In exchange for tens of billions of dollars a year in tax breaks, non-profit hospitals are required to provide charity care and other benefits to their surrounding community. Few guidelines exist regarding obligatory charitable activities, yet some lawmakers have begun to question the adequacy of non-profit hospitals’ current contributions.
Non-profit hospitals’ special tax-exempt status continues to receive scrutiny in national debates. In exchange for tens of billions of dollars a year in local and federal tax breaks, non-profit hospitals are required to provide charity care and other benefits to their surrounding community. Few guidelines exist regarding the nature or level of obligatory charitable activities, yet some lawmakers have begun to question the adequacy of non-profit hospitals’ current contributions.
Lawmakers’ doubts have been fueled by media accounts that have exposed high executive compensation packages, unfair billing, and aggressive collection practices toward low-income, uninsured patients.1,2 Other reports have revealed few differences between for-profit and non-profit hospitals’ provision of charity care and community benefits.1
Non-profits Under Investigation
Several government investigations were initiated to clarify what benefits non-profit hospitals provide to justify their tax-exemption. In June, the Internal Revenue Service (IRS) sent compliance check questionnaires to 550 non-profit hospitals. This is a significant increase over previous levels of inspection for the roughly 7,000 non-profit hospital and health care organizations, which have received only 375 audits in the last ten years. The IRS results could lead to more formal audits and updated guidance to the 1969 standard for “community benefits”.2
The Senate Finance Committee, chaired by Senator Charles Grassley (R-Iowa), recently completed a 15-month investigation of non-profit hospitals’ benefits to communities. A hearing was held in September to release findings and discuss strategies with industry leaders and academic experts. The Senate investigation found that non-profit hospitals routinely overcharge or deny care to the low-income, uninsured.3 Sen. Grassley has previously encouraged the industry to self-regulate but, in reaction to continued shortfalls, has recently considered introducing legislation that would set community benefit standards.4 A handful of states have also considered or instituted policies regarding charity care guidelines, transparency in nonprofit governance, spending mandates, or withdrawal of tax breaks.5
Some believe that current tax-exemption standards should remain unchanged because they allow non-profit hospitals the flexibility to address the unique needs of the community in which they are situated.6 A recent Health Affairs article argued that some community benefits are very difficult to measure and excessively inflexible standards should not substitute for decisions better made at the community level.7
Developing Guidelines
A recent Senate hearing highlighted Catholic Health Association’s (CHA) voluntary guidelines for planning, measuring, and documenting charitable activities, “A Guide for Planning and Reporting Community Benefits.” Sen. Grassley has been working with CHA to develop a set of best practices and has encouraged other non-profit hospitals to follow CHA’s example.
The American Hospital Association (AHA) developed a separate set of voluntary guidelines. AHA and CHA’s proposals diverge on what activities should be classified as community benefits. CHA recommended hospitals stop counting bad debt and Medicare shortfalls as charity care, while AHA feels that hospitals should get credit for direct and indirect costs of subsidized health care services, charity care, bad debt, and the unpaid costs of government-sponsored health care, including Medicaid, Medicare and public and/or indigent care programs.8,9
While many industry leaders have advocated for voluntary adoption of guidelines, some worry that additional mandatory requirements for charity care and community benefits would put increased economic pressure on non-profit hospitals that may already be struggling.10 Simply tracking and reporting community benefits can require significant resources. Despite fiscal pressures, some nonprofit hospital systems have chosen to prioritize charitable activities emphasizing increased transparency and accountability. One example was explored in a recent HCFO Findings Brief. James Robinson, Ph.D., of University of California-Berkeley examined how a forty-hospital, non-profit system was able to reorganize and reverse losses, while preserving its charitable mission.11
Examining Differences and Similarities
Critics of non-profit hospitals argue that they are more similar than different to for-profit hospitals, questioning their special tax status. Several HCFO-sponsored projects have examined this question. Karen Eggleston, Ph.D., of Tufts University, Frank Sloan, Ph.D., of Duke University, and Gary Young, Ph.D., J.D., of Boston University each investigated how hospital ownership and non-profit conversions impact different aspects of performance. In general, the evidence has provided mixed results that make it difficult to compare non-profit and for-profit hospitals. Eggleston preformed a meta-analysis to try to explain why the literature has such different findings regarding the impact of hospital ownership on quality and financial performance. Her preliminary findings indicate that the diverse results can be explained largely by the studies’ different analytic methods.
