By Tony Leys
Many hospital systems are putting up gleaming new buildings, and they’re paying salaries approaching, or exceeding, $1 million per year to top executives. But most are defined as nonprofit organizations, so they avoid most of the taxes that regular businesses pay.
I’d wondered for years: At what point do hospitals cross over from being charities to being money-making businesses?
The Internal Revenue Service now provides a straightforward way to consider that question, offering journalists – like me – a chance to compare area hospitals. My story, “Hospitals avoid taxes despite little free care” found that “scores of Iowa hospitals are exempt from most taxes because they’re classified as charities, but some spend less than 1 percent of their money on free care for the poor.”
The IRS recently began requiring nonprofit hospitals to report how much they spend each year on free care for poor patients.
The IRS said those charity-care figures may not include “bad debt” expenses, which are bills that were sent to patients but were not paid. It also said the charity reports had to be figured at actual cost, not at the inflated full-charge rates that often were used in the past. The charity-care reports are more concrete than the hospitals’ longstanding reports of “community benefits,” which included an array of services that any hospital – for-profit or nonprofit – would provide. (Here’s an IRS fact sheet on some of the new requirements for tax-exempt hospitals under Health Policy.)
I set out to find the new reports for hospitals throughout Iowa, so readers could see how their hospitals stacked up. I spent several days on the online service GuideStar, pulling 990 tax returns that include the new charity-care figures. In some cases, hospitals filed returns under different corporate names or as part of a large system.
I called numerous hospital administrators, most of whom were willing to track down returns that showed charity-care levels for their specific facilities. My search turned up 990 tax forms for about half of Iowa’s hospitals. Several dozen others don’t file such returns because they are public hospitals, owned by governments, such as cities or counties. That’s too bad, because it would be interesting to compare how much charity care those facilities provide.
The main reason average people might care about this issue is that when some property owners are exempted from taxes, everyone else has to pay more.
To illustrate that, I pulled reports filed by county assessors showing how much tax-exempt hospital property was in their areas. The total was about $2 billion, which I multiplied by the average levy rate to show that hospital companies were being excused from paying more than $58 million per year in property taxes. This calculation doesn’t include other kinds of taxes, such as income taxes, that nonprofit hospitals avoid. Those taxes would be tougher to estimate, because of all the possible exemptions and deductions each business could try to use if they were declared for-profits.
It’s important to note that charity care is an incomplete measure of how much help a hospital gives to needy people, but it’s the most solid way to compare facilities to each other. The best quote I heard was from a University of Illinois law professor, who noted that a Ford dealership could claim to be offering a community benefit by providing people with transportation. However, he said, “You wouldn’t expect your local Ford dealer to be giving away cars.”
Iowa has just one for-profit hospital, Ottumwa Regional Health Center. It was a nonprofit until it was purchased by an out-of-state chain last year. I hoped to use the Ottumwa situation as a central example of the difference – or, more likely, the similarity – between the amount of charitable care provided by a nonprofit hospital and a for-profit hospital.
Unfortunately, the new owners in Ottumwa showed little interest in being held up as such an example. However, I could point out that the hospital is now paying $1.5 million in annual property taxes, compared to less than $600,000 in charity care it provided during the last year it was a nonprofit. If I was working in a state with more for-profit hospitals, I would have focused the story on comparing how the community is served by each type of organization.
This debate could intensify if the Affordable Care Act is upheld and Medicaid is expanded to cover most poor people. If that happens, hospitals could expect fewer patients to need free care. They also could expect more folks to wonder why local hospitals are excused from paying the same taxes as almost any other kind of business.
Tony Leys is a reporter at the Des Moines Register and a 2011-12 Regional Health Journalism Fellow.
