The Fairy Tale of a Non-Profit Hospital

Nonprofit hospitals have higher profit margins than most for-profit hospitals after accounting for their tax obligations.  3900 (62%) of U.S. Hospitals are non-profit and therefore tax-exempt: they pay no property tax, no federal or state income tax, and no sales tax.  An article published in Health Affairs found seven of the nation’s 10 most profitable hospitals were of the non-profit variety, each earning more than $163 million from patient care services. Revoking their property tax-exempt status for not functioning as a charitable entity could return billions in healthcare dollars to local government, communities, and citizens, struggling to afford quality health care.

The idea of exempting nonprofits from paying taxes in the first place is based on the belief these entities provide charity for the underserved and underinsured who would otherwise require the government to lend a helping hand.  As the percentage of uninsured declines as a result of the ACA, the justification for tax exempt status is being called into question.

Many nonprofit hospitals calculate their charitable care by using something known as “charge master” pricing; exorbitant, non-negotiated prices which are inflated many times higher than what private insurance or Medicare would pay.  This allows facilities to overstate their provision of “charity care,” calculated as revenue loss by the hospital in exchange for their lucrative tax exemptions. In a patient evaluated with chest pain, the allowable for Medicare is $3600; however, in an uninsured patient, the hospital may “write-off” an inflated $25,600 in uncompensated costs, which is 8 times higher than actual cost of care provided.  Nonprofit hospitals should be required to meet a higher standard by providing true (non-inflated) charity care.

A study, conducted by Zack Cooper (Yale), Stuart Craig (University of Pennsylvania), Martin Gaynor (Carnegie Mellon), and John Van Reenen (London School of Economics), evaluated the way nonprofit hospitals charge.  “Not-for-profit hospitals don’t price any less aggressively than for-profits. We subsidize not-for-profits to the tune of $30 billion annually, in the form of tax exemptions, and we have to ask what that money is getting us,” says Cooper, co-author of the study.

So what is the tax exemption getting us if not to “real” charity care for those in need?  A significant amount of nonprofit hospital revenue is being spent on executive salaries and benefit packages, reinvestment in new state-of-the-art facilities, and expanded healthcare services for those who can afford it.

According to Becker’s Hospital Review in 2012, the combined compensation of the top executives at the 25 most profitable non-profit hospitals totaled almost $58 million. The highest paid nonprofit hospital CEO in the nation is Jeffrey Romoff, at the University of Pittsburgh Medical Center (UPMC.)  An article in The Pittsburgh Post Gazette found his 2015 compensation was $6.43 million dollars; he has topped $6 million for the last four years, plus notable perks, such as access to a private chef, chauffeur, and a jet.  Additionally, the Gazette found 31 UPMC executives and physicians earned at least $1 million in 2015, six of whom received more than $2 million each.

In 2013, Pittsburgh Mayor Luke Ravenstahl unsuccessfully sued UPMC to collect more taxes on the grounds his city was losing $20 million annually as a result of the tax exemptions.  CBS News aired a segment after investigating the financial details.  UPMC brought in $948 million in profit over the 2 year period 2011-2012, while providing a mere 2% of its budget in charity care, and yet was saving $200 million after tax exemption. Imagine what that could pay for in the way of healthcare for the poor, disabled, and elderly, not to mention the funding for teachers, police officers, and firefighters?

The idea nonprofit hospitals should be paying property taxes has been gaining traction ever since.  In 2015, a New Jersey judge ruled that Morristown Medical Center should be responsible for paying property taxes because it acted more like a for-profit organization than one devoted to the provision of charity care.  He said, “modern nonprofit hospitals are essentially legal fictions;” kind of like a modern day fairy tale.  Ultimately, Morristown Medical Center reached an amicable agreement with the city to pay $1 million in the way of taxes, but multiple cities have followed suit, challenging the tax exempt status of nonprofit hospitals in the state.

