Threatening Nonprofit Hospital Tax Exemption: A Better Path Forward

This Viewpoint discusses regulation of nonprofit hospitals in a way that will advance their charitable purposes without eliminating their tax exemption status.

Association of Nonprofit Hospitals' Charitable Activities With Unreimbursed Medicaid Care After Medicaid Expansion

IMPORTANCE

In the United States, nonprofit hospitals receive tax-exempt status with the expectation that they provide a high level of benefit to local communities. Prior work has shown that Medicaid expansion reduced hospital spending on uncompensated care.

OBJECTIVE

To measure the association of tax-exempt hospital spending with community benefit and changes in uncompensated care after Medicaid expansion.

DESIGN, SETTING, AND PARTICIPANTS

This cohort study was performed using a difference-in-differences analysis (ie, a pre-post treatment-control design) to estimate changes in reported charitable categories associated with Medicaid expansion. Data from Internal Revenue Service form 990, Schedule H, tax filings for 2253 tax-exempt hospitals in the United States from 2012 to 2016 were used. Data were analyzed from June to November 2019.

EXPOSURE

The proportion of the hospital's tax filing that spanned the period after Medicaid expansion.

MAIN OUTCOMES AND MEASURES

Hospital-reported spending on uncompensated care, unreimbursed Medicaid expenses, and other community benefit spending categories.

RESULTS

Across 2253 hospitals, mean (SD) uncompensated care costs between 2012 and 2016 were $4.20 million ($8.80 million) and unreimbursed Medicaid expenses were $7.60 million ($18.62 million). Compared with tax-exempt hospitals in states that did not expand Medicaid, those in states that did expand Medicaid reported mean reductions in their provision of uncompensated care of $1.11 million (95% CI, $0.35 million to $1.87 million; P < .001), representing a mean change of -2% (95% CI, -6% to 2%; P < .001). These reductions have been offset by mean reported increases in the provision of unreimbursed Medicaid expenses of $1.63 million (95% CI, $0.31 million to $2.94 million; P = .02), representing a mean increase of 2% (95% CI, 1% to 4%; P = .01). Tax-exempt hospitals in states that expanded Medicaid reported no statistically significant mean increase in spending on other community benefit activities.

CONCLUSIONS AND RELEVANCE

In this study, large decreases in uncompensated care among tax-exempt hospitals associated with Medicaid expansion were not accompanied by increases in other reportable categories of community health benefit spending. Instead, they were accompanied by increased spending on unreimbursed Medicaid expenses.

Paying Their Way? Do Nonprofit Hospitals Justify Their Favorable Tax Treatment?

This study addresses the effect of hospital ownership on the delivery of services to medically indigent patients and on their communities, using two alternative definitions of community benefits. Using data from hospitals in California, the study finds that in similar markets, the amount of community benefits provided by a tax-exempt private hospital is equivalent in value to that provided by an investor-owned hospital. These results are sensitive to the definition of community benefits, thus indicating need for a more explicit identification and minimum standard of the community benefits expected of nonprofit hospitals in return for their special tax treatment.

[Evaluation of the cancer co-pay fee exemption data source (048 code) to estimate cancer incidence]

OBJECTIVES

to assess whether the data source of cancer exemption ticket (code 048) correctly estimate the cancer incidence produced by Cancer registries (CR).

DESIGN

comparison between incidence estimates produced by cancer exemptions ticket and cases registered by CR.

SETTING AND PARTICIPANTS

six CRs provided incidence data for one year in the five-year period from 2007 to 2011 and for the previous five years, the exemptions provided for the same year and for the previous five years.

MAIN OUTCOME MEASURES

incidence distribution by gender, age and tumour site, exemptions 048/incident cancers ratio, and trend estimates.

