionals. Our members are
widely diverse, employed by hospitals, integrated delivery systems,
managed care organizations, ambulatory and long-term care facilities,
physician practices, accounting and consulting firms, and insurance
companies. Members' positions include chief executive officer, chief
financial officer, controller, patient accounts manager, accountant,
and consultant.
HFMA is a nonpartisan professional practice organization. As part
of its education, information, and professional development services,
HFMA develops and promotes ethical, high-quality healthcare finance
practices. HFMA works with a broad cross-section of stakeholders to
improve the healthcare industry by identifying and bridging gaps in
knowledge, best practices, and standards. For the purposes of this
statement, the most relevant examples of these activities are:
Attributes of tax-exempt status. In 1988, HFMA formed a
chairman's task force to identify the specific attributes of healthcare
providers that characterize them as tax-exempt institutions. That
report was published in 1991. (See http://www.hfma.org/resource/
focus_areas/business_of_hc/articles/02_21_02.htm)
These findings were recently incorporated into HFMA's Principles
and Practices Board 2005 monograph: Issue Analysis 05-01: The
Relationship of Community Benefit to Hospital Tax-Exempt Status, which
seeks to clarify ways in which hospitals can gather and report the
information needed to demonstrate their fulfillment of their charitable
mission.
Quantifying bad debt and charity care. In 1993, HFMA
published Principles and Practices (P&P) Board Statement 15, which
explains how to distinguish between charity care and bad debt. These
statements are rigorously peer-reviewed to ensure they reflect the best
thinking of the industry. The IRS has recommended adherence to P&P
Board Statement No. 15 in all representations regarding charity care.
(See http://www.hfma.org/resource/P_and_P_board/Statement_15.htm)
Improving patient financial communications. HFMA leads the PATIENT
FRIENDLY BILLING Project, a cross-disciplinary, nationwide initiative
to make patient financial communications clear, concise, and correct.
Five years ago, a Project work group began work on a report aimed at
helping hospitals efficiently and effectively review their financial
assistance policies to better serve the needs of their communities. The
report, Hospitals Share Insights to Improve Financial Policies for
Uninsured and Underinsured Patients, was published in January 2005.
(See http://www.patientfriendlybilling.org/2005report/
2005_pfb_report.pdf
Summary Points of this Statement
We would like to make the following points regarding the role of
tax-exemption for hospitals, to be discussed in more depth following
this summary:
HFMA strongly urges the Committee to consider the full
range of community services deserving of tax-exemption, not just
charity care. Exempt hospitals are an important part of the healthcare
delivery network and provide a wide variety of community services that
fall under the IRS definition of ``charitable'' under Revenue Ruling
69-545.
Because of this diversity of services, HFMA encourages
the Committee to use great caution when viewing research that compares
amounts of charity care provided by individual hospitals. Some
hospitals that provide smaller amounts of charity care may instead
devote their exempt resources to other important community services,
such as trauma centers, neonatal intensive care units, and a host of
other important needs not served by governments or for-profit
organizations.
HFMA asks the Committee to realize that healthcare
needs--including charity care needs--differ greatly by community, and
therefore solutions, whether legislated or voluntary, must be flexible
to best serve the needs of the patients and communities they serve.
In most aspects of daily operations--such as provision of
optimal clinical care, effective operations, and business efficiency--a
hospital's ownership type should be transparent to the patient. Indeed,
not-for-profit entities have an obligation to operate as efficiently
and effectively as possible to ensure the best possible cash flow,
which, in turn allows them to fulfill their missions. Instead, the
meaningful distinctions among ownership types are found in specific
characteristics such as use of financial surpluses, accountability, and
the provision of services.
Comparable, scaleable reporting standards will greatly
help tax-exempt hospitals accurately document and report the entire
range of the community benefits provided. HFMA believes that these
comprehensive reports should be communicated regularly and clearly to
the public. We applaud the excellent work that the Catholic Health
Association and VHA have done in this area.
The Role of Charity Care and Community Benefit in Justifying Tax-Exempt
Status
HFMA believes that while the provision of charity care is an
important attribute of tax-exemption, it is only one of many attributes
that warrant tax-exempt status, as the IRS defines ``charitable'' under
IRC Section 501(c)(3) and Revenue Ruling 69-545. Failure to recognize
the broad basis for tax-exemption could lead to a specific trade-off
between the amount of charity care provided and the amount of tax-
exemption allowed, which would undermine important and cumulative
community benefits that tax-exempt healthcare institutions deliver.
Our members know that the problem of care for uninsured patients is
far greater than healthcare providers can resolve alone. Even if each
provider in the country devoted every exempt dollar to the delivery of
charity care, there would still be a shortfall of funds to care for the
uninsured, and furthermore, vital community services would have to be
eliminated, ranging from trauma centers to boarder baby programs.
Attributes of Tax-Exempt Healthcare Providers
Tax-exempt healthcare organizations are formed to address the
specific needs of their communities; therefore, the attributes that
merit tax-exemption are not standard across all institutions. In 1991,
an HFMA Chairman's Task Force released a report identifying the major
attributes of tax-exempt organizations. The P&P Board built on these
attributes in light of the current environment.
For the purposes of the issues before this Committee, these
attributes can be divided into organizational characteristics and types
of services.
Organizational characteristics:
Mission to Provide Community Benefit. Mission is a cornerstone of
granting tax-exemption. According to federal law, the tax-exempt
provider must have a clearly defined mission statement committing the
institution to charitable endeavors. Both the institution's historical
background and the community's needs are important in determining the
mission statement.
Use of Financial Surpluses. No individual may receive any portion
of a tax-exempt institution's financial surpluses as a result of
ownership. Both federal and state laws require that all financial
surpluses must go toward furthering the organization's charitable
purpose. Compensation arrangements must be carefully constructed to
reflect fair market value for services rendered.
Accountability. The organization's board of trustees must hold
itself answerable to its community for maximizing the entity's
contribution to the community.
Goodwill. Goodwill is an intangible attribute characteristic of
successful tax-exempt hospitals continuing their mission of providing
care and meeting their community responsibility over a long period of
time. Such organizations usually have stable ownership and governance
structures and regularly receive significant philanthropic and
volunteer support.
Types of charitable services:
Provision of Charity Care. Free or discounted care is an important
component of many hospitals' tax-exempt missions, but is not the only
function that hospitals perform to merit tax-exempt status.
Organizations that provide charity care must establish and communicate
a clear charity care policy based on community needs and input. The
policy should include easy-to-understand, written eligibility criteria.
Reduction of Government Burden. Many tax-exempt hospitals provide
services that government otherwise would have to provide. Services
especially demanded from tax-exempt healthcare providers include high-
tech, high-intensity services, emergency care, chronic care, long-term
care, and unprofitable services.
Provision of Essential Healthcare Services. Tax-exempt healthcare
providers are often the sole providers of healthcare services that are
so essential to community health that tax-exempt status is warranted.
Examples of essential services include emergency rooms and outpatient
clinics serving low-income patients.
Provision of Unprofitable Services. The provision of unprofitable
services is commonly a provider's charitable response to a community
need. Unprofitable services in this sense lose money because of high
costs combined with low volume or inadequate payment rather than
inefficient operations. Common examples of unprofitable services
include burn, neonatal, and trauma centers and community mental health
centers.
Public Education. Teaching institutions, of course, are exempt
because of their role in the advancement of education and science. Most
tax-exempt healthcare providers, however, also provide a range of
educational programs to enhance public health. Examples of such
programs include public health education, wellness programs, and the
sponsorship of educational activities.
Serving Other Unmet Human Needs. Some tax-exempt hospitals provide
important services that are tangential to health care but that are
unmet by any other entity in the service area. Examples of these
activities include senior citizen education and outreach programs, care
for ``boarder'' babies, or the operation of a ``meals on wheels''
program.
Documenting Community Benefit
HFMA believes healthcare providers should identify, measure, and
prominently disclose all the attributes of their organizations that
warrant tax-exempt status. It is important that all stakeholders, from
government officials to members of the provider's community, understand
all the reasons why an organization qualifies for tax-exemption and the
progress that is being made toward achieving its mission.
This can be accomplished effectively only with appropriate
community benefit reporting standards that promote comparability and
are still scaleable enough to accommodate the wide variation in
provider size and resources that characterize the nation's exempt
healthcare providers. HFMA applauds VHA Inc., the Catholic Health
Association of the United States, and Lyon Software for their
contribution in this area through the development of Community Benefit
Reporting: Guidelines and Standard Definitions for the Community
Benefit Inventory for Social Accountability.
Conclusion
HFMA takes pride in its history of providing balanced, objective
healthcare finance technical expertise to Congress, HHS, and advisory
groups. We hope that these comments and recommendations are useful as
the Ways and Means Committee pursues the best interests of patients,
tax-payers, and the nation's healthcare system.
We are at your service to help your Committee gain a balanced
perspective on this complex issue. If you have additional questions,
you may reach me, or Richard Gundling, Vice President of HFMA's
Washington, DC, office, at (202) 296-2920. The Association and I look
forward to working with you.
Sincerely,
Richard L. Clarke, DHA, FHFMA
President and Chief Executive Officer
Statement of K.B. Forbes, Consejo de Latinos Unidos, Los Angeles,
California
An all-paid ocean cruise is one of the newest bribes offered by one
so-called ``non-profit'' hospital to cover its unconscionable conduct.
Our organization has been fighting to change the egregious behavior
of hospitals since 2001. In the last couple of weeks we have been
wrangling with a so-called ``non-profit'' called Florida Hospital, the
flagship operation of the ``faith-based'' Adventist Health System, in
Orlando, Florida.
Why?
Because we brought members of an uninsured family that were denied
services by FloridaHospital to meet with the professional staff of the
U.S. House Ways and Means Oversight Subcommittee on May 9, 2005.
Several days later, Florida Hospital contacted the uninsured Vega
family on the early morning of Friday, May 13, 2005 with offers of a
free ocean cruise and free services.
Rodney Vega, a six-year-old, and his mother Judith Montilla Vega
met with Congressional staffers to outline their plight on Monday, May
9. Young Rodney had an aggressive brain tumor last year and Florida
Hospital appears to have refused to help the family even though the
child had only two weeks to live. The shocking fact is the so-called
``Adventist'' hospital did not help the Vegas who are practicing
Adventists while Rodney's father is an Adventist pastor.
