High Earnings at Some Not-for-Profit Hospitals Draws Criticism of Tax-Exempt Status

The Wall Street Journal on Friday examined how the "growing gap" between many not-for-profit hospitals' earnings and the amount of charity care they provide "is raising questions about the billions of dollars in tax exemptions they receive." Not-for-profit hospitals in exchange for tax exemptions are supposed "to provide a 'community benefit,' a loosely defined requirement whose most important component is charity care," according to the Journal. However, "many hospitals include other expenses in their community-benefit accounting to the Internal Revenue Service, including unpaid patient bills" and employee salaries, the Journal reports.

While some not-for-profit hospitals -- "particularly ones in inner cities that handle large numbers of uninsured patients -- remain under financial strain and are struggling to keep their doors open," data from the American Hospital Directory shows that the combined net income of the 50 largest not-for-profit hospitals in the U.S. increased nearly eight fold to $4.27 billion from 2001 to 2006, according to the Journal. According to AHD, at least 25 not-for-profit hospitals or hospital systems earn more than $250 million annually. Some not-for-profits are "faring even better than their for-profit counterparts," the Journal reports. Seventy-seven percent of the 2,033 not-for-profit hospitals in the U.S. earn money, compared with 61% of for-profit hospitals, according to the AHD data.

A December 2006 Congressional Budget Office report found that not-for-profit hospitals receive $12.6 billion in tax exemptions and $32 billion in federal, state and local subsidies annually. However, the Journal reports, according to studies by various counties and states, many not-for-profit hospitals spend less on charity care than they receive in tax breaks. "[M]uch of the industry's profit growth comes from strategies it honed to increase profits," such as demanding upfront payments from patients and increasing list prices for procedures and services to several times the actual cost, according to the Journal. Other reasons for the rise in profits include an increase in Medicare reimbursement rates and untaxed investment gains.

Senate Finance Committee ranking member Chuck Grassley (R-Iowa) said, "Some [not-for-profit] hospitals seem to forget that their operations are subsidized with generous tax breaks. They allow their priorities to get out of whack." Last year, Grassley considered introducing legislation that would have required not-for-profit hospitals to provide a minimum amount of charity care. In 2009, new standards will take effect that require not-for-profits to break down their community-benefit contributions, but hospitals will not be required to provide a minimum amount of charity care (Carreyrou/Martinez, Wall Street Journal, 4/4).