Illinois is the latest battleground for the property tax exemption controversy.  A 2009 report by the Center for Tax and Budget Accountability found the property tax exemptions for 47 Chicago-area nonprofit hospitals were worth $279 million. In Illinois, a charity was originally defined as an organization generating revenue from donations and providing services to those in need.   In 2010, the Illinois Supreme Court ruled Provena Covenant Medical Center was not entitled to a property tax exemption because they were not a charity, as most of their revenue was generated from fees for service.

In 2012, the Illinois Hospital Association lobbied hard to expand the definition of charity in state law.  The state legislature passed a provision—buried in the Medicaid Reform Bill 2194– allowing property tax exemptions for hospitals providing charity care in the equivalent amount to their tax liability.  Medicaid reimbursements, considerably lower than private insurance payments, were allowed to count toward the “charity care” tabulation.

The Carle Foundation Hospital is the 10th most profitable hospital in the nation, according to the May 2013 article in Health Affairs.  They filed a request to have a property tax exemption after the controversial 2012 law was enacted.  The City of Urbana argued Carle had revenues approaching $2 billion annually, functioned more as a for-profit organization than nonprofit, and caused the city to lose $6.3 million in property taxes, necessitating a rate increase for other city properties as a result.  Last year, the 4th District Appellate Court ruled the 2012 state law unconstitutional.

Dissatisfied with the outcome, Carle Foundation Hospital appealed to the Illinois Supreme Court.  On March 23, 2017 the Supreme Court of Illinois vacated the ruling of the Appellate Court, but would not consider constitutionality of the 2012 law; Carle will be entitled to the property tax exemption for now.  The Supreme Court recommended reconsideration in the lower courts as to the question of constitutionality, so the debate remains ongoing.

The days of charitable establishments singularly devoted to comforting and caring for the poor and suffering are long gone.  Most nonprofit hospitals are vast profit machines bearing little resemblance to the charitable organizations of the past.  By reinvesting in state-of-the-art facilities with unnecessary “bells and whistles,” nonprofits are currently dominating city landscapes, becoming the largest local employers, and bringing in more revenue than the cities in which they are located.
By sidestepping property tax payments to the county or city in which nonprofit hospitals reside, they are shifting the financial burden for essential services and infrastructure onto the backs of individual citizens and small business owners, who should not bear the costs alone.  Stricter criteria should be applied to determine whether a hospital meets a “charity care threshold” in order to retain the lucrative nonprofit designation.  This is a vital step toward ensuring cities and counties collect adequate revenue for developed land, while ensuring vulnerable populations have somewhere to go when in need of healthcare, which is rapidly becoming unaffordable for us all.

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22 replies »

  1. I broadly agree with you here, but you have, I think, oversimplified a nuanced topic. Rather than look at absolute dollars, I would look at the profit margin. Even non-profits need to make a “profit” since that is how they pay for new equipment, maintenance of old ones and building new ones. (Are you opposed to state of the art facilities? I can’t tell. I would certainly be unhappy if they were spending a lot of money on gourmet chefs, fountains and other fluffy stuff like they do at privately owned surgicenters, but having an up to date IR suite so we can do stuff better and faster? Not sure why that is awful.) Anyway, I think that when places are consistently running high profit margins, say over 7%-10%, they should pay taxes on what they make over that.

    I think you also miss out a lot when you look only at charity care. I practice on the wrong side of the tracks. Our percentage of charitable care is higher than our competitor in the rich part of the town, but where it really hurts is in our much higher percentage of Medicaid patients. The for profit hospital competitor near us does almost none of those. They always find a way to make sure they get to our ER.

    I think your point about exec pay is valid. I think for all non-profits, not just hospitals, executive pay above a certain amount should be taxable.


    • I agree that in 1000 or so words this topic is oversimplified. I actually felt like I could have written 4 posts on this topic all on its own, however it might bore some of the readers…. Profit margin would have been an interesting take on this subject too. I agree with you it would be wonderful to have these hospitals pay state, federal, and payroll taxes too. The 7-10% profit margin as the cut off is reasonable.
      There are more ways to look at this than charity care alone, however that makes this a much larger topic in and of itself I, too, practice on the wrong side of the tracks and Medicaid patients need and deserve good quality care as much as the wealthy. Maybe I will write on this topic again…. 🙂

      • We should probably not have had a tax deduction for charity of any type because it has been so abused. However if one wants to provide tax deductions IMHO it should go as a percentage of those funds that go directly to needy indiivduals which is what charity is meant for.