On Wednesday, May 11, the Judith Montilla Vega signed a HIPAA
release allowing the U.S. House Ways and Means Oversight Subcommittee
to discuss young Rodney's medical history. Two days later, Florida
Hospital called the Vegas with ``the bribe.'' Here is Judith Montilla
Vega's written testimony given to us on Monday, May 16, 2005:
``I am taking this opportunity to let you know about a call that I
received Friday, May 13, 2005 between 6:30 and 6:40 a.m. at my home.
Ms. Marilyn (she did not tell me her last name) called me from Florida
Hospital. After she introduced herself, she asked me for the name of my
husband, and she wanted to know about my experience with my son, Rodney
Vega, at Florida Hospital. I told her the name of my husband, and I
explained that I had a bad experience with Rodney at this hospital,
because last year (2004) when my son needed a very urgent surgery to
save his life from his brain tumor (ganglioneuroblastoma IV), they did
not help us. I told her, too, that they knew of my son's condition
because they had some medical records on him. I said that thank God for
the Consejo de Latinos Unidos, Rodney had the life-saving surgeries,
MRIs, bone age tests, medical appointments and all medical services
that he has needed. Marilyn agreed about the medical records. She told
me she had them, and she apologized for the situation. Marilyn offered
me free medical services at Florida Hospital for Rodney. This lady told
me that this offer came directly from Florida Hospital's Vice-
President. She said she wanted to review the results of Rodney's last
MRI in order to know more about my son's medical condition. She finally
offered us a paid ocean cruise, too. She said that Florida Hospital can
meet any wish Rodney had and they would be willing to pay for the
cruise. I was so surprised with this call, because I do not understand
the real reason why they called. When I really needed Florida Hospital,
they did not help me with my son. Why now, a year later, are they
calling me when, thanks to God, Consejo is helping us with our little
boy? I met with Congress last week and now Florida Hospital is offering
me cruises when my son would have been dead because of their lack of
care or charity.''
According to published media reports, Florida Hospital executives
attempted to call the contact a ``clinical'' follow-up for young Rodney
Vega. The problem is Rodney Vega was last seen by Florida Hospital
three years ago, in 2002. Does it take three years for a follow-up and
is everyone offered a free cruise?
As easy as it is for Florida Hospital to dish out bold face lies,
we warn the committee today to be wary of slick or sugar-coated
testimony given by the executives or nuns of non-profit hospitals.
Although non-profit hospitals do wonderful life-saving work and give
away millions in charity care and uncompensated care, the truth is
after all the spin and all the public relations:
the uninsured are still being charged three or four times
more for the exact same care,
executives are still being paid excessively, sometimes in
the millions of dollars,
the non-profits are still siphoning off billions in off-
shore accounts.
Florida Hospital has said the most foolish things to cover their
tracks just because the spotlight is on them. We believe the non-profit
hospital sector will say anything, justify anything, plea and cry about
everything, instead of focusing on the issues at hand since the
spotlight is on them.
We appreciate the Committee's hard work and thank you for the
opportunity to submit this brief statement.
Statement of Edward Goodman, VHA Inc.
VHA Inc. appreciates the opportunity to submit this statement on
the tax-exempt hospital sector. Congress' oversight of the not-for-
profit hospital sector and its exploration of the rationale for federal
tax exemption are of great interest to not-for-profit organizations
nationwide, and a serious matter for VHA-member hospitals throughout
the United States.
VHA Inc. is a national alliance of leading not-for-profit health
care organizations that work together to improve the health of the
communities they serve. VHA delivers industry leading supply chain
management services and enables regional and national member networks
to improve clinical and operational performance and to drive
sustainable results. Based in Irving, Texas, VHA has 18 local offices
serving more than 2,400 health care organizations across the United
States.
VHA's mission is directly related to the viability of the
charitable not-for-profit community hospital in the face of a variety
of economic pressures. Indeed, the need to develop economic strategies
to preserve the not-for-profit hospital's charitable mission, and at
the same time ensure its financial survival, is the principal policy
goal that underlies VHA programs and activities.
The Role of Tax-Exempt Hospitals
Historically, the tax-exempt hospital sector has played an
important role in American society. Not-for-profit community hospitals
have consistently served to lessen the burdens of Federal and State
governments by filling gaps in medical care that might otherwise fall
to governmental agencies. Such hospitals provide urgent and routine
medical care for the indigent, medical research and education,
community health services, and essential services such as 24-hour
emergency rooms, neonatal intensive care, burn units, and care for
terminally ill patients. These services are frequently less profitable
and often unprofitable for those who conduct them. The commitment of
not-for-profit hospitals to provide a broad range of health care
services as part of their charitable mission transforms these hospitals
into social charities as well as medical providers.
The Evolution of the Hospital Tax-Exemption Standard
Not-for-profit hospitals are exempt from federal income tax as
Section 501(c)(3) organizations if they are organized and operated
exclusively for ``charitable'' purposes within the meaning of the
Internal Revenue Code.\1\ The meaning of the term ``charitable'' has
evolved over time as changes have been made in the financing and
delivery of medical care.
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\1\ Unless otherwise indicated, all section references are to the
Internal Revenue Code of 1986 or to the Treasury regulations
promulgated thereunder.
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In the 1950s and earlier, hospitals generally operated as
almshouses that supported the sick, needy, poor, and other individuals
who lived on the margins of society.\2\ Consequently, hospitals relied
to a large extent on charitable contributions to meet daily operations.
The Treasury Regulations at the time reflected this role and defined
charitable organizations as those operated for the relief of the
poor.\3\
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\2\ See Sound Health Ass'n v. Commissioner, 71 T.C. 158 (1978),
acq., 1981-2 C.B. 2; Eastern Kentucky Welfare Rights Org. v. Simon, 506
F.2d 1278, 1288 (D.C. Cir. 1974); Robert S. Bromberg, The Charitable
Hospital, 20 Cath. Univ. L. Rev. 237 (1970) (hereinafter, ``Bromberg,
The Charitable Hospital ``).
\3\ See, e.g., Treas. Reg. 39.101(b)-1(b) (1939 Code), reprinted
in Eastern Kentucky Welfare Rights Org. v. Simon, 506 F.2d 1278 at 1286
(D.C. Cir. 1974), rev'd, 506 F.2d 1278 (D.C. Cir. 1974), vacated on
other grounds, 426 U.S. 26 (1975).
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In the 1950s, the Internal Revenue Service (``IRS'') relied
principally on the ``relief of poverty'' standard as the rationale for
hospital tax exemption. Revenue Ruling 56-185, 1956-1 C.B. 202, stated
that a hospital could qualify for tax exemption only if it was
``operated to the extent of its financial ability for those not able to
pay for the services rendered and not exclusively for those who are
able and expected to pay.'' The ruling set forth four requirements for
hospital tax exemption: (1) a hospital must be organized as a nonprofit
charitable organization for the purpose of operating a hospital for
care of the sick; (2) it must be operated to the extent of its
financial ability for those not able to pay for the services rendered,
and not exclusively for those able and expected to pay; (3) it must not
restrict use of its facilities to a particular group of physicians; and
(4) its net earnings must not inure to the benefit of any private
shareholder or individual.
After the IRS released Revenue Ruling 56-185, dramatic changes
occurred in the financing of medical care, including an increase in the
availability of medical insurance.\4\ As a result of these changes,
hospitals were no longer exclusively dependent on philanthropic and
charitable contributions for hospital operations. Instead, caring for
patients--both rich and poor alike--became a primary concern of
hospitals.\5\ While philanthropy still played a role in charitable
hospitals, it was no longer the primary source of hospital income.\6\
This development shifted attention toward a policy of insuring that
adequate health care services were actually delivered to those in the
community who needed them.\7\
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\4\ See Eastern Kentucky, 506 F.2d. at 1288; see also Sound Health
Association, 71 T.C. 158; Bromberg, The Charitable Hospital.
\5\ See Eastern Kentucky, 506 F.2d. at 1288.; see also Sound
Health, 71 T.C. at 180;
\6\ Sound Health Association, 71 T.C. at 180.
\7\ Id. at 180-181.
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In 1959, new regulations interpreting Section 501(c)(3) were
issued. The new regulations moved away from a narrow definition of
charitable based on relief of poverty and adopted a new standard
definition that defined the term ``charitable'' in its generally
accepted legal sense.\8\ As defined, the term is not limited by the
separate enumeration in Section 501(c)(3) of other tax-exempt purposes
that may fall within the broad outlines of ``charity'' as developed by
judicial decisions.\9\
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\8\ See Treas. Reg. 1.501(c)(3)-1(d)(2); T.D. 6391 (24 Fed. Reg.
5217 June 26, 1959).
\9\ Id.
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In 1965, the federal Medicare and Medicaid programs were
established. In addition, county governments and other political
subdivisions began providing nonemergency hospitalization and medical
care for those unable to pay.\10\ Following on these developments, the
broader regulations, and the changing role of hospitals, the IRS in
1969 issued Revenue Ruling 69-545, 1969-2 C.B. 117, explicitly
recognizing the ``promotion of health'' as a charitable purpose that
could qualify for exemption where an organization is promoting the
health of a class of persons that is broad enough to benefit the
community. This is known as the ``community benefit standard.''
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\10\ See Eastern Kentucky, 506 F.2d. at 1288.
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Criteria Used to Assess Whether Hospitals Meet the Tax-Exemption
Standard
The community benefit standard enunciated in Revenue Ruling 69-545,
as clarified in Revenue Ruling 83-157,\11\ remains the standard used
today for hospital tax exemption. Revenue Ruling 69-545 is a flexible
standard that looks to the facts and circumstances of each case in
determining whether tax exemption is warranted. This standard allows
the IRS to determine hospital tax exemption on a hospital-by-hospital,
community-by-community basis.
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\11\ 1983-2 C.B. 94.
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Revenue Ruling 69-545 recognized that, in the general law of
charity, the promotion of health is considered to be a charitable
purpose.\12\ It acknowledged that an organization providing hospital
care may be operated for a charitable purpose where an organization is
promoting the health of a class of persons that is broad enough to
benefit the community. Even if the class of beneficiaries eligible to
receive a direct benefit from its activities does not include all
members of the community, an organization may still qualify for
exemption provided that the class is not so small that its relief is
not of benefit to the community.
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\12\ See Restatement (Second) of Trusts, sections 368, 372 (3d ed.
