So Did Anything GOOD Come Out of the IRS Hospital Study?

A few days ago I posted a pretty severe critique of the community benefit portion of the recent final IRS nonprofit hospital study. But given that the study is 200 pages long, didn’t SOMETHING worthwhile come from it?

Well, OK. Yes, there were some useful things in the study – mostly confirmation of things we already knew (or thought we knew), such as that hospitals have in the past reported community benefit expenditures in a variety of different ways using a variety of different methodologies, and that smaller hospitals are more often financially on the brink.

But I’d like to pick up on one suggestion for future data-gathering at the very end of the report (later followed up on by Senator Chuck Grassley, IA, the ranking minority member of the Senate Finance Committee, in a press release on the Report) that I think is central to the whole nonprofit hospital debate. That suggestion is that the IRS needs to collect data from for-profit hospitals to compare to nonprofit hospitals.

Amen and Hallelujah! One of the things that has most annoyed me about the political discussion of tax-exemption for nonprofit hospitals is the complete lack of comparison to what for-profit hospitals do as a baseline to measure what we’re “getting” for tax-exemption (this is not true in the academic world by the way, where hundreds of empirical studies compare nonprofit to for-profit hospitals). Nonprofit hospitals talk about what they spend on community benefit; but they never talk about what they spend in comparison to for-profit hospitals. For example, a study done some years ago on uncompensated care found that nonprofit hospitals as a whole did not have much more uncompensated care than for-profits (of course, for-profits refer to all uncompensated care as “bad debt” while nonprofits refer to all or most of it as “charity care” – it’s only recently that the nonprofit community has started to separate charity care from bad debt, and the methodology for doing so is still a work-in-progress). It’s not what nonprofits do in an absolute sense that should justify tax-exemption – rather, it’s what they do that is different from for-profits. If for-profits as a group report 4.0% of revenues as “uncompensated care” and nonprofits report 4.5%, then as a practical matter all tax-exemption is getting us is a .5% increase – or, put more bluntly, not much.

And that brings me to my final point. I know it’s not going to happen during my lifetime, but I really wish we could bury the “community benefit” concept once and for all and focus on what REALLY should motivate our grant of tax exemption for nonprofit hospitals: whether they provide in some substantial way access to health services not provided by the for-profit market. That is why in my earlier post I suggested that the hospitals most deserving of exempt status were not necessarily the ones the IRS found reported the most community benefit. For example, critical access hospitals (CAH’s) and rural hospitals all reported less community benefit spending (as a percentage of revenues) than urban hospitals. But CAH’s and rural are often the only source of health care for their geographic area and carry heavy Medicaid patient loads – in short, these hospitals provide critical access to health services not provided to their communities by the for-profit sector.

If we abandoned the concept of “community benefit,” which has been completely bastardized by the practices of nonprofit hospitals identified in the Report and previous studies done by the CBO (2006) and GAO (2005, 2008), we could get both hospitals and policy makers to focus on what should be the core issue for tax-exemption: what a particular nonprofit hospital provides that is not being provided by the for-profit market. We don’t need nonprofits to duplicate services already provided by the market; we need them to fill the holes and push the boundaries. But that’s not going to happen so long as we keep talking about community benefit without forcing a comparison between nonprofits and for-profit hospitals. In some cases, merely existing may be the critical difference (e.g., the CAH, serving populations no one else wants to serve) and that should be enough for us in the tax-exemption world even if the CAH didn’t spend a dime on so-called “community benefit”; in other cases, plenty of for-profits also serve the population served by the nonprofit, so the nonprofit needs to explain what it does differently (and if the empirical work done by Jill Horwitz at Michigan, Bradford Gray at the Urban Institute and Mark Schelsinger at Yale is any indication, many nonprofits could tell a compelling story on this issue).

A side benefit of approach is that it would not only focus our policy lens, but it would also focus nonprofit managers on their nonprofit mission, which should be different than a for-profit manager’s business plan. A reporter once asked me why Provena Covenant hospital in Urbana, IL got into tax-exemption trouble. The answer I gave was that the group of managers of Provena at the time forgot they were supposed to be a charity; no one ever woke up in the morning and said “We can’t be suing poor people and throwing them in jail for not paying bills; we’re a CHARITY for cryin’ out loud.” If we forced charities to defend their exempt status by comparing what they do to for-profits, I’ll bet this kind of thing wouldn’t happen.

JDC