        We have to remember that charity means someone else is paying for the taxes that would have been paid if the charity didn’t exist. That negatively impacts a lot of low income families.

  2. The argument is that non-profit hospitals don’t pay taxes and are therefore profitable. Perhaps it would have helpful if the author had stuck to the topic of taxes and not veered off into executive compensation. Perhaps the author could have compared UPMC to a similar institution and recast the other institution’s finances if they were not paying taxes to show that taxes are the only variable that matter.

    • Your suggestions are fair, however the first sentence is not the point I was making. For profit and nonprofit hospitals are both profitable. Period. Why is one getting a tax break while the other contributes to the city in which it is located? Both are providing charity care, so why does one enjoy such a discount? They shouldn’t. Especially when a large institution like UPMC can afford almost 40 million per year in executive compensation.

  3. The real issue is that there are too many hospitals providing comprehensive inpatient medical-surgical services in locations adjacent to one another. Don’t worry about the marble floors–worry about the 3 and 4-hospital towns, all with extensive feeder systems, and all of which want the best equipment and facilities, all operating at a fraction of their original bed capacity. Outpatient makes money, inpatient not so much, if any in many places. Competition in healthcare does NOT reduce costs. Competition equals more facilities, equipment, and doctors, which you can be assured will be used. Price competition in healthcare is virtually non-existent. A “competitive market” in healthcare simply allows investors to avoid CON restrictions and build new hospitals in attractive markets. You don’t see investor-owned Pneumonia hospitals, or outpatient diabetic facilities…they build ortho or cardiac or oncology hospitals, places where they can run up the bills and manage the referrals, and many of which don’t have EDs.

    Another topic entirely is so-called critical access hospital reimbursement–cost based reimbursement to 1600+ rural hospitals who have overbuilt to beat the band. Need a joint replacement–go to your corner hospital. Want to go to a full-service grocery store–you may have to drive 45 minutes or so. These are the economics of the two markets. The FEds subsidize over investment in rural facilities, building $60-80 million hospitals in markets that can’t support a real grocery store.

    Good article below about healthcare propping up the economy for the past 10 years—the question is how we turn this around if we are really going to manage healthcare costs. There have to be some real takeaways at some point.

    In progressive states, non-profits neogitiate meaningful PILOTs with their cities and towns; they are required to state free care at cost, not charges; and they extend their overall average insurance discount to un-and underinsured patients. They run EDs, and take all comers to the hospital, and their owned or managed physician practices do the same. They work with their communities to improve health and prevent disease. These are minimum standards for non-profits, and if this is not required, my guess is the state government is overly concerned about the for-profit hospitals, which will all lobby hard against these kind of requirements.

    • So your last paragraph pretty much sums it up. There should be some expectation that nonprofits hold up their end of the bargain, taking all comers, running ED’s, and extending those charity and other practices to the physician clinics.
      I hear your complaint about 3 or 4 hospital towns however, data seems to back up the claim costs are far lower that way. I am in a soon-to-be 1 hospital town and prices are already 40% higher than most in the state. It is a 45 min drive to the next nearest hospital. Competition is non-existent. A monopoly is going to make things worse.

    • The biggest profit generators for most hospitals on the inpatient side are surgical procedures, especially cardiac, orthopedic and neurosurgery. Even Medicare pays quite well for these. Cancer care is also quite profitable though much of that can be handled on an outpatient basis. Outpatient procedures, including imaging, are profitable though the “ticket” is considerably lower. Since surgeons are key revenue and profit generators for hospitals and when there are multiple hospitals in a given city or county, it’s often the surgeons that push hospitals to ensure that they have state of the art OR’s, robots, imaging equipment, highly qualified OR nurses and techs and anything else they may need to do their job as well as it can be done. This phenomenon can easily trigger a medical arms race in a particular community or region.