HCFO grantee, Jill Horwitz, Ph.D, J.D., of the University of Michigan is investigating the impact of hospital ownership mix and medical service provision. She is examining whether non-profit and for-profit hospitals offer different kinds of services in markets with varying for-profit penetration; whether shifts in for-profit market share change the propensity of non-profit hospitals to offer profitable and unprofitable services; and how for-profit penetration relates to the overall percentage of hospitals providing different types of medical services.
Conclusion
As state and federal policymakers consider tax regulation and community benefit standards, they need additional evidence to distinguish the differences between non-profit and for-profit hospital systems, determine whether non-profit conversion is decreasing public good, and develop effective strategies for non-profits to achieve financial stability and accountability. HCFO-sponsored research can provide some of the evidence needed by policymakers.
Related HCFO funded Research:
Title: Hospital Pricing and the Uninsured
Institution: RAND
Principal Investigator: Glenn Melnick, Ph.D.
Grant Duration: February, 2006–January, 2008
Are hospital prices to the uninsured systematically different from prices to the insured by examining the trends in charges (list prices), net revenues (net prices)? Is there a relationship between the two, while controlling for other factors that may affect prices at the hospital level? This study would address the following questions: (1) Is there evidence that uninsured patients are charged more than insured patients for similar services? (2) Is there evidence that uninsured patients pay more than insured patients for similar services? (3) If uninsured patients pay higher prices than insured patients are the differences systematically related to factors such as type of hospital or financial status of the hospital? (4) For hospitals that are collecting higher prices from uninsured patients, what is the order of magnitude of these additional revenues and how important are these higher prices to overall profitability and financial status of the hospital? The objective of this project is to inform policymakers and hospital leaders about the effects and implications of current hospital pricing practices on the uninsured, on the future of high deductible health plans, and on hospital finances.
For more information on this grant see:
http://www.hcfo.net/grantees/grant.asp?GrantNo=56528&searching=Yes
Title: The Effects of Health Plan Concentration on Hospital Prices, Costs, Capacity, Charity Care, and Outcomes
Institution: RAND
Principal Investigator: Glenn Melnick, Ph.D.
Grant Duration: February, 2006–January, 2008
Do differences in health plan concentration affect hospital performance in important areas, including prices, costs, staffing, capacity, charity care, and patient outcomes? In particular, they will address the following questions: 1) Do increases in health plan concentration slow hospital price growth? 2) Does increased health plan concentration lead to lower hospital growth? 3) Do increases in health plan concentration led to reduced capacity in terms of closure or reductions of specialty units in hospitals (such as ER or trauma center) and/or reduced hospital staffing? 4) Do increases in health plan concentration affect patient outcomes? 5) Do hospitals reduce charity care in response to increased health plan concentration? 6) Do any of the above observed effects of health plan concentration differ depending on the level of managed care penetration, differences in dominant form of managed care (HMO vs. PPO), or differences in markets dominated by for-profit compared to not-for-profit health plans? The objective of this project is to inform the policy debate about whether health plan consolidation is welfare decreasing or welfare increasing.
For more information on this grant see:
http://www.hcfo.net/grantees/grant.asp?GrantNo=56110
Title: Peer Pressure: Hospital Ownership Mix and Medical Service Provision
Institution: University of Michigan Law School
Principal Investigator: Jill R. Horwitz, Ph.D., J.D., M.P.P
Grant Duration: September, 2006–August, 2007
Does medical service provision by nonprofit hospitals vary with the for-profit share of the market? The researchers will examine approximately 40 medical services sorted into three profitability categories (relatively high, relatively low, variable) and address three related questions: (1) Do for-profit and nonprofit hospitals offer different kinds of services in markets with varying for-profit penetration; (2) Do shifts in for-profit market share change the propensity of nonprofit hospitals to offer profitable and unprofitable services; and (3) How does for-profit penetration relate to the overall percentage of hospitals providing different types of medical services? The objective of this project is to inform federal and state policymakers as they consider tax regulation and community benefit standards, as well as decision makers considering availability and access to services in conjunction with the negotiation of hospital conversion terms.
