The benefit of nonprofit hospitals to their surrounding community has increasingly been coming under scrutiny – at least in relation to whether or not the benefit is equal to their tax-exempt status.
This past spring, for example, Pittsburgh’s mayor, Luke Ravenstahl, sued the University of Pittsburgh Medical Center, the city’s nonprofit healthcare behemoth, questioning the nonprofit status of an organization that boasts nearly $10 billion in operating revenue annually.
[See also: Calif. charity care standards questioned]
With revenues like that, it is no wonder that nonprofit hospitals are being scrutinized by states and the federal government.
This scrutiny is not new; some have been looking at the issue for decades. But there are a few things that have helped bring it back to the surface, including the move toward more transparency in healthcare in general and the fiscal crises of state and local governments.
“(State and local governments) are looking for additional revenue and they see all those nonprofit hospitals and are starting to ask if they should at least be paying something in turn for services they receive, like police or fire protection,” said Bruce McPherson, president and CEO of the Alliance for Advancing Nonprofit Health Care.
In an effort to make sure nonprofit hospitals are providing the appropriate amount of community benefit in exchange for its tax breaks, the federal government and state and local governments are creating legislation.
The Affordable Care Act mandates that nonprofit hospitals create a community needs assessment every three years. In the assessment, nonprofit hospitals must demonstrate their community benefit and provide a plan for addressing identified needs.
States are addressing the issue in a variety of ways.
In legislation passed in Illinois during the 2012 spring session as part of a large healthcare package, lawmakers created new requirements for hospitals seeking tax exemption. Nonprofit hospitals will only be eligible for property and sales tax exemptions if the estimated value of their community services is greater than the amount of tax they should pay.
“It is really important to understand the landscape is changing and our old views about charity care and tax exemption are rapidly changing,” said Danny Chun, spokesperson for the Illinois Hospital Association.
For the most part, the amount of charity care hospitals must provide to remain tax exempt is not regulated. A majority of charity care is typically for uninsured patients, but how much each hospital spends varies widely.
An article released in April in the New England Journal of Medicine looked at 1,800 nonprofit hospitals across the country. Researchers found that 7.5 percent of nonprofit hospitals’ operating expenses, on average, went toward community benefits (hospitals ranged anywhere from 1 percent to 20 percent).
“If you have an organization that is only providing about 1 percent of its total operating costs toward community benefit, then the board of that hospital is going to be doing some soul searching and asking why they are not doing more than that,” McPherson said.
Approximately 85 percent of the total was made up of patient care; 10 percent went toward professional education and research; and 5 percent toward community health expenditures.
The expansion of Medicaid and the creation of state health exchanges in 2014 should reduce the number of patients needing charity care. This will likely require hospitals, and others, to expand the definition of community benefit beyond charity care.
“The community benefit standard was adopted in 1969 and many feel it is no longer consistent with the industry we have today and what we really should expect from hospitals for tax exemption,” said Gary Young, director of the Northeastern University Center for Health Policy and Healthcare Research in Boston and a co-author of the NEJM study.
Young said it may be as much a matter of doing things differently as it will be doing more to keep tax exemption.
“Things like community outreach, population health, screening initiatives for cancer … hospitals spent almost nothing on those kinds of activities,” Young said of the results found in his study. “We may see some expectation that hospitals will shift what they are doing.”
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