      One area of controversy is the extent to which emergency departments are profitable or not. Some hospitals get as much as half of their inpatient admissions through the ED. If I go to the ED and am sent for a CT or ultrasound, does the ED get credit for the revenue generated or does the radiology department capture it? Is the ED assigned more than its fair share of the hospital’s indirect costs? Profit vs. loss is often driven by accounting conventions at the departmental level. If half of inpatient admissions are coming through the ED, where would the hospital be without the ED? Could it even sustain its business? I doubt it.

      As for high end amenities, they are not likely to be built in lower income areas but in solid middle class and upscale areas where most people have decent insurance through an employer or at least Medicare. If a well above average share of the population is uninsured or on Medicaid, it won’t make economic sense to build the equivalent of a four or five star hotel.

      Personally, I’ve never been in a critical access hospital so I just don’t know what most of them are like in terms of amenities. Since hospitals have high fixed costs, they need to operate at a fairly high occupancy rate to earn a profit or at least break even and they can’t afford to treat too many uninsured patients or patients on Medicaid which doesn’t pay close to full costs. As more and more care can be safely delivered on an outpatient basis, inpatient length of stay is shorter than it used to be and better drugs are keeping more people out of the hospital in the first place, the number of hospital inpatient beds is in secular decline. Shortly after World War II, there were 10 inpatient beds per 1,000 people in the country. Now the number is down to 2.9 and the secular trend is down. That’s probably a good thing overall.

      • It is a good thing overall. Remember, Washington State has the lowest hospital bed concentration in the nation at 1.7/1,000. My county is approaching 1.3.

        • Niran, is there a reason why Washington State has such a low concentration of inpatient beds? If there is a genuine shortage, at least in middle income and wealthy areas, market forces should support appropriate expansion. In lower income areas, people may have to travel farther for care and rely on ambulance or even helicopter transport to a distant hospital for more sophisticated care including trauma care.

          • It is an interesting question. I believe it is due to our odd geography. I am on the Olympic Peninsula which is beautiful but has a lot of coastline and little pockets of people spread out over 3600 sq. miles. There are three hospitals in total over that area. There aren’t really any “wealthy” areas except Bainbridge Island and they travel by ferry to Seattle, which is a 30 minute ferry ride. Our hospital operates on people as far away as Forks, WA (made famous by the Twilight series of books and movies), which is a fairly long drive away.

      • I work in a critical access hospital on a regular basis. The level of amenities mostly sucks. The ORs are over 50 years old and tiny. The morgue is so small that they can’t even fit patients over 350 pounds through the doorway. They redid the ER recently so it looks up to date, but nothing fancy. If I want to see fancy I go to our local surgicenters which are all privately owned. Lots of fountains, flat screens, Olympic sized pool (one of the surgeons was a college swimmer I am told) and 24 hour gourmet chefs on call at the boutique inpatient units).


  4. Your example above on Medicare and chest pain. I don’t believe Medicare bad debt can be counted as charity care. The inflated charges hospitals use, while beneficial to bolster hospitals, as demonstrated in the latest HA paper you cite, don’t aid in the computation of charity.

    • Brad F, you are missing the point, so I will try to make mine more clear. The write off is not for a Medicare patient, I am talking about one with no insurance. The hospital should write the specific amount off equivalent to what the Medicare allowable was as opposed to the inflated “chargemaster” price. It is a falsehood. The hospital accepts 3600 for the service, yet when caring for an poor patient without coverage, they “write off” 25k. This absolutely aid in the computation of charity care. This is how the nonprofits are making their case for the large tally. In addition, based on the expansion of what qualifies as “charity care” according to legislation in Illinois, treating Medicaid patients allows that to count toward the “charity care” tally even though the hospital is receiving payment.

      • Actually, you completely missed mine. The reason for the obscene mark ups is for the reason you cite. That is well known.

