Folwell has battled for years with North Carolina’s largest hospitals, labeling them a cartel and calling for new laws to require more consistent, transparent pricing for medical services, as well as to rein in medical debt collections. His office has now released three reports in nine months on hospital finances, and he blasted health executives Wednesday, saying they’re failing to earn the significant tax breaks nonprofit hospitals enjoy.  “These entities who disguise themselves as non-profits have lost their mission,” Folwell said. “They have turned into stock market, private equity and real estate development firms versus health care firms.”  As treasurer, Folwell oversees the State Health Plan, which insures teachers and state employees and is the state’s largest purchaser of healthcare services.

 

So when I read the report causing all kinds of fuss in North Carolina, I was skeptical.  The report reads like an advocacy piece for the foregone conclusion that nonprofit hospitals should not be tax exempt.  But the report is based on objective data — salary information from 990’s primarily. The data don’t lie.  Here is just a snippet:

 

Nonprofit hospital executives have enriched themselves while fueling a crisis of health care affordability. North Carolina’s nine largest hospital systems paid “highly compensated” executives more than $1.75 billion from 2010 to 2021. Almost 20% of that hospital executive pay was captured by a small handful of hospital chief executive officers (CEO), who collectively took home $308.8 million over 12 years . . . Experts fear that the method by which top tier hospital executives are paid makes health care increasingly unaffordable and monopolistic. Existing evidence suggests that hospital CEO pay is not meaningfully tied to quality of care or patient safety. Instead, experts have warned that too many hospital CEOs and top tier executives are  financially incentivized to cut costs and boost revenue in ways that threaten patient safety and hurt affordability.

 

North Carolina’s nonprofit hospitals supposedly enjoy huge tax breaks in exchange for providing community benefits, but too many have failed to fulfill their charitable mission. State lawmakers, local leaders and hospital boards of directors are all responsible for holding hospital executives accountable.

 

Two especially credible academic centers co-authored the report: The Johns Hopkins Bloomberg School of Public Health, and the Rice University Baker School of Public Policy.  So the Report can’t be easily dismissed as a biased attack on nonprofit hospitals as the North Carolina Healthcare Association asserts, not without reasonable justification.  Here is how another respected organization, the North Carolina Healthcare Association, defended the compensation practices:

 

Executive compensation of health system leaders is the responsibility of an organization’s board of trustees. They are not able to ‘enrich themselves.’ There is a rigorous process prescribed by the Internal Revenue Service for setting executive compensation. For tax exempt hospitals, an independent panel drawn from the board of trustees is charged with setting CEO compensation. To help determine appropriate compensation, this independent panel relies on benchmark data from similar organizations, and the compensation package is approved by the entire board.  Hospitals and health systems are transparent about these salaries. Nonprofits disclose them on their IRS Form 990s. The compensation of the chief executive officer and other top executives at public hospitals are, by law, a matter of public record.  In terms of scope of job responsibilities, many chief executives of large health systems, some multi-state, direct an array of care services that include overseeing multiple large acute care hospitals, physician groups, primary care and specialty clinics, home health organizations and often rehabilitation and behavioral health care facilities, as well, in a constantly shifting state and federal regulatory environment.  

The surprising thing about the hospitals in both the Pennsylvania cases, and in North Carolina, is that non of those cases involved unreasonable compensation!

The surprising thing is that the hospitals in Pennsylvania and in North Carolina were right; the compensation paid to Top Hats was not unreasonable, at least not as defined in the excess benefit regulations.  In both states, it was determined that compensation was within the range required by Treas. Reg. 53.4958-4 (defining excess benefit).  The NCHA is essentially making the case that nonprofit hospital compensation is entitled to the strong presumption of reasonableness in Treas. Reg. 53.4958-6.  

So one may not agree with the report’s asserted cause and effect, that very high compensation unjustifiably reduces the charitable health care, but it cannot be doubted that the compensation is high.  Very high.  That was the point, as well, in the Pennsylvania cases.  The compensation was “eye-popping.” If you are interested in tax exemption for hospitals, you should really make time to read the Pennsylvania cases and the North Carolina Report.  I am about half way through with the opinions and will talk about those next week.  

Here’s the point.  The Pennsylvania cases and the North Carolina Report make the very strong case that even if the amounts paid to hospital executives does not constitute private inurement or excess benefit — because the compensation is within the range paid by like organizations in like industries, for-profit or nonprofit — the “very high” or “eye popping” amount of compensation may unjustifiably preclude the charitable mission to an intolerable intent. In those cases, tax exemption should be denied or revoked: 

Worse, there is disturbing evidence that hospital executive pay is not meaningfully linked to either patient safety or nonprofit hospitals’ charitable mission. Patient safety “declined severely” during the pandemic, as health care-associated infections jumped as much as 47% from 2019 to 2020, accompanied by troubling increases in patient falls and other preventable patient safety events. Patients’ financial health also suffered during the pandemic as hospitals sued thousands of patients over medical debt. In North Carolina, some nonprofit hospitals billed more than $149 million to poor patients who should have received charity care. Worse, many of North Carolina’s largest nonprofit hospitals encouraged thousands of North Carolinians to sign up for “medical credit cards” that can charge up to 18% interest.

Taken together, the Pennsylvania cases and the North Carolina Report make a strong case that an insider’s very high salary, even if it does not violate the prohibition against private inurement and does not constitute excess benefit, may still result in private benefit so that the hospital should not be tax exempt.  On a deeper level, this might mean that we eliminate the rule adopted in the excess benefit regulations whereby the reasonableness of compensation is determined by reference to compensation paid by for-profit as well as nonprofit hospitals.  Treasury Reg. 53.4958-6(c)(2)(i).  As long as the for-profit market sets the outer limits of reasonable compensation, nonprofit compensation rates will be indistinguishable from for profit compensation.  And according to the Pennsylvania Courts and at least one credible report so far, nonprofit charitable care will hardly be more than charitable care by for-profit hospitals.  I just don’t believe, as nonprofit boards are wont to argue, that we cannot attract capable nonprofit hospital administrators unless they are paid astronomical salaries like their for-profit counterparts.  There are true believers and dedicated people who would accept a fraction — what, $500 to $750 million — to work at a nonprofit.  I certainly doubt those folks would make things worse than they already are.  I gotta think about this.  

 

darryll jones