How ObamaCare Could Cause Nonprofit Hospitals To Lose Tax-Exempt Status

Affordable Care Act (ObamaCare) has been knocked for its alleged unintended consequences. The bill’s attracted speculation that workers will lose their health plans, college grads will stop looking for jobs, and even that fewer people will get married.

Those are just the effects related to insurance regulations. Less attention has been given to how hospitals and health systems might change  after ObamaCare.

The most common theory is that reform causes consolidation. But what if the effect on hospitals is even more radical? What if the legislation changes the largely nonprofit nature of the industry?

Right now approximately 60% of the 6,000 or so hospitals in the U.S. are nonprofit, while 25% are government-owned. The rest–fewer than 1,000–are for-profit. There’s a reason the pie cuts this way.

Religious groups, especially Catholic orders, opened many of these facilities as charitable institutions. (Ever driven by a hospital with Mercy in its name?)

Then during the post-war infrastructure boom the federal government offered subsidies to cities that wanted hospitals. Getting the money required nonprofit tax status and a promise to provide “community benefit.”

The IRS originally defined community benefit to mean spending 3% of operating revenue to take care of patients who couldn’t pay. Over time, being tax-exempt became a good deal. If you count all the sales, property, and income taxes that nonprofit hospitals avoid paying it would total $20 billion.

The new health reform legislation could shake the foundations of this cozy set-up. Why?

Many hospitals already do not take care of enough uninsured patients. The GAO found that in California in 2005–which exemplified national trends–nonprofit hospitals only spent 3.5% of their expenses on average on uncompensated care for the uninsured. That means many were below the line. Ironically, for-profit hospitals spent 3.2%.

When 30 million more people get insurance from ObamaCare, those numbers will fall. And tax-exempt status could be threatened.

State laws already provide some guidance. In Texas a hospital must spend 4% of its revenue on charity care to stay nonprofit. In Pennsylvania it is 3%. In Illinois the attorney general, Lisa Madigan, is calling for an 8% threshold to stay nonprofit. Imagine how few will meet that cutoff when, at least in theory, everyone has insurance.

Illinois, with its $8 billion budget deficit, has been the most aggressive state to challenge nonprofit hospitals. The state has been suing one hospital for ten years. Its opponent, Provena Covenant, is a Catholic hospital in Urbana that was known for using bill collectors to go after uninsured patients. The year before the legal battle began Provena spent only 0.7 % of its revenue on charity care.

Last year Madigan began the process of voiding the tax-exempt status of other hospitals in Illinois, including Northwestern’s new women’s hospital.

For now these hospitals can argue, in the legislature and in court, about how much charity they truly provide. Many facilities take a bath on Medicaid patients. But they can not count that as charity care under most current rules. There’s also a legitimate question about what constitutes charity care and what constitutes bad debt or an unpaid bill.

Those will soon be dated arguments.

Assuming that the supply of uninsured patients dries up after 2014 when ObamaCare goes into effect hospitals will have two options.

One will be to convert themselves into for-profit enterprises. This is already happening in places like Detroit, Boston, Scranton, and Miami–where for-profit chains are gobbling up old Catholic and nonprofit systems.

The other option would be for hospitals and governments to agree on a community benefit standard that unlike the old one does not depend on taking care of uninsured patients for free. Many people who work at nonprofit systems do so because they like the mission of caring for their community. So this would be a better option.

Redefining that mission might mean taking money that was going to go to build a new patient tower and instead providing free preventive health services, funding biomedical research, or pursuing some other charitable endeavor.

Will nonprofit hospitals be able to adapt before they get swallowed up? It will all become clear fairly soon.

David Whelan is a contributing editor at Forbes, where he was a staff writer for 8 years covering health care payers, providers and policy. He’s currently studying and working in hospital administration. Follow him on Twitter @WhelanHealth. This post first appeared on Forbes.

10 replies »

  1. Not-for-profit is for profit for somebody. One large non-profit is know for trolling the Pacific Rim to bring in “their” nurses and undercut American nurses. Also, the working conditions and pay is usually worse.

  2. Thanks for all the great comments. What’s interesting about this argument is that academic medical centers by virtue of having a broader charitable mission already (teaching, research) will become more fenced off. I wonder if payment models will have to reflect that in the future. Why does a community hospital with an empty parking lot and one hospitalist manning three units get paid the same per DRG as a busy academic center filled with staff and an ER full of patients waiting for beds?

  3. In terms of behavior, I observed no difference in the treatment of uninsured patients between the nonprofit charity and the for profit hospitals, both want their money and they have few qualms about ruining a patient’s credit and turning over patients to collection agencies. I don’t see the shift a s a great loss.