1967); 4A Austin W. Scott and William F. Fratcher, The Law of Trusts,
sections 368, 372 (4th ed. 1989); Bogert, Trusts & Trustees, section
374 (2d ed. 1964).
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The ruling compared two hospitals, one that was found to qualify
for exemption and one that did not. The following factors were
important in the IRS' determination that the one hospital qualified for
exemption.
Open Emergency Room. The hospital operated a full-time
emergency room that treated all persons requiring emergency care
regardless of ability to pay (the hospital normally referred non-
emergency indigent patients to another hospital that served indigents).
Nondiscriminatory treatment. The hospital provided care
to all persons in the community who could pay for services, either by
themselves or through private health insurance or public programs such
as Medicare.
Open Medical Staff. Medical staff privileges were
available to all qualified physicians in the area, consistent with the
hospital's size and nature of its facilities.
Community Board. The hospital was governed by a board of
trustees composed of independent civic leaders.
Surplus. The hospital used its surplus of receipts over
disbursements to improve the quality of patient care, expand
facilities, and advance its medical training, education, and research
programs.
The ruling states that, in considering whether a nonprofit hospital
claiming such exemption is operated to serve a private benefit, the IRS
will weigh all of the relevant facts and circumstances in each case.
The absence of particular factors set forth above or the presence of
other factors will not necessarily be determinative.
Tax-Exempt Hospitals' Focus on Charitable Mission
One recurring question central to the Committee's examination is
whether not-for-profit community hospitals are ``commercial
enterprises'' that do not significantly differ from shareholder-owned,
for-profit hospitals. Not-for-profit hospitals differ significantly
from their for-profit counterparts in terms of both their structure and
their operations. Fiduciaries of not-for-profit hospitals are driven by
the hospitals' charitable mission and not a duty to maximize profits.
One primary aspect in which not-for-profit hospitals substantially
differ from their for-profit counterparts is in terms of their
governance structure. Tax-exempt hospitals have no shareholders, but
instead are governed by community boards. The absence of shareholders
eliminates any conflict between maximizing profit and operating in
accordance with their charitable mission. For this reason, not-for-
profit hospitals typically offer a broad range of low-margin medical
services to their communities, including urgent and routine medical
care for the indigent, 24-hour emergency rooms, neonatal intensive
care, burn units, and care for the terminally ill.
Tax-exempt community hospitals diverge from for-profit hospitals in
the use of any surplus of receipts over disbursements. Shareholder-
owned, for-profit hospitals generally distribute this surplus to
shareholders as dividends or retain such surplus as working capital.
Tax-exempt hospitals, on the other hand, must use their surplus to
benefit the community such as improving quality of patient care,
expanding facilities, providing community health services (such as
immunization clinics), and advancing medical training, education and
research.\13\ Amounts spent on these activities do not increase the
profitability of not-for-profit hospitals. These activities are
provided as a benefit to the community in furtherance of a not-for-
profit hospital's charitable mission.
---------------------------------------------------------------------------
\13\ See Rev. Rul. 69-545.
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It is often thought that not-for-profit hospitals must operate with
little to no profit to justify their tax-exempt status. However, the
regulations expressly contemplate that a Section 501(c)(3) organization
may carry on a trade or business as a substantial part of its
activities without jeopardizing its tax-exempt status if the operation
of such business is in furtherance of (i.e., substantially related to)
the organization's exempt purpose.\14\ The provision of hospital care
in accordance with the community benefit standard is substantially
related to a not-for-profit hospital's charitable purpose.
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\14\ Treas. Reg. 1.501(c)(3)-1(e).
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The Role of VHA in Facilitating Commitment to Mission in a Changing
World
Post-1969 changes occurring in the tax-exempt hospital sector
include a significant increase in the number of uninsured (or
underinsured) patients who seek treatment at hospitals or in other
venues. In 2003, an estimated 15.6% of the U.S. population, or 45
million people, had no health insurance.\15\ Fewer Americans are
covered by employer-provided health insurance today than were covered
by such insurance fifteen years ago.\16\
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\15\ U.S. Department of Commerce, Economic and Statistics
Administration, U.S. Census Bureau, Income, Poverty, and Health
Insurance Coverage in the United States: 2003 at 14 (Issued Aug. 2004).
\16\ Douglas Holtz-Eakin, Director of Congressional Budget Office,
Testimony before the Subcommittee on Health of the House Committee on
Ways and Means (March 9, 2004).
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VHA hospitals provide medical services regardless of ability to pay
to the growing number of uninsured individuals residing in each
individual not-for-profit hospital's service area. However, based on
its understanding of the sector, VHA believes that not-for-profit
hospitals provide valuable community health benefits to their medical
service areas that equal or exceed the associated tax benefits.
VHA believes that not-for-profit hospitals should be prepared to
quantify and articulate the value of their community benefit. Since
Congress last examined the issue of hospital tax exemption in the early
1990's, VHA has worked in collaboration with the Catholic Health
Association of the United States (``CHA'') to develop resource tools to
assist not-for-profit hospitals in documenting the benefits they
provide to the community. The first resource was released in 2002 and
was entitled Community Benefit Planning: A Resource for Nonprofit
Social Accountability. The second was released in 2004 and entitled
Community Benefit Reporting: Guidelines and Standard Definitions for
the Community Benefit Inventory for Social Accountability.
Community Benefit Planning: A Resource for Nonprofit Social
Accountability provides background on the importance of social
accountability and provides an explanation of the differing types of
community benefit. This resource sets forth the following guidelines
for use by not-for-profit hospitals in setting their social
accountability community benefit process:
Step 1: Renew the commitment. Not-for-profit hospitals
should regularly review and revise their mission statements, establish
the accountability of leaders, establish explicit charity care policies
and procedures, and develop an explicit plan for advocacy on behalf of
the community and needy populations.
Step 2: Plan and budget for services. Not-for-profit
hospitals should assess community needs and assessments, integrate
awareness of community needs throughout the organization, and budget to
meet community needs.
Step 3: Monitor services and activities. Not-for-profit
hospitals should measure and conduct an inventory of services and
activities for the poor and underserved, special populations, and the
broader community.
Step 4: Report community benefits. Not-for-profit
hospitals should determine how their organizations are received by the
community, develop a community benefit message and media strategy, and
inform external and internal audiences about the organization's
mission, values, and community benefits.
Step 5: Evaluate effectiveness. Not-for-profit hospitals
should evaluate the structure of the community benefit program, the
effectiveness of each program, and the effectiveness of the overall
community benefit strategy.
The Community Benefit Reporting: Guidelines and Standard
Definitions for the Community Benefit Inventory for Social
Accountability is an extensive guide that defines what activities are
considered to be community benefits and how to count and measure each
activity. This document provides accounting guidelines for calculating
costs, including subsidized health services, charity care, and
government-sponsored health care. A copy of the guide and other
community benefit resources are available to VHA members (and members
of the public) on VHA's website at www.vha.com under ``Public Policy,''
``Community Benefit Resources,'' ``More.''
As a companion to the resources identified above, VHA, in
collaboration with CHA and Lyon Software, also developed the Community
Benefit Inventory for Social Accountability (``CBISA'') software. This
low-cost software program is designed to assist not-for-profit
hospitals in collecting, reporting, and preparing budgets for their
community benefits. This software is enhanced and revised annually by
VHA, CHA, and Lyon Software. Currently, the software is used by over
800 hospitals.
VHA, in collaboration with CHA, also reaches out into the not-for-
profit hospital community and hosts a bi-annual national conference on
the community benefit process. This conference is open to all not-for-
profit hospitals and is intended to assist them in fulfilling their
charitable missions. VHA and CHA hosted the first conference in 2002.
Conclusion
The tax-exempt hospital sector continues to play an important role
in American society and contributes importantly to the public good by
lessening the burdens of government. This sector delivers many
essential services to communities--24-hour emergency rooms, neonatal
intensive care, burn units, and care for terminally ill patients--that
otherwise may not be available. Not-for-profit hospitals differ
significantly from their for-profit counterparts in terms of both their
structure and operation. These differences allow not-for-profit
hospitals to act exclusively in furtherance of their charitable mission
to improve the health of their communities.
VHA agrees that not-for-profit hospitals should clearly distinguish
themselves from their for-profit counterparts. In collaboration with
CHA, VHA is helping not-for-profit hospitals with their community
benefit reporting process. These two resources--Community Benefit
Planning: A Resource for Nonprofit Social Accountability and Community
Benefit Reporting: Guidelines and Standard Definitions for the
Community Benefit Inventory for Social Accountability--provide a
framework for documenting the value of the benefits currently provided
by not-for-profit hospitals to their communities.
VHA looks forward to the opportunity to work with Chairman Thomas,
the Members of the Committee, and their respective staffs to address
any concerns with the tax-exempt hospital sector in an appropriate
manner.
No date available
Oversight and review of not-for-profit facilities is an appropriate
topic for the Committee on Ways and Means. Recognizing that many of the
not-for-profit facilities are hospitals these comments will focus on
the hospital component of the not-for-profit facilities. However, it is
important that the Committee also evaluate facilities such as churches
or religious organizations that are property owners or acquiring funds
from investments and yet are not-for-profit. The question must be
asked, is there very clear benefit, in proportion to the revenues the
organizations gain, to the community in return for the tax exempt
status?
One concern with hospitals within the category of not-for-profit
facilities can be highlighted in the following example, the county
hospital which is a not-for-profit, tax exempt facility in Beaufort, SC
has a 180% cost to charge ratio (meaning 180% above costs) based on
their published data, which is an inappropriate position for a not-for-
profit facility. A 2002 statewide average operating cost-to-charge
ratio study identified Maryland with the lowest ratio of 32% above
cost, Nevada with the highest at 255% above cost and Arizona at 190%
therefore, for a county, not-for-profit, tax exempt facility in
Beaufort, SC to be 180% is alarming.
In a comparison of charges with other facilities it is clear that
the charges of this example facility is on the high end and outstrips
national and local standards for charges. The focus seems to be only on
their per day bed charges being competitive for health insurance review
but apparently the charges are shifted to other areas to off-set that
charge. For example, a mammogram can be obtained at another facility,
that is not tax exempt and enjoying any of those benefits, but charges
$55 for the mammogram procedure, yet the county not-for-profit facility
in Beaufort, SC charges $106. A sample laboratory battery of tests
would be charged at $445 by the not-for-profit, while if obtained at a
taxed facility would be $250 or a bone density procedure is $270 at the
not-for-profit hospital but the taxed facility charges $133. An
emergency room administered tetanus/diphtheria vaccine, that based on
national standards! should be charged at approximately $20, is charged
by the example not-for-profit facility at $136.
