Time for a new test on hos­pi­tals’ tax ex­emp­tions

Modern Healthcare - - COMMENT - By Bruce McPher­son Bruce McPher­son is pres­i­dent and CEO of the Al­liance for Ad­vanc­ing Non­profit Health Care, Wash­ing­ton.

As of last year, not-for-profit hos­pi­tals are re­quired un­der the Pa­tient Pro­tec­tion and Af­ford­able Care Act to meet new tax-ex­emp­tion reporting re­quire­ments on their poli­cies and prac­tices in four ar­eas: com­mu­nity health needs as­sess­ment; pa­tient fi­nan­cial as­sis­tance; billing and col­lec­tions; and emer­gency-care pric­ing.

Un­for­tu­nately, this is the wrong way for tax-ex­empt hos­pi­tals to demon­strate their per­for­mance in pro­vid­ing spe­cial ben­e­fits to their com­mu­ni­ties.

First, these four ar­eas are far from the only im­por­tant com­mu­nity-ben­e­fit con­sid­er­a­tions for a hospi­tal’s board and man­age­ment. Other crit­i­cal is­sues in­clude defin­ing the roles of the board and CEO in plan­ning, bud­get­ing, im­ple­ment­ing, eval­u­at­ing and reporting on com­mu­nity-ben­e­fit pro­grams and ac­tiv­i­ties; de­ter­min­ing the qual­i­fi­ca­tions and or­ga­ni­za­tional place­ment of one per­son re­spon­si­ble for day-to­day co­or­di­na­tion of com­mu­nity-ben­e­fit pro­grams across the or­ga­ni­za­tion; and in­cor­po­rat­ing com­mu­nity-ben­e­fit ob­jec­tives into ex­ec­u­tive in­cen­tive pay ar­range­ments—just to name a few.

Sec­ond, and more im­por­tant, the cur­rent reporting re­quire­ments rep­re­sent a form of mi­cro­man­age­ment by the federal govern­ment, fo­cus­ing on process rather than re­sults. They fail to ad­dress the fun­da­men­tal pub­lic pol­icy ques­tion: Is each not-for-profit hospi­tal do­ing enough to jus­tify its tax ex­emp­tion?

In June 2013, the New Eng­land Jour­nal of Medicine re­ported on a study that be­gins to ad­dress this ques­tion. The data were de­rived from the In­ter­nal Rev­enue Ser­vice Form 990s for tax year 2009 from 1,800 of the 2,900 not-for­profit hos­pi­tals in the U.S. (The other 1,100 not-for-profit hos­pi­tals were part of sys­tems not re­quired to re­port their in­di­vid­ual fa­cil­ity in­for­ma­tion). While the study found that the hos­pi­tals on aver­age de­voted 7.5% of their to­tal op­er­at­ing ex­penses to com­mu­nity ben­e­fits (ex­clud­ing bad debt and any Medi­care pay­ment short­falls), on the high end, hos­pi­tals av­er­aged 20% of to­tal op­er­at­ing ex­penses, and the low­est av­er­aged only 1%. These vari­a­tions can be ex­plained only in part by dif­fer­ences in these hos­pi­tals’ earn­ings, as de­ter­mined in a more re­cent study con­ducted by the same pri­mary re­searchers.

Rather than ig­nor­ing these un­ex­plained vari­a­tions, Congress and not­for-profit hospi­tal lead­ers should work to­gether to es­tab­lish a fair and sim­ple fi­nan­cial test com­par­ing each hospi­tal’s com­mu­nity-ben­e­fit in­vest­ments to the es­ti­mated value of its federal in­come tax ex­emp­tion. Such an ap­proach would take into con­sid­er­a­tion each or­ga­ni­za­tion’s fi­nan­cial sta­tus while get­ting at the right pub­lic pol­icy ques­tion.

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