In recent months, California legislators have debated a bill that would require nonprofit hospitals to provide annual charity care equal to 5% of hospital revenue if they want to keep tax-exempt status. It's renewed a fight that has gone on for decades.
According to the Sacramento Business Journal, the bill — which is backed by a coalition of groups including the Service Employees International Union and the California Primary Care Association — is opposed vehemently by the California Hospital Association. The latter group’s CEO, Duane Dauner, says the measure offers a "one-size-fits-all charity care requirement across diverse communities that have different needs."
For many years, various members of Congress have pushed nonprofit hospitals to deliver more charity care to the poor and uninsured. But legislators have grappled with basic issues such as what percent of hospital revenues should in fact be spent on discounted care, and what the legal differences are between bad debt and charity care. And in the meantime, taxing authorities really aren't pursuing the matter.
At present, hospitals have considerable leeway to define charity care for themselves. And, to date, few have seen their nonprofit status threatened. In one example from 2011, the state of Illinois claimed that three large hospitals, which provided between 0.96% and 1.85% of patient care revenue to free and discounted medical care, didn’t deserve nonprofit status. As has historically been the case, little came of the kerfuffle.
To fight off claims that their not-for-profit members are insufficiently charitable, the AHA cites numbers that show that over the last several years, nonprofits have spent between 5.8% and 6.1% of the revenues on uncompensated care. Remember, however, that "uncompensated care" is a measure that mixes charity and community benefit with bad debt.
After so many years of bargaining, it's time to get tough. I propose we set a firm 5% of revenues as a nonprofit standard.
I'd argue that a flat, testable, provable charity care standard is in the best interest of hospitals. The lack of clarity around this issue isn't doing nonprofit hospitals any good; it's actually distracting them, as they have to wonder every year how their charitable activities will be interpreted. After all, while it's extremely rare for state or local government to suspend a not-for-profit hospital's tax exemption, and to my knowledge the IRS has never done so, it's something hospital CFOs must always have in the back of their minds.
Here's some benefits I believe hospitals would see from a single charity care standard — let's say 5% of net revenues in this case, but these arguments could apply to any standard:
- By setting a baseline requirement — one that didn't have any holes for errant hospitals to wiggle through — it changes the focus of health leaders to meeting that number, not to potentially doing as little charity care as they can.
- If the definition and level of charity care were clear, it would give hospitals a safe harbor so that nobody could reasonably question whether hospitals were earning their nonprofit status.
- Most importantly, if hospitals routinely spend 5% of their revenues on charity care, it would take some of the burden off public hospitals and safety net hospitals that currently take far more than their share of the load. While this may not seem like a good development for the individual nonprofit, it benefits the health system as a whole.
Above all, it's about time that if a hospital claims nonprofit status, it is given clear, unarguable guidance as to what financial standard it must meet to protect its tax exemption. We can't afford to be unclear on such an important matter.