Thursday, August 13, 2009

Do we have to worry about this, too?

Here's something that never would have occurred to me. A colleague today suggested that if the President and Congress are successful in eliminating or dramatically reducing the number of uninsured Americans, some in Congress would argue that the tax exemption enjoyed by non-profit hospitals should be the next target. The logic would be that if we were no longer providing free care, there would be no public service rationale for the tax exemption.

This thought left me surprised, but anything is possible. In my view, of course, this is not sound logic. First of all, there are other functions carried out for the public good in academic medical centers and other hospitals, like education and training of future doctors and nurses, and scientific research. And, even if everyone does end up with government-sponsored insurance in the future, there would remain a substantial deficit in those government payments. For example, the states pay Medicaid rates that are substantially below the actual costs of caring for Medicaid patients. These patients are subsidized by hospitals all across the country.

Beyond this, if the tax exemption were revoked, it would just raise the cost of care delivered in hospitals, adding sales tax to the purchase of goods and services; property tax on the value of plant and equipment; taxable interest on bond issues to finance new buildings and equipment; and state and federal income taxes for those hospitals lucky enough to earn a margin at the end of the year. Those costs, in turn, would be built into the rates, undercutting the goal of controlling cost increases in this sector.

If my colleague is right and this kind of sentiment is indeed likely, perhaps those currently deliberating on the health reform bill should put in some safeguard to protect the nation's non-profit hospitals and consumers from this unintended consequence.

6 comments:

Nick Dawson said...

Interesting proposition Paul. I share your sentimentality that non-profit hospitals do considerably more than provide free care to the indigent to earn their tax exempt status. I am thinking about our certificate of need regulations, wellness programs, the list is lengthy.

On more than one occasion I have heard hospital executives posit that a government "public plan" will be so widely adopted to the point of becoming the sole payor for most hospitals. I am not one to stand up for payors, but is it at all likely that some of them will begin to trim the fat and operate as efficiently as Medicare? That would seem to take out one of the stepping stones towards an all government payor mix. If that is wishful thinking, then what happens to the majority of non-profits that operate with margins in the single digits? Is tax exempt status even an issue if they are millions of dollars upside down from the payor mix shift?

Thanks for the thought provoking post. Fingers crossed that it does not come to fruition.

Anonymous said...

In our State this has been an issue that has been discussed the past few months. It depends on the criteria that is used to define/defend tax exempt status. If it is just the amount of charity care then it is not a far leap of logic to then say that tax exempt status is no longer justified. If you broaden the definition to community benefit then it becomes more difficult to make the argument. I beleive tax exempt hospitals need to be held to a community benefit standard to justify their tax exemption. Also in some states the tax exempt test and case law is based upon another era of hopital charity (pre Medicare and insurance plans). Unfortunately many tax exempt hospitals and systems have operated more like for profit hospitals and systems therefore making them a target for this type of argument.

76 Degrees in San Diego said...

Non-for-profit hospitals/systems that provide undergraduate and graduate medical education are generally substantially different from those that don't. The difference is in culture, collegiality, and the benefits that come from wanting to be a good teacher of those that follow after us. In deference to the MIT study cited a week ago, we still do learn from our mistakes and and want to share this with those who follow. Teaching medical students, residents, and fellows helps us refocus on the privilege and blessing it can be to serve as a physician to others.

Anonymous said...

I agree with anon 2:58's last sentence. Although you know I am an admirer, Paul, your post sounds like that of the beneficiary of any other entitlement which is threatened. I would like to hear a better justification of exactly why hospitals deserve to maintain their tax exempt status, rather than predictions of the "dire consequences" of eliminating it. (Dire consequences are predicted by just about every industry which is threatened with anything these days, thus I find it a tired strategy.)
First, education of future docs and nurses is balanced out by the substantial benefits of the labor they provide.
Second, most research these days is subsidized by outside interests.
Third, physicians also subsidize Medicaid and even Medicare patients to a degree, but no one suggests they should acquire tax exempt status.
Fourth, the "community benefit" standard is vaguely defined and even more vaguely (read, not) fulfilled by many hospitals.
At a minimum, I believe the tax exempt status of hospitals should at least be addressed and qualification for it more clearly defined in any current or future health care bill.
And BTW, I feel the same way about the tax exempt status of religious institutions, so it's nothing personal!

nonlocal MD

Paul Levy said...

Ah, your last sentence is key. How do you feel about colleges and universities, or art museums, or historic house museums, or the YMCA? (By the way, some doctors groups are non-profit, too.)

Whether you think that the consequences I mentioned are dire or just an inconvenience, they are irrefutable. Those would be the simple and direct consequences of removing the tax exempt status of hospitals: Costs would rise.

If we want to change the overall rules, that's one thing. But to focus on hospitals seems to me to be too narrow. As you seem to suggest, all or nothing!

Anonymous said...

Thanks for helping me clarify my thought process. My answer now is, yes - I want to change the overall rules. I think nonprofit status is being abused by too many different organizations which enjoy that status - hospitals included.
Of course, changing the overall rules for all nonprofits would be a huge issue in itself, which is beyond our purview here. But I do not see any reason why clarification of what services hospitals would have to provide in order to maintain nonprofit status, cannot be defined in the current health care discussion.
In other words, IMO, yes - you do have to worry about this too.

nonlocal