Monday, September 29, 2014

What happens if charity care becomes obsolete?

An article last week in the Washington Post (h/t Chronicle of Philanthropy) discussed a report by the Department of Health and Human Services that indicated that hospitals are experiencing significant declines in charity care and bad debt, thanks to expansions in Medicaid and a drop in the number of otherwise uninsured individuals due to the Affordable Care Act.  The report projects $5.7 billion (that’s billion, with a “b”) in savings in uncompensated care costs in 2014.

The first thing that I thought was, “Wow, that’s a big number!  Great news!”   The second thing I thought was, “Gee, I wonder if that will change how we evaluate nonprofit hospitals.”    What that might say about my mental state aside, it will be interesting to see how this structural change to the way we pay for health care works its way through the standards for tax exemption.

I note that the HHS report tracks “uncompensated care,” which it treats as the sum of bad debt and charity care.  While the HHS report does indicate that there is a difference between “self-pay” patients and “charity care”, the report is quick to note that not all hospitals break down their reporting this way.   (See HHS Report, FN 6).  Of course, part of the raging debate is whether bad debt is charity care – the Catholic Hospital Association says it isn’t but not all hospitals agree.

Either way, under traditional formulations of the community benefit standard, charity care is not the be-all and end-all of for exempt status – it might not even be necessary.   The recent trend, first evident in the Revised 990 Form’s Schedule H and then in the community assessment report requirements of the ACA, appears to lean toward wanting more discussion and disclosure of charity care as component of tax-exemption, even if that doesn’t appear anywhere formally quite yet.  It will be interesting to see if a structural reduction in the need for charity care (however defined) changes that conversation.

Then, of course, there are the states.   Having practiced in Illinois at the time of the Provena decision (good summary here), I’m particularly curious to see how that might play out.   For those of you who weren’t following Provena, Illinois revoked the property tax exemption for a number of nonprofit hospitals, stating that the Illinois property tax charitable exemption provisions (some of which are in the state constitution) require actual charitable use (as in relieving- poverty-charitable-use) of the property.   While denying that charitable use is a numbers game (that is, you need to show that there are enough charitable dollars spent to offset the property tax uncollected) – the court then engages in exactly that mathematical exercise.  

I’ve moved from Illinois since Provena came down, but I understand there was a legislative fix (SB 2194 and SB 3261, passed in 2012), that partially codifies this math-based analysis.  What happens if a hospital doesn’t meet its charity care dollars spent requirement because they are simply not necessary anymore due to ACA?

I might be going out on a limb here, but I’m guessing that Prof. Colombo might have a thought or two on this…

EWW

https://lawprofessors.typepad.com/nonprofit/2014/09/what-happens-if-charity-care-becomes-obsolete.html

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A possible comparison is how Canada treats its hospitals. See the article by Robert Hayhoe and Amanda Stacey, 59 EOTR 149 (2008), available at http://www.millerthomson.com/assets/files/article_attachments/Public_Benefit_and_Canadian_Public_Hospitals.pdf.

Posted by: Lloyd Mayer | Oct 1, 2014 9:03:11 AM

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