Are There Really Any Nonprofit Hospitals Left?

The Fort Wayne Journal-Gazette's Dan Stockman takes a critical look at the difference between nonprofit and for-profit hospitals and, not surprisingly, he learns there is little difference between the two other than one pays taxes and the other does not. In describing Fort Wayne's Parkview Hospital, which is supposedly nonprofit, Stockman writes:

Imagine a local company with more employees than the General Motors plant and an amount of land and number of buildings similar to Lutheran Hospital.

The company made a $57 million profit in 2004, which came after $138 million in profits since 2000. In those five years, it averaged a 10 percent profit margin – comparable to most Fortune 500 companies. Its parent company at the end of 2004 held $470 million in stocks and bonds.

But the company doesn’t pay state or federal income taxes on its profits. The parent company didn’t pay taxes on the capital gains it made on its nearly half-billion in investments.

And neither one paid property taxes on its millions of dollars’ worth of land and buildings. But you don’t have to imagine such a company – it’s Parkview Hospital.

Lutheran Hospital pays taxes on its income – its 2004 profit was $71.9 million, according to state records. It pays property taxes on its land and buildings – the 2006 bill for the main hospital building was $983,175, county records show.

As Stockman points out, Parkview gets its nonprofit status because it supposedly performs a "community benefit." So what counts as a "community benefit"? Stockman writes, "But some of the things non-profits count as a community benefit are things that for-profit entities consider the cost of doing business: Bad debt, training employees, reimbursements that don’t cover costs and promotion." On that basis, Parkview claimed a community benefit of $61.7 million on its tax return according to Stockman, including about $10 million in subsidized care (i.e. the amount people were unable to pay for their services). The figure also included $22.9 million in bad debt and $28 million in unreimbursable Medicare or Medicaid expenses). Parkview tells Stockman, however, it is no longer counting these latter two categories as part of its "community benefit".

Making matters worse is the utter failure of the Internal Revenue Code to provide a bright line rule for determining "community benefit." A nonprofit tax expert tells Stockman there is no standard for determining what constitutes a "community benefit." That allows the nonprofit hospitals to set their own rules.

With so many uninsured Americans, some are looking at taxing these so-called nonprofit hospitals as a means of funding health care for the uninsured. “People are looking around for somebody to ameliorate that problem,” PriceWaterhouse's Reatha Clark said. “And the questions might be more salient when you have for-profit hospitals nearby who are paying taxes.” A Kent Law professor tells Stockman it has always been a myth that nonprofit hospitals are charities. “This core myth that non-profits exist to serve the poor was never true. … Maybe it should be, but it never was the historic reason for it,” Evelyn Brody said. “They’re not required to serve the poor, they’re not required to lose money, they’re not required to underpay their employees; … until the law changes that’s not what we’ve asked them to do.”

Stockman's story really brings this issue home. These nonprofit hospitals have become giant corporations which are escaping taxation completely. If you've ever been unfortunate to be a patient in one of these hospitals, you quickly learn they are all about profit. The billing practices of these hospitals would be considered criminal if they were done by any for-profit businesses.

I remember more than a decade ago when EDS implemented a new Medicaid billing system which allowed the state to enforce the Medicaid law to the letter of the law for the first time, the providers, including nonprofit hospitals learned they could no longer bilk the system the way they had for many years. They went running to the legislature for help, which created an oversight committee to investigate EDS (who I was representing at the time)--as if it had done something wrong. After many months of investigation, it became apparent the only real problem had been the provider's billing practices (i.e., billing for services which were non-reimbursable and failure to file claims properly). The state actually had success for a brief time in cutting Medicaid expenditures before reimbursement rules and other changes led to escalating costs again.

Let's pull the cover of nonprofit status off these hospitals. Unless they want to actually become true charities, it's time for them to pay their share of taxes. Maybe this will put an end to the ever-increasing building boom of new facilities out into the suburbs and into the rural areas of the state, which are totally unnecessary.