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Ways and Means Questions Nonprofit Hospitals' Tax Status

MAY 26, 2005 -- Invoking the infamous bank robber Willy Sutton, House Ways and Means Committee Chairman Bill Thomas, R-Calif., led his panel Thursday through an examination of the nonprofit hospital sector. "I think it's obvious if we begin an examination in this area—the old Willy Sutton motto of 'Why do you rob banks? He said 'That's where the money is,'" Thomas said in his opening remarks.

The session was part of the panel's ongoing series of hearings on charities and the breaks they receive under the tax code. Nonprofit hospitals and health care organizations make up the single largest segment of the tax exempt charitable community, accounting for three-quarters of the sector's revenue.

Nonprofit hospitals also receive tax breaks at the state and community level and finance expansion through tax exempt bonds. Many communities rely on nonprofit hospitals to provide medical care, and a change in tax status could have serious financial and public health implications for hospitals and the communities they serve, lawmakers and lobbyists said.

Thomas said it was appropriate to ask what taxpayers were getting in return for tens of billions of dollars in tax subsidies given each year to nonprofit hospitals. He cited data from the American Hospital Association, a trade group representing both for-profit and not-for-profit hospitals, that said the average percentage of uncompensated care in 2002 was 4.4 percent in nonprofit hospitals and 4.5 percent in for-profit hospitals.

"If blindfolded and taken to a hospital, would a patient know whether he or she was in a for-profit or a nonprofit?" Thomas said to the hearing room, which was packed with hospital and health industry lobbyists. Rep. Charles B. Rangel, D-N.Y., said there was "no answer" to the question of why the committee was "picking on" nonprofit hospitals. "Clearly there's been no evidence of wrongdoing," Rangel said, asking if other nonprofits such as universities or churches would also be brought before the panel.

IRS Commissioner Mark W. Everson told the committee it had become "increasingly difficult to differentiate" for-profit hospitals. "We regularly find ourselves engulfed in paper as we attempt to discern whether those in control of a particular nonprofit health care provider are acting more as investors for their own account or as stewards of charitable assets," Everson said.

A Government Accountability Office study presented at Thursday's hearing found that government hospitals generally devoted "substantially larger" shares of their patient operating expenses to uncompensated care than did nonprofit and for-profit hospitals. While the nonprofit groups' share was higher than that of the for-profit groups in four of the five states studied, the difference was small relative to the difference found when making comparisons with the government hospital group, GAO found.

Centers for Medicare and Medicaid Services Administrator Mark B. McClellan testified that between Medicare and Medicaid, "disproportionate share" payments, indirect medical education, bad debt payments, and other funding provide tens of billions of dollars to help hospitals pay for uncompensated care. Nonprofit hospitals will also realize several billion dollars more in tax exemptions, he said.

McClellan suggested that the funding streams for nonprofits required further review. "The question that should be asked is whether the funding mechanisms I have mentioned most effectively target those funds to the programs and settings that provide the best value in terms of the type of care they provide," he said.

The American Hospital Association did not have anyone testify at the hearing but released a statement that nonprofits' tax exempt status was the "key to community care" and "an essential ingredient" to helping uninsured Americans get medical care.

Jill R. Horwitz, an assistant professor at the University of Michigan Law School, said the differences between nonprofit and for-profit hospitals "depends on where you look." For-profit hospitals are more likely than their nonprofit counterparts to offer the most profitable services, and less likely than either nonprofits or government hospitals to offer services that are unprofitable yet valuable, she said in prepared testimony.

But John D. Colombo, a law professor at the University of Illinois College of Law, said there was "no reason to believe" nonprofits offered better medical care to communities. "Empirical studies on quality of care, costs of care, and free care for the poor show decidedly mixed results," he said in prepared testimony. "So if we are looking to empirical evidence to justify the 'trust me' approach of community benefit, the evidence simply isn't there."

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