IRS Report Puts Tax-Exempt Hospitals Under Microscope

An IRS report finds that a small percentage of not-for-profit hospitals provide the bulk of uncompensated care. Based on a survey of 489 hospitals of varying sizes, this report is likely to increase pressure on Congress to require tax-exempt institutions to provide a certain level of charity care. Even before the IRS report was released, Sen. Charles Grassley (D-Iowa) was considering the introduction of a bill that would hold not-for-profits accountable for justifying their tax exemptions.

Another revelation of the IRS report that may ignite public anger is the large salaries that chief executives of not-for-profit hospitals are pulling down. The average CEO received $490,000 in total compensation in 2006, and top executives at 20 of the larger hospitals raked in an average of $1.4 million a year. At a time when banking executives are being blasted for the bonuses they received as taxpayer money was flowing into their coffers, this is bound to raise questions about the $12.6 billion worth of tax exemptions given to not-for-profit hospitals in 2006.

According to the IRS report, 9 percent of the surveyed hospitals accounted for 60 percent of the spending on community benefits, and 14 percent contributed 63 percent of all the money that responding hospitals spent on uncompensated care. On average, the surveyed hospitals spent 9 percent of their revenues on community benefit, but 58 percent of the facilities reported spending 5 percent or less.

Of the amount reported as benefiting communities, uncompensated care accounted for 56 percent.  Other major categories included medical education and training (23 percent), research (15 percent), and community programs (6 percent). If the medical research component were removed, 71 percent of hospitals’ contributions to the community would consist of uncompensated care.

A surprisingly large percentage of the respondents—44 percent—included bad debt as part of uncompensated care, even though that is a cost of most for-profit businesses.  Twenty percent of the hospitals included the difference between their costs and Medicare and Medicaid payments; 19 percent included shortfalls in private insurance; and 51 percent counted the amount they couldn’t collect from “self-pay” patients, including the uninsured and people in high-deductible plans.

The American Hospital Association, which said the survey was “flawed,” took a glass-half-full attitude toward the community benefits provided by not-for-profits. In a statement, AHA President and CEO Rich Umbdenstock pointed out that 80 percent of the hospitals did not include Medicaid “underpayments” in their tally of uncompensated care. Also, he noted, “hospitals weren’t even asked for the amount they spend to keep costly and critical community services, such as trauma, long-term and neonatal care, available to their communities.”

Nonetheless, the IRS report underlines the fact that not-for-profits are as much concerned about business realities as their for-profit brethren. (The same is true, by the way, of for-profit and not-for-profit health plans.) They are, after all, competing in the same marketplace for the same patients. So, while some tax-exempt hospitals devote less to charity than we think is fair, they must take in more than they spend, or they will be out of business. Some not-for-profits, it is true, are very hard-nosed about collecting bills from people who can’t afford to pay, and it is outrageous that hospitals bill uninsured patients for a much higher percentage of their full charges than an insurance company has to pay. Yet the solution is not to crack down on hospitals, but to reform the crazy system that makes such absurdities possible.