It is reasonable to draw the conclusion that there is inadequate
oversight of the applicability of the not-for-profit, tax exempt status
provided to a hospital that gains from that benefit and in addition
charges high fees. There is a definite disconnect between not-for-
profit and the generation of charges that produce revenue on which no
taxes are paid.
In addition, it is unclear that communities monitor the return in
providing tax exempt status to facilities, stipulate specific target
expectations or measure the benefit received by such not-for-profit
facilities. If there is declared jurisdiction or oversight by any
elected representatives or legislators that is a further source of
ignorance and denial. In contacting elected legislators and
representatives in South Carolina, the response has uniformly been one
of ``no jurisdiction'', which can be interpreted by tax payers as not
wishing to become involved or of no political interest.
I sincerely hope that the Committee on Ways & Means reviews the
role of the unscrunitized high percentage cost to charge ratio, not-
for-profit hospital facility as perhaps a part of the problem in the
escalating health care crisis and lack of affordable health care access
in the U.S.
Thank you.
Sincerely,
Paula Loftis
Southern Illinois Healthcare
Carbondale, Illinois 62902
May 24, 2005
Dear Sirs:
I understand that the Ways and Means Committee is holding hearings
this week on the tax-exempt hospital sector. This correspondence is
testimony for that hearing.
Southern Illinois Healthcare (SIH) is a three-hospital system
located in far southern Illinois. A small, not for-profit system, our
largest hospital is 142 beds and our smallest is 25 beds. Despite our
relatively small size, SIH hospitals offer sophisticated and modern
medical care including open heart surgery, neurosurgery, neonatology,
trauma care, and comprehensive rehabilitative care. We serve all
patients regardless of ability to pay and serve a population that is
heavily dependent upon Medicare and Medicaid.
The exemption of taxes for 501(c)(3) healthcare organizations is
critical to Southern Illinois Healthcare's financial stability and its
ability to fulfill its mission of caring for the residents of southern
Illinois. As a not for-profit, tax exempt organization, SIH uses any
excess of revenues over expenses to further invest in facilities,
medical technology, and caregivers. Should the tax exempt status of SIH
be eliminated, the very survival of SIH's hospitals would be brought
into question. In order to survive, a for-profit SIH would be required
to limit the charity care it provides, aggressively pursue bad debts,
and limit care to Medicaid clients.
In fiscal year 2005, SIH hospitals provided over $3.9 million in
charity care and wrote off almost $20 million in patient's bad debts.
If SIH's tax exemption were removed, it is estimated that SIH's income
tax alone would be almost $13 million. Clearly, this would jeopardize
SIH's ability to provide care to all patients, regardless of ability to
pay.
A fact of the healthcare industry is that the financial viability
of hospital organizations is tied to an ability to access capital for
building renovations, new equipment, and new technology. For example,
Herrin Hospital, located in Herrin, Illinois, is in the midst of a $20
million expansion to provide patient care rooms replacing areas that
are over 30 years old and very small. This addition would not be
possible without SIH's ability to borrow the money necessary for this
construction. The ability to borrow these funds and the interest rate
for this debt is tied very closely to SIH's tax exempt, not for-profit
status.
SIH operates a Community Benefits department for the benefit of the
communities it serves. Through this department, SIH has provided parish
nurse training, coordinated school health education, school nurses,
helped place automated external defibrillators in communities, and
conducted health screenings to detect diseases earlier. SIH offers
these services as part of its mission to care for the residents of
southern Illinois.
I applaud the Ways and Means Committee for its examination of the
tax exemption issue. If I may offer any further information, please do
not hesitate to contact me.
Sincerely,
Philip L. Schaefer, FACHE
Vice President
Statement of Mark Schlesinger, Yale University, and Bradford H. Gray,
Principal Research Associate, Urban Institute
We appreciate the opportunity to submit this statement to the
committee in connection with its important hearing on tax exemption for
nonprofit hospitals. We have each studied the role of ownership in
American health care for more than 20 years, and for the past decade
have collaborated in these endeavors. We believe the testimony received
by the committee provided an incomplete perspective regarding nonprofit
and for-profit health care. Our statement is based on the most
extensive review of the pertinent research literature that has been
carried out to date.*
In 21st Century America, the legitimacy and favorable tax treatment
of nonprofit medical care have come under fire from both political and
academic fronts. Accusers charge nonprofits with three central
failings. Some critics assert that nonprofits have lost public
legitimacy and that ownership has become irrelevant to most Americans.
They contend that ``the vast majority of consumers either did not know
the difference between for-profit and nonprofit insurers, or did not
care'' \1\ and ``the public seems to have little concern about who owns
their hospitals.'' \2\ Second, because empirical comparisons of
nonprofit and for-profit performance are judged to have ``mixed and
inconsistent findings,'' in much recent scholarship ``for-profits and
nonprofits are assumed to be similar health services organizations.''
\3\ Third, there are questions about whether nonprofits are deserving
of tax exemptions. Many policymakers have grown concerned that a
substantial portion of the nonprofit sector has lost sight of its
charitable mission and needs to be held more accountable for meeting
community needs.
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\1\ Organizations'' Bulletin of the New York Academy of Medicine
1997; 74(2): 286-91 at 290.
\2\ Frank Sloan, ``Commercialism in Nonprofit Hospitals.'' Pp. 151-
68 in To Profit or Not to Profit: The Commercial Transformation of the
Nonprofit Sector, edited by B. Weisbrod. (New York: Cambridge
University Press, 1998) at 167.
\3\ T Reeves and F Ford, ``Strategic Management and Performance
Differences: Nonprofit versus For-Profit Health Organizations'' Health
Care Management Review 2004; 29(4): 298-308.
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Because these charges have been repeated frequently in academic and
policy discourse, it would be natural to assume that they must be
accurate. However, although each contains an element of truth, each is
in fact deeply mistaken. Our goal in this statement is to set the
record straight, distinguishing accurate criticisms from false charges
in the assessment of nonprofit healthcare. We consider each of the
three charges in light of the best recent evidence. From this
assessment we develop an alternative perspective on the realistic
benefits and real challenges regarding nonprofit health care in the
U.S.
Do People Think Ownership Matters? Public Perceptions of Nonprofit
Health Care
The claim that the public is unconcerned about ownership in
American medicine is demonstrably false. This is evident whether one
asks about healthcare in general terms or related to specific aspects
of services. A general assessment comes from public opinion surveys
fielded in the late 1990s. Changes in ownership in American medicine
were described thusly: ``In recent years, some health insurance plans,
HMOs and hospitals have changed from not-for-profit status into for-
profit institutions.'' Respondents were then asked whether this was ``a
good thing for healthcare in this country,'' ``a bad thing for
healthcare in this country,'' or ``doesn't make much difference either
way.'' Between 70 and 80 percent (varying across the four surveys) felt
that for-profit expansion would make a difference (in ways that we will
describe).\4\ A 2002 survey inquired about the impact of ownership on
specific attributes of medical care. Respondents were asked whether
nonprofit or for-profit providers were superior in 10 aspects of
medical care (five involving hospitals, five involving health plans).
Fewer than 3 percent felt that ownership would not matter in at least
one aspect of care.\5\
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\4\ Srija Srinivasan, For-Profit Health Care Companies: Trends and
Issues (Menlo Park, CA: Kaiser Family Foundation, 1998)
\5\ Mark Schlesinger, Shannon Mitchell and Bradford Gray,
``Restoring Public Legitimacy To The Nonprofit Sector: A Survey
Experiment Using Descriptions Of Nonprofit Ownership'' Nonprofit and
Voluntary Sector Quarterly 2004, 33(4): 673-710.
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The key question is thus not whether Americans see ownership as
consequential in medical care, but how they think ownership might
matter. The public sees for-profit firms doing better at some aspects
of medical care, nonprofits at others. In a nutshell, for-profit firms
are considered by a plurality of Americans to (a) provide better
quality medical care, (b) be more responsive to consumers, and (c) be
more efficient in the provision of health services. Nonprofits, on the
other hand, are considered to (a) provide care at lower cost, (b) more
generously treat indigent patients, (c) provide treatment in a more
fair and humane manner, and (d) be more trustworthy.\6\ The most
pronounced differences in public expectations are related to
efficiency, cost to patients, treatment of indigent patients, and
trustworthiness.
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\6\ Mark Schlesinger, Shannon Mitchell, and Bradford Gray, ``Public
Expectations Of Nonprofit And For-Profit Ownership In American
Medicine: Clarifications And Implications'' Health Affairs 2004; 23(6):
181-91.
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Comparative Advantage to the Nonprofit Sector, but Varying Across
Different Services: Some scholars conclude from such data that
Americans must have no strong preferences about nonprofit versus for-
profit healthcare, since each is seen as having certain advantages.
This inference is too simplistic, because it presumes that the public
equally values the dimensions on which nonprofits and for-profits have
distinctive strengths. Evidence suggests otherwise. When explicitly
asked whether the growth of for-profit ownership is a ``good thing'' or
``bad thing'' for healthcare in the United States, two to three times
as many of those surveyed (varying across polls) saw the change as bad
rather than good.
Alternative measures yield even larger portions of the public
favoring nonprofit healthcare. When asked whether nonprofit or for-
profit hospitals and health plans are ``more helpful'' for communities
in which they are located, three to four times as many respondents
favored nonprofit over for-profit organizations.\7\ And in the 2002
survey that itemized expectations for 10 aspects of services, more than
three times as many Americans identified more nonprofit than for-profit
advantages. Lest readers suspect that these negative assessments of
for-profit firms might be an artifact of biased wording or
questionnaire design, the Wall Street Journal--a stalwart proponent of
free enterprise and the profit motive in American society--recently
concluded, based on its own 2003 survey, that ``most of the public do
not view healthcare as a business which should be driven by the profit
motive. . . . There is little appetite for businesses to run home care,
health insurance, nursing homes, hospitals, or medical research.'' \8\
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\7\ Mark Schlesinger, Shannon Mitchell, and Bradford Gray, ``Public
Expectations Of Nonprofit And For-Profit Ownership''
\8\ Harris Interactive, Most People Uncomfortable With Profit
Motive in Health Care Harris Interactive, Volume 2, Issue #12, p.1
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The Real Challenge: Misunderstanding and Misperceptions of
Ownership: Although it is clearly wrong to suggest that the American
public thinks ownership is irrelevant in medical care, there is one
sense in which the skeptic's critique is on target. Many Americans'
awareness and understanding of ownership is sketchy at best. When asked
about their reaction to ``for-profit healthcare'' in a 1996 survey, a
quarter of the respondents indicated that they were not familiar with
the term.\9\ If asked to define how nonprofit and for-profit
organizations differ, roughly a third of all Americans cannot even
hazard a guess, and another 20-30 percent have difficulty articulating
what that difference is, even in simple terms.\10\
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\9\ This question was a part of a survey conducted in the summer of
1996 by Princeton Survey Research Associates. The question cited in the
text has the Roper Center identification number: USPSRA.073086,R05H.
