Tax Breaks Questioned as Health Costs Soar

As health costs and the number of uninsured Americans continue to climb, policymakers are questioning whether subsidizing non-profit hospitals with billions of dollars in tax breaks is an effective way of making health care more affordable.

 

Non-profit hospitals – 59 percent of U.S. hospitals – are not subject to federal income tax, most sales taxes or property taxes. And in most states, they can sell tax-free bonds, making it cheaper to fund building projects.

 

The exemptions cost the federal government alone $4.3 billion in 2002, according to Congress’ Joint Committee on Taxation . The impact on state and local governments is even bigger. Nancy Kane, a Harvard University expert on health management, estimates the total benefit for non-profit hospitals could be up to $20 billion a year.

 

The tax preferences for non-profit hospitals date back more than a century, when hospitals served chiefly poor patients while doctors visited better-off patients at home. But now critics claim many of the hospitals aren’t doing enough for their communities to justify all of the tax benefits they receive.

 

State attorneys general have called for more disclosure. State bonding authorities are becoming battlegrounds as unions raise the issue, especially when labor-resistant hospitals are involved.

 

The Service Employees International Union (SEIU), a 1.8 million-member union, which includes 900,000 health care workers, has criticized hospitals all across the country for not doing enough for poor patients, shortchanging taxpayers. Hospital executives say the union is using the issue to embarrass them, win concessions in labor talks and boost membership.

 

In any event, a hospital’s benefit to its community is tough to quantify.

 

Critics look at what advantages non-profit hospitals give to their neighborhoods that for-profit hospitals don’t. That’s usually limited to charity care the hospital provides.

 

Others say such a narrow definition doesn’t give non-profit hospitals enough credit. They claim community benefits should also include hospital “bad debt” from deadbeat patients, the cost of serving Medicaid patients beyond the government’s low reimbursement rates, the expense of running emergency rooms year-round, educating the community about health issues and providing educational opportunities for doctors and researchers.

 

Property taxes

 

One of the most lucrative tax breaks non-profit hospitals receive is an exemption from local property taxes. But a recent ruling and pending action in the Illinois Legislature could bring changes for that state’s non-profit hospitals.

 

In September, Illinois Department of Revenue director Brian Hamer, ruled that a Catholic hospital in Urbana, Ill., did not qualify for a local property tax exemption because he said it provided only “the illusion of charity.” Hamer said free care represented only 0.7 percent of Provena Hospital’s revenues.

 

Hamer also questioned Provena’s billing practices. Charity care patients got a discount on the listed price of their care, not on the actual cost. And, in many cases, Provena referred charity care patients who didn’t pay to collection agencies, Hamer said.

 

Provena president William Foley said Hamer’s ruling ignores evidence, “undermines our charitable mission and threatens every hospital in the state.” In the meantime, though, the hospital has been paying property tax bills for a total of $4.8 million since 2003.

 

Meanwhile, Illinois Attorney General Lisa Madigan (D) is pushing for legislation that would require non-profit hospitals to list benefits they provide to their communities. A similar measure stalled last year, but Madigan’s office is now negotiating with Illinois hospitals to try to craft an agreement.

 

Tax-exempt bonds

 

Thirty-two states allow non-profit hospitals and other institutions to borrow money using the state’s tax exemptions. That permits hospitals to borrow at lower interest rates because investors who buy the state-issued bonds don’t have to pay federal income tax on them.

 

In California and Washington, state laws require hospitals selling bonds through the state to pass on savings to patients in the form of lower prices or more charity care.

 

But last year, SEIU tried to block major bond issues by non-profit hospitals in both states, questioning the hospitals’ record on charity care.

 

In December, under pressure from the union, the California Health Facilities Financing Authority delayed action on a $958 million bond issue for Sutter Health, a chain of 26 hospitals in Northern California. Sutter said it planned to use the money to protect its facilities against earthquakes. A Sutter vice-president, Bill Gleeson, said the union’s effort to block the bond is ironic, because the union criticized hospitals last year for not protecting their patients and workers from earthquakes.

 

In Washington, Gov. Christine Gregoire (D) asked the state’s health bonding authority to address SEIU concerns about proposed rules that the union claims would undermine a state law requiring hospitals to pass savings from bond sales to patients.