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Putting The Charity Back In Charitable Hospitals — A Bipartisan Agreement?

May 9, 2023
By Dean Zerbe

The new Chairman of the House Ways and Means Committee Jason Smith (R-MO) recently held a hearing on charitable hospitals. The hearing continued a long bipartisan/bicameral interest of Congress in considering the substantial tax and spending benefits charitable hospitals receive from federal/state/local government — which unfortunately far outweigh the amount of charity care that these hospitals provide to those in need. As discussed below, requiring charity hospitals to be charitable is something that should attract bipartisan interest – and could also help address concerns about spending as Congress looks at discussions on the debt and debt limit.

Chairman Smith’s statement makes it clear: “Recent studies and articles have raised concerns, however, that the level of community benefit, which includes charity care, provided by tax exempt hospitals has been inadequate compared to the value of their tax exemption. . . The level of executive compensation is particularly alarming. The top 10 nonprofit CEOs average more than $7 million annually. Some as high as $14 million. This further questions whether these facilities are living up to their mission statement.”

This sobering overview by the Chairman is supported by the eye-blinking number of stories in the media about charity hospitals failing to provide basic charity care. A useful overview and cites to many of these stories and studies the Chairman is alluding to are contained in a fine analysis of charitable hospitals in Wayward Samaritans — a recent SSRN article from two DC-based attorneys.

Lots Of Bucks – Little Bang

The simple reality – as made clear by the testimony at the hearing is that the charitable hospitals benefits from tax relief (federal, state and local) is approximately $28 billion dollars a year in 2020 – having increased from $19 billion in 2011 (and this number is arguably on the low side – with a 2015 study finding in 2011 the value of the nonprofit exemption for hospitals was $26 billion). That $28 billion dollar figure does not include the billions of dollars more that charitable hospitals get from 340B program as well as the disproportionate share hospital (DSH) payments — discussed on the SSRN article above and also testimony at the hearing.

By contrast to the tens of billions of dollars in tax benefits, 340B, DSH payments the charity hospitals receive – the amount of charity care (actual reduced or free care to the poor) provided by charitable hospitals is embarrassingly small. The hearing heard that charity care costs were approximately $16 billion in 2020 – representing a median of 1.4% of charity costs as a percentage of operating expenses for charitable hospitals. Thus, while there are some charitable hospitals that provide a reasonable amount of charitable care – it only underscores why can’t all charitable hospitals provide a marked level of charitable care. Stunning – many charity hospitals provide less charity care than for-profit hospitals.

Congressman Steube (R-FL) in questions at the hearing brought the reality of how the current system is working: “We are increasingly hearing about how some non-profit hospitals are making it difficult for eligible patients to get financial assistance or delaying checking patient’s eligibility for financial assistance, and are sometimes engaging in aggressive billing and debt collection practices. Are you familiar with these practices?

The witness – Dr. Ge Bai from Johns Hopkins University replied: “What we have seen is that hospitals have 100 percent discretion in designing those eligibility criteria. To start with you can make the policy very generous, so many people would have been qualified to receive charity care but many hospitals did not do that. And beyond that [the hospitals] are trying to make the charity care policy very obscure. The patient, under stress would not be able to find the policy, so they will lose the opportunity to apply for it. After that, once they incur that, the hospital will go into very aggressive techniques to go after them to garnish wages. This is really against their charitable mission and not consistent with their purported mission statement.”

To translate this all into real lives — The New York TimesNYT +1.6% in a recent article does an excellent job of providing how hammer-and-tong some charitable hospitals grind the poor – hounding them, charging top rates with a goal (at a minimum) of making sure the poor never come back.

Reform – Require Charity Care

Much-needed reform — requiring charitable hospitals to help those in need (and at a minimum not grind the poor) — is an issue that Chairman Smith I believe can look to bipartisan/bicameral support in the Congress – possibly the Chairman of the Senate Finance Committee, Senator Wyden (D-OR) as well as my old boss Senator Grassley (R-IA). Voices on the left have long-advocated for reform of charitable hospitals. Finally, there is no reason that the Treasury Department and the administration can’t show leadership in this area – and speak to (and support) reform of charitable hospitals. I should add that of course states are always free to impose their own requirements for charity care for charitable hospitals – and some have with mixed results.

Such reform could build on the earlier bipartisan work by Senators Grassley and Baucus (D-MT) on placing requirements on charitable hospitals that was included in the Affordable Care Act (ACA). As the hearing shows – there is much that can be done to improve the initial reforms – particularly in establishing clear requirements for charitable hospitals to provide charity care that would also encourage rural hospitals.

I would encourage policy makers to revisit the original Finance Committee staff discussion paper on nonprofit hospitals (that was the foundation for the later ACA reforms) that I helped draft which provides a strong analysis and detailed justification for establishing a requirement of a 5% charity care requirement for nonprofit hospitals. A 5% requirement of charity care is a straight-forward test that can be administered – and more importantly, provide real meaningful benefit to those in need. In addition, a focus on charity care takes us out of the morass of “community benefit” that has been a hot mess for the IRS to address according to the GAO testimony at the hearing. An alternative might be to consider having the charity hospital calculate all the federal, state and local taxes that it would owe if it were a for-profit corporation and have its charitable care amount equal that amount of foregone taxes (and tax benefits).

The House hearing is a good start to bringing back to the forefront this important issue of requiring charitable hospitals to provide charitable care in return for their billions in tax breaks. Reform in this area can translate into meaningful benefits for working families across the country and help address the crush of medical debt on families (largest source of debt for families) with charities acting charitable. Here’s hoping.


Read More at Forbes.