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As Gov’t Brings the Heat to Nonprofit Hospitals, Nonprofits Have to Bring Their A-Game

Nonprofit hospitals are feeling the heat over their tax-exempt status. As local, state, and federal deficits climb, it’s only natural that an industry segment enjoying significant tax breaks—to the tune of $30 billion annually according to the 2015 study “The Price Ain’t Right” by Zack Cooper, Stuart Craig, Martin Gaynor, and John Van Reenen—will be challenged to justify tax-free status. The spotlight is only going to get hotter.  

The ACA too has changed things. As the number of uninsured patients declines as a result of the ACA, the justification for tax-exempt status has been called into question. As a Politico analysis rather infamously found in 2017, the top seven hospitals, as ranked by the U.S. News & World Report, increased revenue under ACA and reduced their charity spend. 

Nonprofit hospitals termed a “legal fiction”

It’s little wonder that current Senator Chuck Grassley, once again the sitting Finance Committee Chairman, has ramped up his scrutiny of nonprofits. The last time he served in this role, he oversaw the investigation that resulted in the redesigned IRS Form 990 with the added Schedule H section in 2008—then expanded it in a provision of the ACA. 

Last year a case on the constitutionality of nonprofit hospitals offsetting property tax liabilities with their charitable expenditures went to the Illinois Supreme Court (the exemption was upheld). In 2017, the IRS revoked a hospital’s tax-exempt status for the first time. In 2013, Pittsburgh Mayor Luke Ravenstahl unsuccessfully sued the University of Pittsburgh Medical Center (UPMC) on the grounds that the city was losing $20 million annually in taxes. Not coincidentally, UPMC’s Jeffrey Romoff was then the highest-paid nonprofit hospital CEO in the country. Romoff is still at the helm and as of last year is pulling down more than $8.5 million annually in salary. 

Or, finally, New Jersey judge Vito Bianco declared in 2015 that “modern nonprofit hospitals are essentially a legal fiction.” In his decision against a nonprofit hospital, the hospital had to pay ten years of back taxes and penalties on parts of its facilities used for for-profit activities. 

Four suggestions on making your charity care and CB undeniable

Regardless of your hospital’s P&L statement or record of community benefit, you’re all suffering from the terrible optics of the industry overall. If you’re going to have a bull’s eye on your back, you’d best start getting bulletproof. 

1. Shift the paradigm from medical care toward true community health

The current focus of Community Benefit (CB) is medical care. In a 2015 report from the IRS to Congress, 92% of CB activities were clinical—charity care, payment shortfall from Medicaid and similar programs, graduate medical evaluation and research—while more than 7% was to community health improvement and contributions to community groups. It’s not surprising that hospitals default to clinical care—it’s what you know and do best; plus, it’s often much easier to track and quantify. Yet ignoring community health is one of the reasons Duke cardiology fellow Haider Warraich, M.D., wrote a devastating 2017 STAT article, “Hospitals Need to Earn Their Tax-Exempt Status.” In the article he recounts working at the Cleveland Clinic, his first experience in the U.S. He was dazzled by “one of the wonders of the world” and buildings “like shimmering pyramids” and an “infinity pool nearly spanning my field of vision.” Yet the first time he walked off campus and saw the “decrepit homes and broken roads,” he thought he was back home in Pakistan.  

Hospital systems would do well to partner with public health, social services, and even other hospital systems to invest in community-based and focused initiatives. Take the extra step of putting community leaders on your board. With their expertise—which can be as deep as yours in clinical care—concrete and sustainable improvements in community health are achievable. Investments such as these could be modest and still deliver outstanding CB ROI. Incidentally, this may represent perhaps the only sure way we’re ever going to bring down climbing healthcare costs that are becoming increasingly unaffordable.

2. Make your CB spend equal to your marketing spend and institute pre-set community giving

As a nonprofit hospital, you have a dual goal of maximizing revenue and caring for your community’s underserved. Making it manifest by matching your CB contribution to your marketing budget won’t only render you safe from lip-service accusations but will in fact operationally balance the two responsibilities. 

3. Advertise your financial aid

It’s often difficult for the public to differentiate nonprofit and for-profit hospitals. In a 2014 study titled “What Are Cancer Centers Advertising to the Public?: A Content Analysis” published in the Annals of Internal Medicine, the authors determined that National Cancer Institute-designated centers—nearly all nonprofit university hospitals—used emotional manipulation in their advertising more frequently than for-profit hospitals and rarely mentioned treatment risks. Earlier this year, Senator Grassley asked the IRS to provide him with the level of charity care nonprofit hospitals have reported on their Schedule H forms, including whether providers are widely advertising the availability of assistance for qualifying indigent patients. 

It’s rather elementary to say, but advertising the assistance you offer for the underserved accomplishes two important things: 1.) it demonstrates your concern for community health (and demonstrates it to Senator Grassley too) and 2.) it will bring underserved patients to your door, whom you’ll serve, which you’ll capture in your CB reporting and serves as a credit to your mission.  

4. The door to scrutiny has opened and it’s not closing

Despite the legal inquiries and press that lumps nonprofit hospitals with their for-profit counterparts, I believe plenty of differences remain. Whereas for-profits have a legal responsibility to serve their shareholders, nonprofits still answer to their communities and the common good—even if some could do a better job at fulfilling their mandates. Despite profits and rates of charity care that are often no less and no more than their counterparts, nonprofits still tend to have lower margins and admit more Medicaid patients. Research and teaching aren’t generally lucrative service lines and consequently, belong almost completely to the nonprofit sphere. 

Yet what I believe and what you believe and even how committed your hospital or system is to social welfare could now be moot. Through legislation and the courts, the door has been opened for governments to pursue tax revenues from nonprofit hospitals (and even health insurance companies such as Blue Shield of California, whose tax-exempt status was revoked by the California Franchise Tax Board in 2015 and whose nearly $14 billion in 2014 revenues was subjected to the state income tax). It’s time you scrutinized your charity care and CB before your local, state or federal government does it for you. 

October 10, 2019
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