[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

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            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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noted above.

                                


    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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..
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
      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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \1\ Unless otherwise indicated, all section references are to the 
Internal Revenue Code of 1986 or to the Treasury regulations 
promulgated thereunder.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \8\ See Treas. Reg. 1.501(c)(3)-1(d)(2); T.D. 6391 (24 Fed. Reg. 
5217 June 26, 1959).
    \9\ Id.
---------------------------------------------------------------------------
    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.''
---------------------------------------------------------------------------
    \10\ See Eastern Kentucky, 506 F.2d. at 1288.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \11\ 1983-2 C.B. 94.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \14\ Treas. Reg.  1.501(c)(3)-1(e).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
----------------------------------------------------------------------------------------------------------------
\52\ Stephanie Woolhandler and David Himmelstein, ``Costs of Care and Administration at For-Profit and Other
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\56\ Yu-Chu Shen, ``The Effect of Hospital Choice on Patient Outcomes After Treatment for Acute Myocardial
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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.

                                  
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