\10\ Mark Schlesinger, Shannon Mitchell and Bradford Gray,
``Restoring Public Legitimacy To The Nonprofit Sector
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Limited public comprehension of a legal abstraction like ownership
form is probably not surprising, but it can have consequences. People
who don't understand ownership are less likely to see nonprofits as
providing medical care in a beneficial manner.\11\ Widespread
misunderstanding can thus undercut the legitimacy of the nonprofit
sector. And it biases downward the public's valuation of nonprofit
medical care expressed on surveys of opinion or in political discourse.
---------------------------------------------------------------------------
\11\ Mark Schlesinger, Shannon Mitchell, and Bradford Gray,
``Public Expectations Of Nonprofit And For-Profit Ownership''
---------------------------------------------------------------------------
Does Ownership Matter? Differences in Nonprofit and For-Profit Health
Care
The legal formulations of nonprofit and for-profit organizations
create differences in the incentives facing their administrators and
staffs, the sources of capital that they can tap, and the sources of
influence over their governance. Whether and how these organizational
features translate into distinctive services has been extensively
studied. More than 250 empirical studies have been published comparing
organizations nonprofit and for-profit auspices. These studies have
examined hospital care, psychiatric services, nursing-home care, home
healthcare, treatment of end-stage renal disease, hospice care,
rehabilitative services, preventive examinations and various forms of
ambulatory treatment. The studies consider many attributes of services:
cost, quality, accessibility for indigent clients, trustworthiness of
the organizations' practices, pricing policies, and stability of
service provision over time.
Supporters and critics of nonprofit healthcare agree that the
measured differences between nonprofits and for-profits in terms of
cost, quality and accessibility vary greatly across studies. Critics
find this troubling. For them, varied findings suggest a sort of
randomness, implying that ownership can't count for much if it does not
predict a consistent difference between nonprofit and for-profit
practices. But this interpretation misconstrues how legal form can be
expected to affect organizational performance. When an organization
operates as a not-for-profit, its ownership form does not define
precisely what it is for. This indeterminism can be seen as an
attractive feature in healthcare settings. Purchasers may be unwilling
to pay for services that provide community benefit. These valuable
aspects of care will be different among organizations that provide
well-insured services (e.g. treatment of end-stage renal disease or
hospice care) compared organizations that provide services for which
tens of millions of patients lack adequate coverage (e.g. hospital
care). They will be different for activities whose benefits go beyond
individual patients (e.g., health promotion and disease prevention
programs) compared with those that help only patients or their families
(e.g. long-term care). They will be different in communities with high
rates of poverty compared with those in which most residents are well
off.
Arguably, it is precisely because these public good aspects of
medical care are difficult to define in a consistent manner across
services, among communities, and over time that nonprofits have a vital
place in American medicine. Viewed from this perspective, variability
in the nature of ownership-related differences can be seen as a virtue
rather than a liability. To better understand the variability of
findings from the empirical literature, we consider here three types of
variation: over different medical services, across studies, and among
different communities. We address the first two sources of variation in
the next section, the third in the section that follows.
Variation Over Services: Much of the apparent inconsistency in the
effects of ownership on medical care emerges when scholars carelessly
combine findings drawn from different health services or differing
measures of performance. By contrast, a series of recent articles have
applied rigorous meta-analysis to aggregate only studies involving a
single type of service organization and employing a single well-defined
outcome. These studies find consistent ownership-related differences:
higher mortality rates in for-profit hospitals and renal dialysis
facilities,\12\ higher prices in for-profit hospitals,\13\ higher rates
of adverse events in for-profit nursing homes,\14\ and larger barriers
to access for indigent patients in for-profit psychiatric
facilities.\15\
---------------------------------------------------------------------------
\12\ P. J. Devereaux, Peter T. L. Choi, Christina Lacchetti, et al
``A Systematic Review and Meta-Analysis of Studies Comparing Mortality
Rates of Private For-Profit and Private Not-for-Profit Hospitals.''
Canadian Medical Association Journal 2002; 166: 1399-1406; P.J.
Devereaux, Holger Schunemann, Nikila J. Ravindran, et al. ``Comparison
Of Mortality Between Private For-Profit And Private Not-For-Profit
Hemodialysis Centers: A Systematic Review And Meta-Analysis''. Journal
of the American Medical Association 2002; 288(19):2449-57
\13\ P.J. Devereaux, Diane Heels-Ansdell, Christina Lacchetti,
``Payments For Care At Private For-Profit And Private Not-For-Profit
Hospitals: A Systematic Review And Meta-Analysis'' Canadian Medical
Association Journal 2004; 170(12):1817-24
\14\ Michael Hillmer, Walter Wodchis, Sudeep Gill, Geoffrey
Anderson, Paula Rochon, ``Nursing Home Profit Status and Quality of
Care: Is There Any Evidence of an Association?'' Medical Care Research
and Review 2005; 62(2): 139-66.
\15\ Pauline Rosenau and SH Linder, ``A Comparison of the
Performance of For-Profit and Nonprofit U.S. Psychiatric Inpatient
Providers Since 1980'' Psychiatric Services 2003; 54(2): 183-87.
---------------------------------------------------------------------------
Many of these ownership-related differences vary a great deal
across services. We illustrate with the empirical research comparing
three categories of outcomes for nonprofit and for-profit hospitals and
nursing homes: economic performance, quality of care, and accessibility
for indigent patients. The appended Exhibit 1 summarizes results from
151 studies that use sophisticated methods (either multivariate models
or matched samples to account factors other than ownership form).
Because some studies reported multiple outcomes, we have a total of 199
distinct comparisons. Exhibit 1 groups these by the types of outcome,
the type of service (hospitals vs. nursing homes), whether the analyses
indicate a statistically significant advantage to nonprofit or for-
profit providers (or insignificant differences between the two), and
the specific type of outcome measure that was compared.
The impact of ownership on hospitals and nursing homes appears to
be strikingly different. Consider first costs and efficiency. There is
overwhelming evidence that for-profit nursing homes have lower costs
and greater efficiency: 20 studies support this conclusion; the only
other study found no statistically significant difference. For the
eight studies with the most sophisticated comparisons of technical
efficiency, seven found for-profits to be significantly more efficient.
Among hospitals, however, costs and efficiency results are more mixed,
but predominantly favor nonprofit facilities. Among the most
sophisticated models of technical efficiency, for example, five found
greater efficiency among nonprofits, three found no statistically
significant differences, and three found for-profit hospitals to be
more efficient. Although it's difficult to determine conclusively
whether ownership matters one way or the other for hospital costs, it
clearly matters quite differently for hospital services and nursing
homes.
The differences are equally striking in the other two domains of
performance. Nonprofit nursing homes have a marked pattern of higher
quality care than their for-profit counterparts, but ownership
differences involving hospitals are less dramatic. (One can see this
most clearly by contrasting similar measures of quality. Among studies
that examine the frequency of adverse treatment events, for example,
nine of the twelve studies in nursing homes found these to be less
common in nonprofit settings; only one favored for-profit homes. Among
hospitals, in contrast, only five of 10 studies found adverse events to
be less frequent in nonprofit settings, and three gave for-profits the
edge.) But the relationship of ownership to access (the ability to
obtain care by patients who are indigent or especially costly to treat)
is much larger among hospitals than nursing homes and in the opposite
direction. Of the 39 studies that compared hospitals, 29 found care to
be more accessible in nonprofit settings; only one found significantly
greater access in for-profit hospitals. However, for the six studies
that looked at access in nursing homes, only one favored nonprofits and
four found greater access in for-profit facilities.
The pattern illustrated by our comparison of hospitals and nursing
homes is a general one. Our examination of the research literature has
not found a single type of service for which there were not
somedifferences between nonprofits and for-profits regarding cost,
quality or accessibility. However, the effects of ownership manifest
themselves in different ways for these services. Ownership always
appears to matter, but never to matter in precisely the same manner
from one service to the next.
Four other attributes of medical care are related to ownership in a
more consistent manner across services. First, for-profit organizations
are more aggressive than their nonprofit counterparts in their markup
of prices over costs and in other efforts to maximize revenue. This
pattern has been documented among community general hospitals,\16\
nursing homes,\17\ psychiatric hospitals,\18\ drug treatment
centers,\19\ rehabilitation facilities,\20\ and health plans.\21\
Second, nonprofit organizations appear to deliver health services in a
more trustworthy manner: They are less likely to make misleading
claims,\22\ less likely to have complaints lodged against them by their
patients,\23\ and less likely to treat less-empowered patients in a
manner different from other clientele.\24\ Third, nonprofits typically
serve as the incubator for entirely new services, using philanthropy
and cross-subsidies to finance the development of services for which
payment systems have not been regularized and for which, therefore,
there is not yet a market.\25\ Fourth, nonprofit healthcare providers
appear to be slower to react to changing conditions, both in terms of
increasing their capacity when demand for care is expanding \26\ and in
dropping services or withdrawing from markets that have declining
profitability.\27\
---------------------------------------------------------------------------
\16\ Devereaux et al, ``Payments for Care''; Jan P Clement and Kyle
L. Grazier. ``HMO Penetration: Has It Hurt Public Hospitals?'' Journal
of Health Care Finance 2001; 28: 25-38; Glenn Melnick, Emmett Keeler
and Jack Zwanziger, Market Power And Hospital Pricing: Are Nonprofits
Different?. Health Affairs. 1999; 18(3):167-73; John R. Meurer, Evelyn
M. Kuhn, Varghese George, Jennifer S. Yauck and Peter M. Layde,
``Charges for Childhood Asthma by Hospital Characteristics.''
