At STAT News Marty Makary opines that nonprofit hospitals that earn profits should pay taxes on those profits. For-profit hospitals are already required to pay taxes on profits. Here is what Professor Makary (Johns Hopkins) has to say about hospital taxes:
… the Internal Revenue Service continues to let most U.S. hospitals pay nothing in federal taxes. It’s time for Congress to take a hard look at the IRS’s hand in health care.
The agency uses a vague “community benefit” standard to liberally grant tax-exempt status to so-called nonprofit hospitals even as many of them are financially taking advantage of sick Americans with inflated medical bills.
The phrase nonprofit does not mean nonprofit organizations do not earn profits. Any organization that loses money every single year will soon go out of business. At the very least nonprofit organizations must break even. Nonprofit status is a tax election. It means in theory the organization is supposed to plow all profits back into a charitable mission, rather than distribute profits to shareholders (of which there are none in a nonprofit organization). In reality nonprofit hospitals plow most of their profits into expansion.
Nonprofit hospitals enjoy a lot of tax breaks. They pay no federal or state income tax. They pay no property taxes. They pay no sales taxes on their purchase of supplies. They often get preferential interest rates on borrowing. Back when I was a hospital accountant in the late 1980s my employer did some calculations and estimated it saved $100 million in taxes a year. Makary goes on to say:
Many tax-exempt hospitals argue that they provide millions of dollars in free care. But here’s what’s really going on: Much of what they call free care is emergency care that hospitals are required to provide by law (the 1986 Emergency Medical Treatment and Labor Act requires hospitals to care for anyone who walks in with an emergent condition). But after the care has been provided, patients are often hounded for payment, often at an artificially inflated price. Hospitals then report the difference between their high sticker price and what they actually collect after shaking down a patient as charity care.
That’s similar to what my old employer did back in the 1980s until they were told to stop. Bad debts were written off to charity care, but at some point the lawyers said we couldn’t do that anymore. To qualify for charity care patients had to be admitted as charity care cases. That also had the unfortunate consequence of making it harder for patients who were deserving of charity care to later qualify for it. To this day many hospitals expect indigent patients to apply ahead of time for charity care. Of course, it’s much harder to receive care when you alert hospital admission to the fact you are not a paying customer.
How much charity care do nonprofit hospitals provide? It varies from hospital to hospital, state to state. Back when I was a hospital accountant, we were advised to provide between 4% and 5% of net patient revenue in charity car (not at list prices). Some nonprofit hospitals don’t meet that threshold. More from Makary:
In a twist of irony, a 2021 study published in Health Affairs found that for-profit hospitals provided 65% more charity care than nonprofit ones.
It could be argued that many nonprofit hospitals act more like fierce competitors with a tax advantage than charities with a benevolent mission. If you think about it, food banks don’t sell food to people with money, while donating it to those without. If your business provides services to both profitable and unprofitable customers, it’s a slippery slope when deciding who to admit: one patient with good insurance or another with no insurance.
There is little in the way of policing whether hospitals earn their tax exemption and Congress is beginning to take notice. Again, more from Makary:
In August, a bipartisan group of U.S. senators including Bill Cassidy and Elizabeth Warren demanded more transparency from the IRS on the issue after a General Accountability Office report found that the agency “did not have a well-documented process” to ensure that hospitals met tax-exempt criteria.
In October, Bernie Sanders, the chair of the Senate Health, Education, Labor and Pensions committee stressed the need to address the problem.
Whether or not you believe nonprofit hospitals should pay taxes, I think we can agree there should be more guidelines to ensure they are benevolent rather than predatory. Some of the best ways I can think of is price transparency, with hospitals also working to also provide lower-cost outpatient care. Hospitals should have more retail health clinics where uninsured patients (or under-insured patients) can see a doctor and pay low cash fees. They should help patients find affordable care, rather than impoverish them. When was the last time a hospital offered you a package deal without having to negotiate? I’m thinking the answer is never.