  4. There were a lot of “non-profits’ who abandoned the inner city when it began cratering in the 1960’s (see St. Louis, e.g.), and a ton of them today who are located in urban centers where you need a bloodhound to find the actual emergency room. You’d be amazed what some of them pay their CEO’s.

    Uwe Reinhardt had it right a few years ago: no hospital gets to be non-profit. They are all taxed on their bottom lines, but can credit legitimate charity care expenses (not discounts off billed charges, as some of them count it) on their tax returns.

  5. Don’t forget that many non-paying “charity” cases are shielding assets and doing so on purpose. Typical in farm country, the asset is mom and dad’s farm still…and they kids and the parents feel “entitled” to make sure they get it in as tax free a way as possible. So, ma and pa will rack up bills like crazy, repeatedly, and never file a charity form, or never complete one, because it requires divulging of tax returns and assets. Just another way those poor sucka’s like us that have W-2’s subsidize everybody. I’d say the “truely needy” and “pikers” is about 25% – 75%.

  6. Personally I do not believe that more than 20% of alleged Non Profit hospitals really fit that term. That said, what if this author is right and for those 20% that are, and losing the designation could lead to them closing or being sizeably restricted in functioning to serve their communities, you all think that other hospitals will pick up the slack and serve the public who can’t use those former facilities either with regularity, or at all? I am not going to ask for an answer, because those who are honest and attentive know it is “NO”.

    Again, here we go and find out what the legislation can and probably will do that will screw things up. I truly believe everyone who continues to scream this legislation will save America are so disingenuous or disgustingly clueless, I really hope they are harmed by the policies to be implemented and have no one to console them! Because to be disingenuous or clueless does not give you the right to shout down those of us asking for more attention and concern what this law will do to health care simply because we do not echo your choir blindness.

    What stupid nature human beings possess. We have to repetitively touch the hot stove and burn ourselves to learn what needs to be avoided. I don’t know what is more disgusting, republicans who have damaged our military with these ugly wars that continue on past a decade, or, democrats who just promote dependency and government regulations that do not problem solve before implementation.

    But, in the end, people either are hurt or killed, so, our one party system of Republocrats can stay in power. I am sure the usual suspects who have partisan agendas to protect will ignore or dismiss what people like me are still saying now for over 2 years. At least I am glad I don’t work with these people in any form, just get aggravated coming to the computer for my internet fix.

    Oh, and by the way, while the process of Romney’s comments were dumb in relaying about not caring for the votes of whatever percent who are pathologically dependent on what this current President is selling, the content was right on the mark for me. And that is where I really hope the general public who does not weigh in on the failure of PPACA really gets burned by their stupid expectation they will always get full court press care for any problem they have. Silence is death is an adage I believe in.

    And now for the endless commentary of numbers and data that will try to claim PPACA will do no harm. Is Jesus going to be on the IPAB?

  7. There is huge potential benefit if the re-definition of non-profit hospitals were to happen. Certainly up and coming issues in health care will be controlling obesity and managing chronic illnesses, preventative medicine. Stuff that is really a drain on Medicaid and Medicare budgets because of the extensive secondary complications with these problems. Currently many of the best solutions to these problems are not reimbursable by Medicare/Medicaid and thus a loss for hospitals and thus they don’t get done or they are done via over-administrated under budgeted govt programs. It is part of the reason they have become such big problems. Certainly these can be managed by a non-profit Hosp for the benefit of the community in exchange for tax-exempt status. This also gives the hospital a new venue for marketing and exposure. The potential is out the ya-ya with this!

  8. Community benefit for NFP health systems is not singularly defined by how much charity care they accept alone. Contribution to community wellness programs, outreach, education, post-care programs etc. tends to raise overall benefit well beyond 3-4% threshold. Also, perhaps a fairere way to look at this is to assess community benefit as it relates to actual tax benefit (as opposed to percent of revenue). Many community-based systems provide multiples of benefit compared to tax savings ($30-$50 to community/dollar tax savings for some systems)

    Concerns regarding diminishing NFP benefit:
    1. No mandate for community contribution or charity care. Where will all these patients go? Who will support these programs?
    2. Gobbling-up of NFP by larger FP companies, alters control and cost curve in wrong direction.

  9. I agree. What’s the problem?

    Some hospitals may be “non-profit,” but they’re all pro-revenue.

  10. “tax-exempt status could be threatened.”

    Implicit here is that this a problem? Does this stuff not all eventually achieve economic equilibrium? Isn’t this all just accounting/legal gimickry anyway?


    (What Would Romney Say?)