Pediatrics 1998;102(6): E70-7.
\17\ Jeffery Ballou, The Role of the Not-for-Profit Firm in the
Mixed Industry: Three Empirical Analyses of the Long-Term Care and
Hospital Industries Doctoral thesis, Northwestern University, 2000;
Howard A Birnbaum, A. James Lee, Christine Bishop and Gail Jensen,
Public Pricing of Nursing Home Care. Cambridge, MA: Abt Books, 1981;
Michael Koetting,. Nursing-Home Organization and Efficiency. Lexington,
MA: Lexington Books, 1980
\18\ Rosenau and Linder, ``Psychiatric Inpatient Providers'';
Barbara Dickey, ``A Comparison of For-profit and Not-for-Profit
Hospitals on the Cost of Mental Health Admissions'' Harvard Review of
Psychiatry 1994; 2(2): 97-103; Michael McCue and Jan P Clement,
``Relative Performance of For-Profit Hospitals in Investor-Owned
Systems and Nonprofit Psychiatric Hospitals'' American Journal of
Psychiatry 1993; 150(1): 77-82.
\19\ J. Wheeler, H Fadel and T D'Aunno, ``Ownership and Performance
in Outpatient Substance Abuse Centers'' American Journal of Public
Health 1992; 82(5): 711-18; M. Edlund, JR Wheeler, and T D'Aunno,
``Payment Systems and Payment Incentives in Outpatient Substance Abuse
Treatment'' Public Budgeting and Financial Management 1990; 4(1): 107-
23.
\20\ Michael J McCue, and Jon M. Thompson. ``Association of
Ownership and System Affiliation with the Financial Performance of
Rehabilitation Hospitals.'' Health Services Management Research 1997;
10: 13-23.
\21\ Treo Solutions, 2004. ``Costs, Commitment and Locality: A
Comparison of For-Profit and Not-For-Profit Health Plans'' Inquiry
41(2): 116-29; Mark Schlesinger, David Blumenthal, Eric Schlesinger.
``Profits Under Pressure: The Economic Performance Of Investor-Owned
And Nonprofit Health Maintenance Organizations'' Medical Care. 1986;
24:615-627
\22\ Mark Schlesinger, Nicole Quon, Mattthew Wynia, Deborah
Cummins, Bradford Gray. ``Profit-Seeking, Corporate Control And The
Trustworthiness Of Health Care Organizations: Assessments Of Health
Plan Performance By Their Affiliated Physicians'' Health Services
Research 2005; 40(3):__-__; E Silverman and Jonathan Skinner,
``Medicare Upcoding and Hospital Ownership'' Journal of Health
Economics 2004; 23(2): 369-89
\23\ This ownership-related patterns has been documented for
nursing homes (Jennifer L. Troyer and Herbert G. Thompson. 2004. ``The
Impact of Litigation on Nursing Home Quality.'' Journal of Health
Politics, Policy and Law 29(1): 11-42; CE Johnson, A Dobalian, J
Burkhard, DK Hedgecock, and J Harman, 2004. ``Predicting Lawsuits
Against Nursing Homes in the United States'' Health Services Research
39(6 Pt 1): 1713-31; Priscilla Allen, An Exploration of Complaints
Forwarded to the Connecticut Long Term Care Ombudsman Program: What Are
the Correlates of Nursing Home Complaints Reported? Doctoral thesis,
Fordham University, 2001; Burton A Weisbrod and Mark Schlesinger,
``Ownership Form and Behavior in Regulated Markets with Asymmetric
Information.'' Pp. 133-51 in The Nonprofit Sector: Economic Theory and
Public Policy, edited by S. Rose-Ackerman, 1986. New York: Oxford
University Press; Riportella-Mueller, Roberta and Doris Slesinger.
1982. ``The Relationship of Ownership and Size to Quality of Care in
Wisconsin Nursing Homes.'' The Gerontologist 22: 429-34) and
psychiatric hospitals (Tami L, Mark, ``Psychiatric Hospital Ownership
and Performance: Do Nonprofit Organizations Offer Advantages in Markets
Characterized by Asymmetric Information?'' Journal of Human Resources
1996; 31: 631-49)
\24\ S.Y. Chou, ``Asymmetric Information, Ownership and Quality of
Care'' Journal of Health Economics 2002; 21(2): 293-311; H.T. Tu and JD
Reschovsky, ``Assessments Of Medical Care By Enrollees In For-Profit
And Nonprofit Health Maintenance Organizations'' New England Journal of
Medicine. 2002; 346(17):1288-93
\25\ Mark Schlesinger and Bradford Gray. ``Nonprofit Organizations
And Health Care''; Theodore Marmor, Mark Schlesinger and Richard
Smithey. ``Nonprofit Organizations and Health Care.'' Pp 221-39 in The
Nonprofit Sector: A Research Handbook, edited by W.W. Powell. New
Haven, CT: Yale University Press, 1987
\26\ Horwitz, ``Why We Need the Independent Sector''; Anup Malani,
Tomas Philpson, and Guy David, ``Theories of Firm Behavior in the
Nonprofit Sector: A Synthesis and Empirical Evaluation'' pp. 181-215 in
The Governance of Not-For-Profit Organizations, edited by Edward
Glaeser Chicago, University of Chicago Press, 2003; Marmor, et al,,
``Nonprofit Organizations and Health Care''
\27\ Henry Hansmann, Daniel Kessler and Mark McClellan, ``Ownership
Form and Trapped Capital in the Hospital Industry'' pp. 45-69 in The
Governance of Not-for-Profit Organizations edited by Edward Glaeser
Chicago; University of Chicago Press, 2003; Horwitz, ``Why We Need the
Independent Sector''; Mitchell Glavin, Christopher Tompkins, Stanley
Wallack and Stuart Altman, ``An Examination of the Factors in the
Withdrawal of Managed Care Plans from the Medicare+Choice Program''
Inquiry 2002/2003; 39(4): 341-54.
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A second sort of variation across studies can be traced to the
context in which healthcare is delivered. Some studies in each group
compare organizations operating under relatively benign conditions,
others in far harsher contexts. If the financial pressures and external
constraints are sufficiently intense, even the most publicly spirited
organization has limited capacity to generate revenues with which to
support community benefit activities \28\ This helps explain why
studies that compare organizations before and after they convert from
nonprofit to for-profit ownership generally find only small differences
in accessibility or quality of services.\29\ The nonprofits prone to
conversion were typically struggling financially, prior to changing
ownership.
---------------------------------------------------------------------------
\28\ Amy Davidoff, Anthony LoSasso, Gloria Bazzoli, and Stephen
Zuckerman, 2000. ``The Effect of Changing State Health Policy on
Hospital Uncompensated Care'' Inquiry 37(3): 253-67
\29\ R Town, Roger Feldman and Douglas Wholey, 2004. ``The Impact
of Ownership Conversions on HMO Performance'' International Journal of
Health Care Finance and Economics 4(4): 327-42; John H. Goddeeris, H.
and Burton A. Weisbrod. 1998. ``Conversion from Nonprofit to For-Profit
Legal Status: Why Does It Happen and Should Anyone Care?'' Pp. 129-50
in To Profit or Not to Profit: The Commercial Transformation of the
Nonprofit Sector, edited by B. Weisbrod, New York: Cambridge University
Press; Jill Marsteller, Randall R. Bovbjerg, and Len M. Nichols. 1998.
``Nonprofit Conversions: Theory, Evidence and State Policy Options.''
Health Services Research 33: 1495-1535.
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The Real Challenge: Understanding How Context Affects Ownership-
Related Differences: Evidence of these contextual effects have led some
skeptics to dismiss nonprofit healthcare as an anachronism, no longer
compatible with a healthcare system that is market-driven and dominated
by large corporations providing services. This seems quite intuitive--
if market pressures and corporate hierarchies constrain provider
behavior, how much can ownership actually affect cost, quality or
accessibility of medical care?
The answer, surprisingly, turns out to be ``quite a bit.'' Evidence
suggests that the growing competition and affiliation with multi-unit
systems have not diminished the magnitude of ownership-related
differences in performance.\30\ Quite the contrary, the gap between
nonprofit and for-profit hospitals in the provision of uncompensated
care appears to be growing as markets have become more competitive,\31\
and ownership-related differences among system-affiliated providers are
larger than among independent organizations in terms of accessibility
of services, quality of care, and trustworthiness.\32\ These findings
do not demonstrate that ownership-related performance is independent of
context, only that the major institutional transformations of American
medicine over the last few decades have not vitiated the impact of
nonprofit ownership.
---------------------------------------------------------------------------
\30\ Schlesinger and Gray. ``Nonprofit Organizations And Health
Care''
\31\ Davidoff et al, ``Hospital Uncompensated Care''; James M.
Ferris and Elizabeth A. Graddy, ``Structural Changes in the Hospital
Industry, Charity Care and the Nonprofit Role in Health Care.''
Nonprofit and Voluntary Sector Quarterly 1999; 28: 18-31; Richard A.
Hirth, ``Competition between For-Profit and Nonprofit Health Care
Providers: Can It Help Achieve Social Goals?'' Medical Care Research
and Review 1997; 54: 414-38.
\32\ Schlesinger et al, ``The Trustworthiness of Health Care
Organizations''; Bruce E. Landon, Alan M. Zaslavsky, Nancy D. Beaulieu,
James A. Shaul and Paul D. Cleary. ``Health Plan Characteristics and
Consumers' Assessments of Quality.'' Health Affairs 2001; 20: 274-86;
William Luksetich, Mary E. Edwards and Thomas M. Carroll. 2000.
``Organizational Form and Nursing Home Behavior.'' Nonprofit and
Voluntary Sector Quarterly 29: 255-79; Armel M Hughes, Kate L. Lapane
and Vincent Mor. 2000. ``Influence of Facility Characteristics on Use
of Antipsychotic Medications in Nursing Homes.'' Medical Care 38: 1164-
73; Mark Schlesinger, Judith D. Bentkover, David Blumenthal, William S.
Custer, Robert Musacchio and J. Willer. 1986. ``The Growth of Multi-
Facility Health Care Systems and Access to Medical Services.'' Pp. 121-
40 in Advances in Health Services Research, edited by L. Rossiter and
G. Wilensky. Greenwich, CT: JAI Press.
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Does Ownership Matter Enough? Accountability and Reliability in
Nonprofit Healthcare
Performance differences between nonprofit and for-profit healthcare
are substantial in size, significant in a statistical sense, and
relatively resilient to changing market conditions. But are these
differences large enough, relative to the tax advantages afforded
nonprofit enterprise? Are the benefits associated with nonprofit
ownership provided with sufficient reliability that policymakers can be
sure that any given nonprofit agency is honoring its social
obligations?