RESULTS

out of 14,586 patients with 048 exemption, a first group was present in the CR database in the same reference year (No. 8,015) and a second group in the previous 6 months (No. 1,696). Of the remaining 4,875, only 2,771 were prevalent cases and 2,104 were manually re-valued: 514 non-cancer; 710 non-malignant/noninfiltrating tumours, 250 non-residents, 532 unknown, and 98 lost at CR. The exemption/ tumours ratio was 32%in males and 37% in females. Out of 27,632 cancer patients in CR, only 29% had a 048 exemption. Among linked cases, there is a case-mix problem: the exemptions overestimated the weight of some cancer sites (breast, prostate), but underestimate the weight of other sites (stomach, liver, lung) and the burden of tumours in the elderly.The trend estimated from the exemptions underestimates the true incidence of tumours and presents fluctuations, because of local administrative and organisational issues.

CONCLUSIONS

the 048 codes are an accessory source for CRs, but when used as single flow they are not able to estimate the true incidence of tumours and, therefore, do not provide useful information on cancer trends.

Boon or bane: 401(k) loans and employee contributions

Economic and behavioral theories arrive at different conclusions about the effect of being allowed to borrow from one's defined-contribution (DC) retirement plan on people's contributions to DC plans. Traditional life-cycle models unambiguously suggest that the borrowing option makes people better off than not being able to borrow. Households consequently contribute more to their DC plans than they would absent the borrowing option. Previous research finds that the ability to borrow from a DC plan increases contemporaneous contributions, consistent with traditional models. Behavioral finance, in contrast, suggests that some workers may operate with nonlinear time discounting. They plan on saving more in the future but change their mind and save less than initially planned as time passes. These workers may enjoy higher lifetime utility if they have no loan option because DC plans serve as commitment devices for retirement saving. The money cannot be used prior to retirement. Absent this commitment device, contributions may be lower for some households than would be the case without a DC loan option. We study DC plan contributions for households with heterogeneous preferences about discounting. We separate households into those that demonstrate inconsistent (or paradoxical) borrowing behavior, which may reflect nonlinear time discounting, and those with more consistent borrowing behavior. We find that a DC loan option raises current savings, but does so more for households with consistent borrowing behavior than for those with inconsistent borrowing behavior.

Characterizing customers at medical center farmers' markets

Approximately 100 farmers' markets operate on medical center campuses. Although these venues can uniquely serve community health needs, little is known about customer characteristics and outreach efforts. Intercept survey of markets and market customers between August 2010 and October 2011 at three medical centers in different geographic regions of the US (Duke University Medical Center, Cleveland Clinic, and Penn State Hershey Medical Center) were conducted. Markets reported serving 180-2,000 customers per week and conducting preventive medicine education sessions and community health programs. Customers (n = 585) across markets were similar in sociodemographic characteristics--most were middle-aged, white, and female, who were employees of their respective medical center. Health behaviors of customers were similar to national data. The surveyed medical center farmers' markets currently serve mostly employees; however, markets have significant potential for community outreach efforts in preventive medicine. If farmers' markets can broaden their reach to more diverse populations, they may play an important role in contributing to community health.

Evaluating hospitals' provision of community benefit: an argument for an outcome-based approach to nonprofit hospital tax exemption

Nonprofit hospitals are exempt from federal income taxation if they pass organizational and operational tests, including satisfying the community-benefit standard. Policymakers, however, have questioned the adequacy of the community benefits that nonprofit hospitals provide in exchange for these exemptions. The Internal Revenue Service recently responded to these concerns by redesigning its tax forms for nonprofit hospitals. The new Form 990 Schedule H requires nonprofit hospitals to provide additional information about their community-benefit activities. This new reporting requirement, however, places an undue focus on input-based community-benefit indicators, in particular expenditures. We argue that expanding the current input-based reporting requirement to include not only monetary inputs but also population health outcomes would achieve greater benefit for society.

Proposed regs address new hospital tax-exemption requirements

Proposed regulations set forth detailed rules for implementing the new tax-exemption requirements of Section 501(r) of the Internal Revenue Code for not-for-profit organizations operating hospital facilities. The proposed regulations provide guidance on the written financial assistance policies (FAPs) that hospital facilities are required to establish. The regulations propose methodologies for determining the amounts that a hospital facility can charge FAP-eligible individuals for emergency and other medically necessary care. They prescribe procedures that hospital facilities would be required to follow before engaging in extraordinary collection actions against an individual.