For more information on this grant see:
http://www.hcfo.net/grantees/grant.asp?GrantNo=58595&searching=Yes
Title: Hospital Ownership and Performance: An Integrative Research Review
Institution: Tufts University
Principal Investigator: Karen Eggleston, Ph.D.
Grant Duration: June, 2004–November, 2005
How does hospital ownership affect health care providers and health plan performance? The researchers are conducting a quantitative meta-analysis of the main findings of the empirical literature on hospital ownership and performance. They are examining the significance of ownership effect on performance by statistically combining the information in each independent study (1990-2004), while taking in to account differences in quality of the empirical design. They will also note how studies account for market interaction and selection bias, since ownership conversions do not occur randomly among hospitals, and for-profits do not randomly enter markets. The objective of the study is to provide policymakers evidence-based guidance on a wide range of policies regarding hospital ownership, including setting provider payment and evaluating for-profit conversions in health care markets.
For more information on this grant see:
http://www.hcfo.net/grantees/grant.asp?GrantNo=50953
Title: Hospital Ownership Conversions
Institution: Duke University
Principal Investigator: Frank A. Sloan, Ph.D.
Grant Duration: December, 1998–November, 2001
What is the impact of hospital ownership changes on strategic and clinical outcomes? Using the Lewin database (approximately 600 conversions), particularly those for which there is complete transaction information (approximately 350), supplemented with data from the Medicare Cost Reports, Medicare Provider of Service Files, American Hospital Association Annual Survey of Hospitals, IRS Sources of Income, and the Area Resource File, researchers from Duke University examined: 1) why some hospitals choose to convert to for-profit status and why they select a particular type of ownership change; 2) in what percentage of cases a "fair" price is paid by the acquiring organization; and 3) how conversions affect the hospitals’ internal decision-making process. They also obtained some information by telephone from hospitals and other parties familiar with the transactions. Finally, they analyzed how strategic business decisions and clinical decisions are affected by will conducting 20 case studies of converted hospitals, comparing the information collected with similar information from 20 matched control hospitals. The investigators hypothesized that organizational goals vary by ownership and differences in goals are reflected in differences in decision-making processes and outcomes. In addition, they posited that conversion increases uncertainty, which, in turn, may reduce the effectiveness of staff and put the hospitals at risk for poor outcomes. The objective of the study was to provide policymakers and regulators with additional information about where oversight and/or intervention with respect to hospital conversions might be desirable.
For more information on this grant see:
http://www.hcfo.net/grantees/grant.asp?GrantNo=35811
Title: The Impact of Nonprofit Conversions on Community Benefit
Institution: Boston University School of Public Health
Principal Investigator: Gary J. Young, J.D., Ph.D.
Grant Duration: September, 1997–August, 1998
How do hospital conversions from nonprofit to for-profit status affect the communities they serve? Researchers at Boston University examined both short-term and long-term impacts using several different measures of community benefit, including uncompensated care, provision of unprofitable services, price discounts, and community representation on governing boards. They also assessed the number of conversions that resulted in either hospital closures or changes in service orientation. The researchers studied hospital conversions in three states: California, Florida and Texas. California and Florida data will cover the period between 1979 and 1996; Texas data span 1988 through 1995 (1996 if available). They also examined Medicare Cost Reports and American Hospital Association survey data. The objective of the study was to assess whether, and how, hospital conversions from non-profit to for profit status affects the community that these hospitals serve.
For more information on this grant see:
http://www.hcfo.net/grantees/grant.asp?GrantNo=32501&searching=Yes.
Title: Changes in Hospital Configurations Between 1980 and 1995 in Urban America
Institution: Boston University
Principal Investigator: Alan Sager, Ph.D.
