Nonprofit Hospitals and Property Taxes

In May, the Senate Finance Committee chairman Max Baucus, and ranking Republican Charles Grassley seemed to agree that nonprofit hospitals have to start acting more like nonprofits or they could risk losing their benefits... But when the Senate committee released its watered-down version of health care reform earlier this month, these stringent new standards emerged equally weakened.... It isn’t clear what happened to the bill on its way out of committee; but the negative response to the proposal from the American Hospital Association and its allies suggests that pressure from lobbyists was a key influence....

In a report issued in December 2006, the Congressional Budget Office estimated that nonprofit hospitals received $12.6 billion in annual tax exemptions--on top of the $32 billion in federal, state and local subsidies the hospital industry as a whole receives each year.

This same CBO report also found that there wasn’t a large difference between how much uncompensated care nonprofit hospitals provided vs. those of the for-profit ilk: the cost of uncompensated care as a share of hospitals’ operating expenses was 4.7% for nonprofits and 4.2% at for-profit facilities. Government hospitals, it turned out, were providing the lion’s share at 13% of operating expenses.

“Northwestern Memorial has been frugal in its spending on charity care, the free treatment for poor patients that nonprofit hospitals are expected to provide in return for the federal and state tax breaks they receive. In 2006, Northwestern Memorial spent $20.8 million on charity care -- less than 2% of its revenues and a fraction of what it received in tax breaks. By comparison, the hospitals run by Cook County, where Northwestern Memorial is located, spent 14% of revenues on charity care.”

Hospitals like Northwestern Memorial argue that they are meeting their “community benefit” requirement in ways other than providing charity care. They point to medical education, research and health fairs as examples. But the vagueness of “community benefit” also means that hospitals can count shortfalls in Medicaid and Medicare payments, bad debt and staff salaries as contributing to this “benefit.”

In Illinois, the Supreme Court is now hearing the case of Provena Covenant Medical Center, a Catholic hospital in Urbana, Illinois that had its state and local property tax exemption revoked because it was not providing enough free or reduced care for the poor. At issue is the charge that in 2002, the hospital, now part of Covenant Medical Center, provided less than 1% of its $113 million income for charity care. The hospital also employed an aggressive debt collection service that targeted poor people. It could be months before a decision is made, but one possible outcome (being watched nationwide) is that the Court could decide to set minimum charity care standards that all Illinois hospitals have to meet to receive valuable property tax exemptions.