Ethics, organ donation and tax: a proposal

Five arguments are presented in favour of the proposal that people who opt in as organ donors should receive a tax break. These arguments appeal to welfare, autonomy, fairness, distributive justice and self-ownership, respectively. Eight worries about the proposal are considered in this paper. These objections focus upon no-effect and counter-productiveness, the Titmuss concern about social meaning, exploitation of the poor, commodification, inequality and unequal status, the notion that there are better alternatives, unacceptable expense, and concerns about the veto of relatives. The paper argues that none of the objections to the proposal is very telling.

Relevant factors to consider prior to an investor-owned acquisition of a nonprofit healthcare entity

The purpose of this article is to explore the factors that affect the negotiations for an acquisition of a nonprofit system by an investor-owned entity. The recent economic downturn, accompanying credit crisis, and healthcare reform legislation will likely encourage and accelerate the pace of merger and acquisition (M&A) transactions between investor-owned entities and nonprofit hospitals. As many nonprofits are smaller, more financially vulnerable, and more limited in their access to capital than their investor-owned counterparts, nonprofits could be prime targets for investor-owned acquirers during the healthcare reform implementation period. In M&A transactions of this type, the investor-owned acquirer typically is motivated to pursue an acquisition when the deal promises an acceptable return on investment and decreased operating costs from economies of scale. Alternatively, the nonprofit target is typically seeking funding for upgrades to facilities and information technology systems as well as a continued commitment to charity care and managed-care contracting leverage. A successful acquisition of a nonprofit hospital by an investor-owned company requires a careful analysis of relevant tax, economic, and strategic factors prior to closing the deal. This article lists the most significant factors to consider in these deals and explains how these factors should influence the purchase price and postacquisition cash flow.

The welfare gain from replacing the health insurance tax exclusion with lump-sum tax credits

This paper analyzes the welfare gain from replacing the tax exclusion of employer-provided health insurance with a lump-sum tax credit. It differs from earlier studies in that we look at the welfare cost of health insurance tax exclusion as coming directly from excessive health insurance rather than from overconsumption of medical care and that we account for the labor market effect of the tax exclusion on welfare. Both differences work to produce a smaller tax reform welfare gain. For a set of mid-range parameter values, the welfare gain is about 21% of current health insurance tax expenditures. In addition, government tax expenditures would fall by 38%, and health insurance spending would fall by 77% after the reform.

Board oversight of community benefit: an ethical imperative

Board oversight of community benefit responsibility in tax-exempt organizations in the nonprofit health care sector is attracting considerable attention. Scrutiny by the IRS and other official bodies has led to stricter measures of compliance with the community benefit standard. But stricter compliance does not sufficiently engage the underlying ethical imperative for boards to provide effective oversight--an imperative that recent research suggests has not been sufficiently honored. This analysis considers why there is a distinctively ethical imperative for board oversight, the organizational nature of the imperative involved, and practical ways to fulfill its obligations. We adopt an organizational ethics paradigm to illuminate the constituent components of the ethical imperative and to clarify emerging benchmarks as flexible guidelines. As these emerging benchmarks enhance board oversight of community benefit they also can shed light on what it means to be a virtuous organization.

The impact of competition among health care financing authorities on market yields and issuer interest expenses

The main source of capital for non-for-profit health care organizations is tax-exempt municipal bonds. The tax-exempt nature of this debt requires that they be issued through financing authorities, which are run by, or affiliated with, state or local government agencies. In some states, all tax-exempt health care bonds must be issued through a single financing authority, but in other states the issuing health care organization has a choice of multiple authorities. Using a Herfindahl index of issuer concentration, prior research has found that greater competition among authorities results in lower interest costs to the issuing health care organization. We pick up where this earlier study left off, examining the links between authority competition, the interest expenses to the issuer, and the yield to the market investor. Although our analysis of all hospital bonds issued between 1994 and 2002 corroborates earlier findings with regard to interest expenses to the issuing health care organization, we also find market yield is lower for statewide authorities where issuer concentration is lower. Thus, authority competition is good from the issuers' point of view, but holds no favor in the investors' eyes. On the other hand, the lower market yield associated with statewide authorities does not make its way down to the issuer in the form of lower interest costs. To help sort through this paradox, we explore our findings through interviews of executives in state issuing authorities.

