Non-profit hospitals face more questions

By STOKELY BAKSH  |  May 27, 2005 at 9:25 PM
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WASHINGTON, May 27 (UPI) -- Non-profit hospitals in the United States, which have spent the past year battling lawsuits alleging they failed to provide the charity healthcare required under their tax-exempt status, this week came under scrutiny by House and Senate leaders, who also demanded they explain their business practices.

A day after Sen. Charles Grassley, R-Iowa, the Finance Committee chairman, asked for an investigation of the financial practices of 10 of the largest U.S. non-profit hospitals, Rep. Bill Thomas, R-Calif., the House Ways and Means chairman, on Thursday asked, "What is the taxpayer getting in return for the tens of billions of dollars per year in tax subsidy?"

Thomas, during a hearing by his committee, suggested lawmakers might consider whether the tax-exemption definition should be changed to serve taxpayers better.

"Tax-exempt status is a privilege. Unfortunately some charities abuse that privilege," Grassley said. "By gathering information from non-profit hospitals, I hope to learn whether the benefits they provide to the needy justify the tax breaks they receive."

Non-profit hospitals around the country have enjoyed some success fighting lawsuits filed by a group of law firms led by Mississippi lawyer Richard Scruggs. The suits allege the hospitals did not live up to their tax-exempt responsibilities.

"It's increasingly difficult to differentiate for-profit from non-profit healthcare providers," IRS Commissioner Mark W. Everson testified before Ways and Means.

During the hearing, the IRS received some of the blame from lawmakers for widening its interpretation of "charitable" from its initial 1956 ruling on tax exemption. In 1969, the IRS adopted the "community benefit standard," which no longer limited organizations to providing a specific level of relief to the poor, but allowed them to demonstrate they benefited the community sufficiently, Everson testified.

The current federal standard for exemption requires non-profit healthcare organizations to be governed by members of the community, rather than by financially interested individuals. It also requires medical staff privileges in the hospital to be made available to all qualified physicians in the area. It requires hospitals to provide full-time emergency room access to all patients, regardless of their ability to pay, and stipulates excess funds be applied to the expansion and replacement of facilities and equipment, as well as training and research.

"It was easy to change the IRS ruling, and that's why we are here today," Thomas said.

Stan Jenkins, chairman of the Board of Review for Champaign County, Ill., said more federal oversight is needed for non-profit organizations that receive charitable tax-exemption status, because county officials are intimidated by hospital politics or ill-equipped to deal adequately with such issues.

Jenkins' group's research found three central problems with two of the county's non-profit organizations: overpriced care for the uninsured, improper billing and collection practices and availability of charity care.

In 2001, Provena Covenant and Carle Foundation hospitals in the county were stripped of their charitable tax-exempt status by the Illinois Department of Revenue, Jenkins said. A county investigation found Provena Covenant operated non-profit and for-profit sectors under its umbrella. Provena Hospitals and Senior Services transferred $159.7 million to the parent corporation, Provena Health, which transferred $23.1 million to a for-profit Provena Ventures. Meanwhile, Carle Foundation was found to have overcharged patients and sued patients over medical debt, Jenkins said.

"A hospital has every legal right to pursue collections through the court system, like any other business," Jenkins testified, "but they can't have it both ways. They can't act like any other business, yet expect to enjoy tax-exempt status unlike any other business -- especially if they hold themselves out to be charitable organizations under either federal or state law."

Professor John Colombo, of the University of Illinois College of Law in Urbana-Champaign, testified that "hospitals have enjoyed exemption from the federal income tax virtually since the beginning of the income tax system."

There is a lack of accountability for legal exemptions, Colombo added.

In Texas, lawmakers adopted specific charity-care standards in the 1993 Nonprofit Hospital Community Benefits Law, which requires non-profit hospitals to provide community benefits equal to 5 percent of net patient revenue. Of that amount, 4 percent must be the cost of charity care and unreimbursed cost of government-sponsored healthcare programs while providing services in relation to the community's needs.

John T. Thomas, senior vice president of the Baylor Health Care System in Texas, said his organization conducts formal community needs assessments and non-profit hospitals submit annual reports detailing the amount of charity care and community benefits provided.

Baylor files three separate reports for its two major facilities -- Baylor University Medical Center and Our Children's House at Baylor -- which satisfy the law requirements because of their heavy Medicaid patient load. Thomas said Baylor Health Care System's total community benefit was $240 million in 2004.

"Texas charity care law is a fair, objective standard for determining if a hospital is meeting its mission as a nonprofit organization," Thomas testified.

A recent survey of 100 hospital financial executives by PricewaterhouseCoopers' Health Research Institute showed hospitals provide more free care than the $25 billion they report annually. The survey found the rising number of uninsured Americans forces hospitals to absorb higher levels of charity care and bad debt.

The survey also found it was difficult to report on the value of charity care because of inconsistencies in hospital policies to qualify for charity. Hospitals unable to classify charity cases when patients do not pay for services write off the debt.

"The survey was critical, because not enough data has been collected for legislators, hospitals, insurance companies ... for anybody," said Reatha Clark, a partner in the PricewaterhouseCoopers healthcare industry group. "The real heart of the problem is people's access to care (and) whether it be charity care, bad debt and billing practices -- that should be the second question. Senator Grassley isn't asking the right question."

Still, for other non-profit and faith-based organizations, a review of the IRS rulings is necessary so tax-exemptions are awarded appropriately because healthcare systems compete for subsidies.

"Many non-profits have a weak structure," said Sister Carol Keehan, chairperson of the Board of Trustees of the Catholic Health Association of the United States. "We need to strengthen it, rather than tossing the non-profit structure out."

The CHA, a faith-based organization that provides community health services, began its Social Accountability Budget and its Community Benefit Inventor for Social Accountability programs to plan, monitor, report and evaluate community-benefit activities in which the organization participates. The CHA hopes such standards could help non-profit hospitals better serve their communities.

Lawmakers said more research was needed on the charitable structure, its economic impact in different regions and joint ventures.

"We're not able to talk honestly about this issue," said Rep. Nancy Johnson, R-Conn. "We have to be conscious because we don't know what we're talking about."


Stokely Baksh is an intern for UPI Science News. E-mail:

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