Variation in the Forms of Community Benefit: These questions prove
challenging to answer. It is difficult to assess the full impact that
healthcare organizations have on the communities in which they are
located. Some forms of community benefit can be more readily measured
than others. Some forms of community benefit carry a more robust
historical pedigree than do others. Caring for indigent patients falls
into both these categories. One can readily count the number of
uninsured patients or the dollars spent on uncompensated care (though
whether the latter should include ``bad debt'' remains a matter of
continuing controversy.). Caring for the indigent has long been a
standard for assessing charitable activity--prior to 1969, it was the
primary criterion used by the IRS to determine federal tax exemption
for nonprofit healthcare providers.\33\
---------------------------------------------------------------------------
\33\ Margaret Potter and Beaufort Longest,``The Divergence of
Federal and State Policies on the Charitable Tax Exemption of Nonprofit
Hospitals.'' Journal of Health Politics, Policy and Law 1994; 19: 393-
410.
---------------------------------------------------------------------------
Judged by this standard, the performance of nonprofit healthcare
appears far from adequate. For nursing homes and health plans,
nonprofit ownership is not consistently associated with any propensity
to treat low-income patients.\34\ Even in hospitals, the commitment to
caring for uninsured patients is not always of sufficient magnitude to
in itself justify tax exemptions. If one does not count bad debt as a
form of uncompensated care, as many as three-quarters of all nonprofit
hospitals fail to provide uncompensated care of a value equivalent to
their tax benefits.\35\ (In some states, nonprofits' commitment to
uncompensated care appears stronger. But even in these jurisdictions,
20-40 percent of all nonprofit hospitals fail to cover the value of
their tax benefits.\36\ Even by the broadest standards, between a
quarter and a third of nonprofit community hospitals in the United
States provide insufficient free care to offset the value of their
favored tax treatment.
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\34\ Schlesinger and Gray, ``Nonprofit Organizations and Health
Care''
\35\ Kane and Wubbenhorst, ``Exploring the Value of Tax
Exemption''; U.S. General Accounting Office. Nonprofit Hospitals:
Better Standards Needed for Tax Exemption. GAO/HRD-90-84. Washington,
DC: General Accounting Office, 1990.
\36\ Michael A. Morrisey, Gerald J. Wedig and Mahmud Hassan, ``Do
Nonprofit Hospitals Pay Their Way?'' Health Affairs 1996; 15: 132-44;
General Accounting Office, Better Standards Needed for Tax Exemption
---------------------------------------------------------------------------
However, care for the uninsured is neither the only meaningful form
of community benefit nor the sole form of charitable activity in
healthcare settings. For example, a recent study found that although
there were no significant ownership-related differences among health
plans in the extent of free or subsidized services, nonprofit plans
were significantly more likely than for-profits to support safety-net
healthcare providers or contribute to other community health
initiatives that benefit the poor.\37\
---------------------------------------------------------------------------
\37\ Mark Schlesinger, Shannon Mitchell, and Bradford Gray.
``Measuring Community Benefits Provided By Nonprofit And For-Profit
HMOs'' Inquiry 2003 40(2): 114-32.
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More generally, this study found that although nonprofit plans were
not more involved than similar for-profit plans in any of three areas
defined by legal precedent for tax exemption, they were significantly
more involved in three of five other domains of activity that can
benefit community health. A small but growing body of research suggests
that nonprofits provide substantially more of these diverse forms of
community benefit.\38\ And one study found that the nonprofits that are
least involved in free or subsidized treatment are precisely those that
are most engaged in the other forms of community benefit.\39\
---------------------------------------------------------------------------
\38\ Research to date is limited largely to hospitals and health
plans. Both have been shown to provide more health promotion services
to the community, to support safety net providers, to collaborate more
extensively with other local health care providers to meet community
needs, to conduct community health assessments, and to work with local
health departments. Gregory Ginn and Charles Moseley, ``Community
Health Orientation, Community-Based Quality Improvements and Health
Promotion Services in Hospitals'' Journal of Healthcare Management
2004; 49(5): 293-306; Treo Solutions, ``Costs, Commitment and
Locality''; Mark Schlesinger, Bradford Gray, and Michael Gusmano. ``A
Broader Vision For Managed Care, Part III: The Scope And Determinants
Of Community Benefits Provided By HMOs'' Health Affairs 2004; 23(3):
210-221; E. Jose Proenca, Michael D. Rosko and Jacqueline S. Zinn,
``Correlates of Hospital Provision of Prevention and Health Promotion
Services.'' Medical Care Research and Review 2003; 60: 56-78; Glen P.
Mays, Paul K Halverson, Arnold D Kaluzny and Edward C Norton, ``How
Managed Care Plans Contribute to Public Health Practice'' Inquiry 2000/
2001; 37(4): 389-410; E Jose Proenca, Michael D. Rosko and Jacqueline
S. Zinn, ``Community Orientation in Hospitals: An Institutional and
Resource Dependence Perspective.'' Health Services Research, Part I
2000; 35: 1011-35.
\39\ Kane and Wubbenhorst, ``Exploring the Value of Tax Exemption''
---------------------------------------------------------------------------
The Real Challenge: Clarifying Expectations for All Forms of
Community Benefit: The forms of community benefit used to justify tax
exemption do not include most ways in which healthcare providers can
and do influence the health of communities.\40\ Enlarging and
clarifying the scope of activities that could justify tax exemption
would improve the accountability of nonprofit healthcare. However, it
can be difficult to tell when nonprofit organizations have a sufficient
commitment to some forms of community benefit. Their provision and
consequences are difficult to measure, so it is hard to sum their
combined effects meaningfully. One could count the resources devoted to
an activity (probably as meaningful as counting the amount of
uncompensated medical care), but this would account for spending,
rather than effectiveness of initiatives. Until we have better measures
of the scope and impact of community benefit activities, it is
difficult to determine when nonprofits are sufficiently charitable.
---------------------------------------------------------------------------
\40\ Mark Schlesinger, Bradford Gray, Gerald Carrino, Mary Duncan,
Michael Gusmano, Vincent Antonelli and Jennifer Stuber, ``A Broader
Vision For Managed Care, Part 2: Toward A Typology Of Community
Benefits Provided By Hmos'' Health Affairs 1998; 17(5): 26-49
---------------------------------------------------------------------------
Variation Among Locales: Does This Undermine the Legitimacy of
Nonprofit Healthcare? A second challenge to accountability involves
geographic variation in nonprofits' commitment to particular forms of
community benefit. Since the mid-1980s, researchers have come to
recognize that the presence of nonprofit providers influences for-
profit organizations (and vice versa) in a wide variety of ways. The
presence of for-profits in a locale seems to encourage nonprofit
hospitals to (a) respond more aggressively to revenue-enhancing
opportunities,\41\ (b) add more profitable services,\42\ (c) discourage
admissions of unprofitable patients,\43\ and (d) reduce the resources
devoted to treating those patients who they do admit.\44\ Conversely,
the presence of nonprofits in a community is associated with increased
quality of care in for-profit nursing homes,\45\ reduced mortality
rates in for-profit renal dialysis facilities,\46\ and increased
trustworthiness of for-profit health plans.\47\ Researchers have also
found that for-profit firms tend to build or purchase facilities in
communities that have few uninsured or low-income residents.\48\
---------------------------------------------------------------------------
\41\ Silverman and Skinner, ``Medicare Upcoding and Hospital
Ownership''; Jason R Barro and Michael Chu, ``HMO Penetration,
Ownership Status, and the Rise of Hospital Advertising'' pp. 101-116 in
The Governance of Not-for-Profit Organizations (Chicago: University of
Chicago Press, 2003); Mark Duggan, ``Hospital Market Structure and the
Behavior of Not-for-Profit Hospitals'' Rand Journal of Economics 2002;
33(3): 433-46.
\42\ R.G. Hughes and Harold S. Luft. ``Keeping Up with the Joneses:
The Influence of Public and Proprietary Neighbors on Voluntary
Hospitals.'' Health Services Management Research 1990; 3: 173-81.
\43\ Mark Schlesinger, Robert A. Dorwart, Claudia Hoover and
Sherrie Epstein, ``Competition and Access to Hospital Services:
Evidence from Psychiatric Hospitals.'' Medical Care 1997; 35: 974-92;
Mark Schlesinger, Judith D. Bentkover, David Blumenthal, Robert
Musacchio and J. Willer. ``The Privatization of Health Care and
Physicians' Perceptions of Access to Hospital Services.'' The Milbank
Quarterly 1987; 65: 25-58.
\44\ Daniel Kessler and Mark McClellan, ``The Effects of Hospital
Ownership on Medical Productivity'' NBER Working Paper #8537 (Cambridge
MA: National Bureau of Economic Research, 2001); Susan L. Ettner and
Richard C. Hermann. ``The Role of Profit Status Under Imperfect
Information: Evidence from the Treatment Patterns of Elderly Medicare
Beneficiaries Hospitalized for Psychiatric Diagnoses.'' Journal of
Health Economics 2001; 20: 23-49.
\45\ David Grabowski and Richard Hirth, ``Competitive Spillovers
Across Non-Profit and For-Profit Nursing Homes'' Journal of Health
Economics 2003; 22(1): 1-22.
\46\ Pushkal P.Garg, Kevin D. Frick, Marie Diener-West and Neil R.
Powe, ``Effect of Ownership of Dialysis Facilities on Patients'
Survival and Referral for Transplantation.'' New England Journal of
Medicine 1999; 341: 1653-60.
\47\ Schlesinger et al., ``The Trustworthiness of Health Care
Organizations''
\48\ Jan P.Clement, Kenneth White and Vivian Valdmanis, ``Charity
Care: Do Not-For-Profits Influence For-Profits?'' Medical Care Research
and Review 2002; 59: 59-79; Bradford H. Gray, The Profit Motive and
Patient Care: The Changing Accountability of Doctors and Hospitals.
Cambridge, MA: Harvard University Press, 1991; Marmor et al.,
``Nonprofit Organizations and Health Care''
---------------------------------------------------------------------------
The Real Challenge: How Much of Each Ownership is Enough? The
policy import of these cross-ownership influences is only partly clear.