Grant Duration: April, 1996–September, 1998
How has the hospital industry changed since 1936, and what indicators could be used to predict change? Researchers at Boston University compiled a data set comprising 1400 variables on approximately 1200 hospitals in 52 large and mid-size U.S. cities from 1936 to 1980. In this project, they updated the dependent variable -- whether the hospital has closed, relocated, merged, or remained open in place -- for the years 1990 and 1995. The researchers described the changes in hospital configuration in 52 cities from 1936 to 1995. They delineated how the different changes in hospital configuration vary by city size and region of the nation and analyze the predictors of hospital closings, relocations, and mergers between 1980 and 1990, between 1990 and 1995, and for the full fifteen years together. The objective of this study was to help policy makers better understand the meaning of how market and environmental factors affect hospital configurations.
For more information on this grant see:
http://www.hcfo.net/grantees/grant.asp?GrantNo=28054
1. Kaisernetwork.org, “’60 Minutes’ Examines Hospital Billing Practices for Uninsured Patients,” Kaiser Daily Health Policy Report, March 6, 2006. Also See: http://www.kaisernetwork.org/daily_reports/rep_index.cfm?hint=3&DR_ID=35807
2. Kaisernetwork.org, “Hospitals Charge Uninsured Ohio Residents More for Health Services, Study Finds,” Kaiser Daily Health Policy Report, March 10, 2005. Also See: http://www.kaisernetwork.org/daily_reports/rep_index.cfm?hint=3&DR_ID=28588
3. GAO, “Non-profit, For-Profit, and Government Hospitals: Uncompensated Care and Other Community Benefits,” GAO-05-743T, Washington, D.C., May 2005. Also See: http://www.gao.gov/new.items/d05743t.pdf
4. Pear, R. “I.R.S. Checking Compliance by Tax-Exampt Hospitals,” The New York Times, June 19, 2006. Also See: http://www.nytimes.com/2006/06/19/washington/19tax.html?ei=5070&en=168a55130e5f0c87&ex=1163221200&adxnnl=1&adxnnlx=1163100486-lGc8q4g/8nOmGQ9iSI8CGQ
5. Day, K. “Hospital Charity Care Is Probed,” The Washington Post, September 13, 2006. Also See: http://www.washingtonpost.com/wp-dyn/content/article/2006/09/12/AR2006091201409_pf.html
6. Pear, R. “Non-profit Hospitals Face Scrutiny Over Practices,” The New York Times, March 19, 2006. Also See: http://www.nytimes.com/2006/03/19/politics/19health.html?ex=1155096000&en=87cd793871e2bc64&ei=5070
7. Mantone, J. “States Turn Up the Heat. As Self-Regulation Sputters, State Legislatures are Leading Charge for More Accountability in Governance of Not-For-Profit Hospitals,” Modern Healthcare, January 30, 2006, Vol. 36, No. 5, pp. 6-7.
8. Lofton, K. “Taking the Pulse of Charitable Care and Community Benefits at Nonprofit Hospitals,” American Hospital Association, Testimony to U.S. Senate Committee on Finance, September 13, 2006. Also See: http://www.senate.gov/~finance/hearings/testimony/2005test/091306kltest.pdf
9. Schlesinger, M. and B.H. Gray, “How Nonprofits Matter in American Medicine, And What To Do About It,” Health Affairs, June 20, 2006, Vol. 25, pp. w287-w303. Also See: http://content.healthaffairs.org/cgi/content/full/25/4/W287
10. “Community Benefits Debate,” Modern Healthcare, August 7, 2006.
11. Lofton, K. “Taking the Pulse of Charitable Care and Community Benefits at Nonprofit Hospitals,” American Hospital Association, Testimony to U.S. Senate Committee on Finance, September 13, 2006. Also See: http://www.senate.gov/~finance/hearings/testimony/2005test/091306kltest.pdf
12. Kaplan, H.L. and L.S. Moroney, “Hospitals Face New Financial Threat of Charity Care Legislation,” American Bankruptcy Institute Journal, June, 2006, Vol. 25, No. 5, June 2006.
13. Robinson, J.C. and S. Dratler, “Corporate Structure and Capital Strategy at Catholic Healthcare West,” Health Affairs, Vol. 25, No. 1, January/February 2006, pp. 134-147.
