Tuesday, October 14, 2008

GAO Releases Report on Community Benefit by Nonprofit Hospitals

The GAO just released a report on community benefit expenditures by nonprofit hospitals, available here. The gist of the report is that it is impossible to compare community benefit reports by hospitals because there is no standard methodology for reporting community benefit, and that the IRS's new schedule H doesn't really help this situation. In particular, the report highlights disagreements on how to report bad debt separately from charity care, whether Medicare (as opposed to Medicaid) "shortfalls" (e.g., expenses in excess of reimbursement) should count as community benefit; and whether so-called "community building" expenses should count. The report also notes that bad debt and Medicare shortfalls are a very significant portion of what hospitals report as community benefits.

Anyway, the report pretty much confirms comments I previously made to the IRS when the agency was in the middle of its 990 revision project: unless the IRS mandates (1) what counts as community benefit, (2) a standard methodology for reporting community benefit expenditures and (3) individual reports for every health care facility, no one will be able to make any meaningful policy judgments or compare individual hospitals to one another. The states aren't going to do this on their own, and hospitals will play the numbers game to the extent permitted, just like law schools play the game with U.S. News rankings. In particular, I don't know why the IRS didn't require nonprofit hospitals to report charity care and other community benefit costs using the same accounting methodology as they use in their Medicaid reports; participation in Medicaid is essentially a requirement of tax-exempt status, so all hospitals have to do these reports. What is so difficult or unfair, then, about making hospitals use the same methodology for reporting charity care costs to the IRS? As for Medicare shortfalls, these simply shouldn't count. Unlike Medicaid, Medicare does not target the poor or a specific group financially at risk for a lack of medical services. True, some retirees on Medicare are poor; and many of them aren't. As for "community building" expenses, don't get me started. I once remarked to a colleague that under the argument hospitals make for community-building expenses -- that these expenditures "improve community health" -- Toyota should get community benefit credit for building hybrid automobiles that pollute less, thus improving community health. "Community building" is just another way for hospitals to argue that everything they do is a community benefit and we all ought to thank our lucky stars that they even exist . . .

Of course, all this begs the question whether nonprofit hospitals should be exempt at all. Though I've mellowed on that subject since writing my first article about tax exemption for nonprofit hospitals 20 years ago, when I read stories like this one in the Wall Street Journal (subscription required), detailing how Ascension Health is closing inner-city facilities that lose money in favor of massive investment in suburban hospitals that generate profits (complete with widescreen TV's in private rooms!), I begin to think that any hospital that (1) does not qualify as an educational organization (e.g., a university-affiliated teaching hospital) or (2) does not PRIMARILY serve the poor (an inner-city hospital or perhaps some rural hospitals that are the only source of health care services in their geographic area) ought to be denied exempt status. Let Ascension Health, which reported aggregate net operating revenues of over $500 million last year, pay taxes like any other big business. Which is what it really is.

JDC

http://lawprofessors.typepad.com/nonprofit/2008/10/gao-releases-re.html

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