On the one hand, the presence of nonprofit competitors appears to have
a generally positive effect on the performance of for-profit healthcare
providers. Nonprofit neighbors appear to rein in some less-palatable
practices associated with the profit motive, though the precise
mechanism for this influence is poorly understood. (It may involve
patients' sorting themselves between nonprofit and for-profit settings,
providers' adapting to local practice norms, or employers and other
large purchasers of medical care revising their expectations). For-
profit competitors have a more mixed effect on nonprofits. They can
exert a positive influence by stimulating more efficiency and greater
responsiveness to changing market conditions. However, for-profit
influence appears to erode nonprofits' commitment to charity care, a
vital concern for at least some health services and many local
communities.
Whatever the net effect of these cross-ownership influences,
identifying the most appropriate mix of nonprofit and for-profit
providers in each community depends in part on how sensitive each is to
the presence of the other. There is only a smattering of evidence on
these relationships. It appears that even a small for-profit presence
(a share of 10% or less in the local market) will induce greater
efficiency from their nonprofit competitors.\49\ But a larger presence
of nonprofits appears required to induce for-profit counterparts to
behave in a more trustworthy manner--market shares of at least 20-30
percent.\50\
---------------------------------------------------------------------------
\49\ Kessler and McClellan, ``The Effects of Hospital Ownership on
Medical Productivity''
\50\ Schlesinger et al., ``The Trustworthiness of Health Care
Organizations''
---------------------------------------------------------------------------
Concluding Thoughts: Maintaining a Vital Nonprofit Presence in Each
Community
Although nonprofits' community benefits vary across services and
localities, the sector plays a vital role in American healthcare. The
ownership-related outcomes that can be sensibly counted add up to be
quite consequential. Although not all nonprofit hospitals (even in
communities with many low-income residents) provide extensive free
care, were private nonprofit hospitals to treat uninsured patients at
the same rate as for-profit hospitals, the burden on government
hospitals treating uninsured patients would double. Although not all
studies find inpatient mortality to be lower in nonprofits, on average
the reduced risk in nonprofit settings is about on par with the quality
benefits from teaching hospitals, which policymakers have generally
viewed as vital to a high-quality healthcare system. And if the price
markups associated with for-profit ownership were extended to other
health care organizations, a 5-10 percent spending increase would
result, hardly trivial when total annual medical costs in the United
States are predicted to exceed $3 trillion dollars by the year 2013.
But in many respects, the most precious aspects of nonprofit
healthcare are those that cannot be counted. As we learn that even
effective programs for patient education leave many consumers ill
informed and vulnerable, nonprofits' comparative trustworthiness will
seem an essential attribute of American medicine. As we come to better
appreciate the importance of the social determinants of health,
nonprofits' greater predisposition to pursue community-based health
promotion programs will become increasingly central to health policy.
As the prevalence of chronic illness increases in an aging population,
nonprofits' predisposition toward collaborative involvements with other
community healthcare providers will become increasingly valuable.
Most Americans care about maintaining nonprofit healthcare; we
believe that they are right to do so. In our assessment, however,
capturing the realistic benefits of nonprofit ownership does not
necessarily require an entirely nonprofit delivery system, as some
advocates have argued.\51\ However, it does require at minimum that
there be a vital and robust nonprofit presence (perhaps 30-40 percent
for each service) for all health services in every community, a
situation that currently exists for few services outside of acute care
hospitals. And it further requires that policymakers address in a
concerted and constructive manner the challenges raised by Americans'
current misunderstandings of ownership, by nonprofits' sometimes
limited involvement with the communities in which they are located, and
by lack of clarity regarding community benefit expectations beyond the
care of the uninsured.
---------------------------------------------------------------------------
\51\ Stephanie Woolhandler, David Himmelstein, Marcia Angell,
Quentin Young and the Physicians' Working Group for Single-Payer
National Health Insurance, ``Proposal of the Physicians' Working Group
for Single-Payer National Health Insurance'' Journal of the American
Medical Association 2003; 290(6): 798-805
EXHIBIT 1
Categorizing Empirical Findings Comparing Organizational Performance by Ownership: Acute Care Hospitals vs.
Nursing Homes
[Citations are available from the authors.]
----------------------------------------------------------------------------------------------------------------
Specific Measures (Number of Studies Using This Measure)
-----------------------------------------------------------------------------
Direction of Finding Accessibility for
Economic Performance Quality of Care Unprofitable Patients
----------------------------------------------------------------------------------------------------------------
Studies of Acute Care Hospitals
----------------------------------------------------------------------------------------------------------------
Nonprofit Administrative overhead Post-discharge mortality Locating in low-income
Advantage (3) \52\ (7) \56\ areas (5) \61\
Costs per admission (10) In-hospital mortality Treating uninsured
\53\ (1) \57\ patients (12) \62\
Measures of inefficiency Adverse outcomes (5) Restrict access of
(5) \54\ \58\ uninsured (4) \63\
Revenues per admission Process measures (4) Providing unprofitable
(6) \55\ \59\ services (6) \64\
Regulatory violations Treating Medicaid
(1) \60\ patients (2) \65\
----------------------------------------------------------------------------------------------------------------
No Difference Cost per admission (7) Malpractice suits (1) Treating uninsured
\66\ \69\ patients (6) \75\
Revenues per admission In-hospital mortality Treating Medicaid
(2) \67\ (7) \70\ patients (3) \76\
Measures of inefficiency Post-discharge mortality
(3) \68\ (9) \71\
Adverse outcomes (2)
\72\
Process measures (1)
\73\
Hospital re-admissions
(1) \74\
For-Profit Cost per admission (5) Adverse outcomes (3) Treating Medicaid
Advantage \77\ \79\ patients (1) \81\
Measures of inefficiency Post-discharge mortality
(2) \78\ (1) \80\
----------------------------------------------------------------------------------------------------------------
Studies of Nursing Homes
----------------------------------------------------------------------------------------------------------------
Nonprofit Administrative overhead Malpractice suits (2) Services at reduced
Advantage (1) \82\ \84\ charge (1) \90\
Revenues per admission Satisfaction with
(4) \83\ treatment (2) \85\
Process measures of
quality (6) \86\
Regulatory violations
(6) \87\
Adverse outcomes (9)
\88\
Physical restraints (4)
\89\
----------------------------------------------------------------------------------------------------------------
No Difference Administrative overhead Regulatory violations Medicaid admissions (1)
(4) \91\ (2) \93\ \98\
Measures of inefficiency Functional improvements
(1) \92\ (3) \94\
Adverse outcomes (2)
\95\
Process measures of
quality (2) \96\
Physical restraints (2)
\97\
----------------------------------------------------------------------------------------------------------------
For-Profit Average operating cost Adverse outcomes (1) Medicaid admissions (4)
Advantage (7) \99\ \102\ \104\
Measures of inefficiency Anti-psychotic use (1)
(7) \100\ \103\
Average total cost (6)
\101\
----------------------------------------------------------------------------------------------------------------
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Statement of Jay Wolfson, Tampa, Florida
We have studied comparative data about for-profit and not-for-
profit (NFP) hospitals in Florida and other states. We sought to find
objective, quantitative bases for assessing the relative value and
contribution made by NFPs to community benefit as against the corporate
benefits of tax exemption enjoyed. ``Community benefit'' was broadly
and consistently defined.
Not-for-profit health care organizations enjoy benefits consisting
of:
Not paying most local, state or federal taxes on income,
purchases or properties;
Receiving contributions from individual and corporate
benefactors that are generally tax deductible for the donor;
Being eligible for certain grants or contracts by virtue
of their tax exempt status;
Being eligible to receive proceeds from certain bond
issues (often at very low rates of interest) for various projects.
In exchange for these and other benefits, NFP health care
organizations are expected to afford their communities distinctive
value and services.
Many NFPs are distinguished by the fact that they may be the only
provider of certain services in their community. Others have
demonstrated a high level of commitment to providing indigent and
uncompensated services and/or reaching out to high risk populations to
provide care.
The value of the services provided by NFPs has been subject to
increasing state and federal attention because there is evidence that
there are often few distinctions between NFP and their for profit
competitors' operations and patient services.
A reasonable hypothesis is that NFP health care organizations
should provide at least as much distinctive community service value as
they receive in tax exempt benefits.
The simple model would ask, does the combined economic value of
programs and services such as: indigent and charity care; special
services to high cost/high risk populations; equal or exceed the
totality of taxes NOT paid (federal income, state corporate, property,
use, etc.)?
Our studies have found that it is the exception for a NFP health
care organization to be able to demonstrate that the totality of its
quantifiable community benefits resulted in value equal to or greater
than the dollar value of the tax exemption enjoyed.
Too, executive compensation arrangements within NFP organizations
may often consist of base and bonus salary packages that equal or
exceed private, for-profit competitors.
One of our early studies (attached), published in the Journal of
Healthcare Financial Management (July 1994) provides an example of the
work we have done. Our goal has been to provide objective information
for health care organizations and policy makers.
There is value in conducting additional studies within and across a
spectrum of communities. The model in the attached publication may
serve as a template that can be applied across such a spectrum of
communities.
Jay Wolfson is Distinguished Service Professor of Public Health and
Medicine, Director of the Florida Health Information Center, Director
of the Suncoast Center for Patient Safety at University of South
Florida; Professor of Health Law at Stetson University College of Law;
and Professor of Medicine at Florida State University. He serves as
Associate Director of the National Patient Safety Center of Inquiry,
Veterans Health Administration, VISN 8, and served as a trustee, vice
chair of the board and chair of finance of Tampa General Hospital for
12 years. He conducts research and writes about health care law, policy
and finance, relationships between physicians and other health care
provider/institutional interests, the role of employers in health cost
management and health status promotion, and he is actively involved in
the local, statewide and national processes of policy analysis,
legislative advisement, and regulatory development/management. In 2003,
he was appointed as the Special Guardian Ad Litem for Theresa Marie
Schiavo, reporting to Governor Bush and the Florida Courts.
Scott L. Hopes is President of Healthcare Management Decisions,
Inc., a health industry consulting group that provides health policy
research, strategic health services planning for governing and private
sector providers. He served as Director of Health Planning for the
State of Florida, and has provided research-based technical assistance
to legislative and executive branches of government, as well as to the
health care industry.