        What I was trying to point out, and where the Medicare issue needs clarity in your post, is hospitals want the write off for Medicare bad debt. Its not allowed. Its a source of contention between hospitals and the feds. By invoking a gap between charges and reimbursement for Medicare, you imply hospitals account for that in their computations for bad debt. They don’t and they cant.

        • So I do understand your point better now. Thank you. Maybe it needs clarity in my post, but I am not implying hospitals do anything with the Medicare gap between charges and reimbursement. I am saying they should only be able to charge an uninsured patient the level Medicare will allow and write that amount off for charity care, as opposed to the pumped up price they are currently using.

  5. I’ve said before that I don’t think the issue of executive salaries and bonuses is a big deal because it’s miniscule as a percentage of revenue. Paying property taxes or payments in lieu of taxes would add to a hospital’s real costs though I think cities and towns where hospitals are located should be reimbursed for a fair share of public services that are provided to hospitals and their employees. Quantifying that amount is not a simple or easy matter though. I do agree that so-called charity or uncompensated care should be calculated based on Medicare rates which more closely approximate costs rather than ultra-inflated charge master rates. The whole approach to charge master rates is obscene, in my opinion, but it still has relevance in the formula used by CMS to calculate outlier payments used to compensate hospitals for the most complex cases for care well beyond what was contemplated in the regular DRG payment rate.

    There are plenty of ways to bury profits in the non-profit hospital sector. One of the most common is to build state of the art facilities with lots of bells and whistles. I’m not sure how much consensus there is, if any, about what aspects of these projects are unnecessary. For example, some newer hospitals are being built with single rooms which is costly, in part, because each room needs its own bathroom. However, I’ve read that single rooms are more restful for the patient and promote healing and the risk of medication errors is reduced. So is the risk of a hospital acquired infections. Those are all good things. Aren’t they? Maybe the marble floors, art work and waterfalls in the lobby are a bit over the top but I don’t think they add significantly to hospital costs in the scheme of things. The hospital amenities do help to attract patients with good insurance which is a desirable objective from a business standpoint.

    I don’t know how much lower hospital costs would be if they looked like one or two star hotels rather than four or five star hotels. Labor and utility costs are probably about the same in either case. My biggest problem with hospitals is their opaque and obnoxious approach to pricing, especially when it comes to the uninsured and patients who find themselves out of network. Even for care that can be scheduled in advance, most of the time a patient can’t find out what anything costs even when they try to.

    • I was specifically interested in your take on this post, Barry as I know it is not one you necessarily agree with overall. Yes, the chargemaster “write off” should be reconciled with using Medicare rates. I wholeheartedly agree with you about the pricing issues, for uninsured or out of network patients. What happens when there is only one hospital and it is out of network? This is what we are facing right now in my community.

      This business about burying profit though is frustrating. We don’t need fancy, schmancy elevators, artwork and fountains. We need basic rooms, entries, and extra money to be shunted toward patient care. The cost of the beautiful hospital could instead go for an extra nurse or two, or three or more to assist with patient care. We have nurses scheduled so tightly here in my hometown, it appears lives are being lost as a result. In a world where we keep talking about “value-based” care, it is becoming a ridiculous notion.
      When their are multiple facilities in one locale, then yes a nice appearance may attract more paying customers, however when there is a monopoly, what darn difference do marble floors make for patient care?

      Barry, I am glad we found some common ground on this post overall 🙂

  6. I understand that the local Blue Cross & Blue Shield owns its own plane for the travel of presumably its executive office…within Nebraska.

    • Well of course they do, Dr. Nelson. Do you ever wonder why everyone else in medicine is sitting back fat and happy, while the doctors are going bankrupt? Knowing someone like you had to close your doors after 40+ years, upsets me to no end.

  7. And then we have the managers converting juicy non-profit hospitals into “for-profits”. In California “assets equal to the value of the transaction have to be deposited into a public trust” when this happens. Try to find decent media descriptions and details of these conversions. Usually the managers get away with treasure. See Mt. Diablo Hospital in Concord, CA==> John Muir Medical Center in Walnut Creek about 15-20 years ago.

    The astonishing complexity of the health care sector consistently deceives the public.

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