On the hot seat. As the recession grows, an IRS report shows enviable salaries and uneven community benefits provided by tax-exempt hospitals

As they look to collect a share of the billions in stimulus dollars designed to boost the economy, not-for-profit hospitals found the tax breaks they get coming under more scrutiny. An IRS report on executive pay and community benefits found six-figure salaries and uneven aid. "It's going to seem out of synch with today's economy," says healthcare attorney Gerald Griffith, left.

Tax-exempt status for hospitals: where have we been--and where are we going?

The IRS has two very different published administrative positions on the tax-exemption requirements that apply to hospitals. Hospitals that meet either standard should be recognized by the IRS as tax-exempt. The IRS sometimes appears to be attempting to back away from its more liberal tax-exemption standard (the so-called "community benefit standard"). There is also some pressure coming from Congress to change the applicable rules. Immediate change regarding tax-exemption standards may be more likely at the state and local level than at the federal level.

Office of Personnel Management. Allotments from federal employees. Interim rule with request for comments

The Office of Personnel Management (OPM) is issuing interim regulations dealing with the use of OPM's allotment authority to allow for pretax salary reductions as part of OPM's flexible benefits plan. Using an allotment from an employee's pay to the employing agency allows certain payments (e.g., employee health insurance premiums, contributions to a flexible spending arrangement, and contributions to a health savings account) to be paid with pretax dollars, as provided under section 125 of the Internal Revenue Code. In addition, these regulations include certain policy clarifications and changes to make the regulations more readable.

Benefits of a charitable gift annuity

Charitable gift annuity (CGA) has been used for may years as a vehicle to provide a means for individuals in higher income and estate tax brackets to transfer assets to an institution of their choice and derive considerable immediate and future benefits. This article discusses the basis and the steps involved in establishing such a plan.

The effect of tax credits for nongroup insurance on health spending by the uninsured

We compare out-of-pocket spending for health care by lower-income uninsured people with their net spending on insurance and health care if they took up each of three hypothetical tax credits. Because of nongroup policies' high cost and low benefits, nearly all would spend more, often much more, under a tax credit similar to that proposed by the Bush administration. When viewed in the context of other research on low-income people's demand for health insurance, the results suggest that sizable reductions in the number of uninsured will require more generous tax credits than those in current proposals.

Revocation of tax-exempt status, excise taxes, and other intermediate sanctions issues, plus income taxes: how the rules have changed after Caracci v. Commissioner

This Article discusses Caracci v. Commissioner, in which the Tax Court imposed intermediate sanctions based on its finding that insiders caused three applicable tax-exempt organizations to sell assets to three for-profit entities owned and controlled by those same insiders. It explores the standards enumerated in Caracci, hypothesizes as to the pending appeal, and examines the guidance given by the decision's clarification of the intermediate sanctions provisions of the Internal Revenue Code.

Community benefits: how do for-profit and nonprofit hospitals measure up?

The rise of the for-profit hospital industry has opened a debate about the level of community benefits provided by non-profit hospitals. Do nonprofits provide enough community benefits to justify the community's commitment of resources to them, and the tax-exempt status they receive? If nonprofit hospitals convert to for-profit entities, would community benefits be lost in the transaction? This debate has highlighted the need to define and measure community benefits more clearly. In this Issue Brief, the authors develop a new method of identifying activities that qualify as community benefits, and propose a benchmark for the amount of benefit a nonprofit hospital should provide.