Category Archives: Tax-Exempt Status

The Implications of Losing Access to Tax-Exempt Financing

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https://www.kaufmanhall.com/insights/thoughts-ken-kaufman/implications-losing-access-tax-exempt-financing

On January 17, 2025, a list of potential cost reductions to the federal budget was released by Republicans on the House Budget Committee. The list is long and covers the federal budget waterfront, but it spends considerable time focusing on reductions to healthcare spending. This laundry list of cost reductions is important because the highest priority of the Trump administration is a further reduction in federal taxes. A reduction in taxes would, of course, reduce federal revenue; if federal expenses are not proportionately reduced then the federal deficit will increase. When the deficit increases then the federal debt must increase and at that point the overall impact on the American economy becomes concerning and possibly damaging. There has already been much public speculation as to how the Federal Reserve might react to such a scenario.

It is not possible right now to highlight and describe all of the House budget proposals, but one proposal absolutely stands out: The suggestion to eliminate the tax-exempt status for interest payments on all municipal bonds, or potentially in a more targeted manner, for private activity bonds, including those issued by not-for-profit hospitals. Siebert Williams Shank, an investment banking firm, described the elimination of tax exemption for municipal bonds as “the most alarming of the proposed reforms impacting non-profit and municipal issuers.”[1] This is certainly true for hospitals, since over the past 60 years the growth and capability of America’s hospitals has been substantially constructed on the foundation of flexible and relatively inexpensive tax-exempt debt. Given all of this, it is not too early to begin speculating on the impact of the elimination of tax-exempt debt on hospital finances and strategy.

We should also point out that a separate topic is under discussion, related to the potential loss of not-for-profit status for hospitals and health systems. Such a maneuver could potentially expose hospitals to income taxes, property taxes, and higher funding costs. For now, that is beyond the scope of this blog but may be something we write about in future posts.

Below is a series of important questions related to the elimination of tax-exempt financing and some speculations on the overall impact:

  1. What immediately happens if 501(c)(3) hospitals lose the ability to issue tax-exempt bonds? Let’s treat fixed rate debt first. Assume for now that only newly issued debt would be affected and that all currently outstanding tax-exempt fixed rate debt would remain tax-exempt. We could see an effort to apply any changes retroactively to existing bonds, but we view that as unlikely. Therefore, our current expectation is that outstanding fixed-rate debt would not see a change in interest expense.

    However, it is possible that outstanding floating rate debt would immediately begin to trade based on the taxable equivalent. Historically the tax-exempt floating rate index trades at about 65% of the taxable index. The difference between the tax-exempt and taxable floating rate indices in the current market is 175 basis points. For every $100 million of debt, this would increase interest expense by $1.75m annually.
  2. How would new hospital debt be issued? New debt would be issued in the municipal market on a taxable basis or in the corporate taxable market. The taxable municipal market would need to adapt and expand to accommodate a significant level of new issuance. The concern in the corporate taxable market is greater. Currently, the corporate market requires issuance of significant dollar size and generally the issuer brings significant name recognition to the market. Many hospitals may have difficulty meeting the issuance size of the corporate debt market and/or the necessary market recognition. As such, smaller and less frequent issuers would expect to pay a penalty of 25-50 basis points for issuing in the corporate market.
  3. If tax-exempt debt goes away will certain hospitals be advantaged and others disadvantaged? Larger hospitals with national or regional name recognition that issue bonds with sufficiently large transaction size and frequency will likely borrow at better terms and lower rates. Smaller- to medium-sized hospitals may find borrowing much more difficult, and borrowing may come with more problematic terms and/or amortization schedules and likely higher interest rates.
  4. Will borrowing costs go up? The cost of funds for new borrowings would increase for all hospital borrowers. For a typical A-rated hospital, annual interest expense would increase by approximately 30%. For example, in the current market, on $100 million of new debt, average annual interest expense would increase by $815,000 annually.
  5. Will debt capacity go down? All other things being equal, interest rates will go up and hospital debt capacity will go down. Also, if the taxable market shortens amortization schedules, then that will decrease overall debt capacity as well.
  6. What would the impact of the elimination of tax-exempt debt be on synthetic fixed rate structures? Hospitals have long employed derivative structures to hedge interest rate risk on outstanding variable rate bonds and loans. The loss of tax-exemption for outstanding variable rate bonds and loans would precipitate an adjustment to taxable rates, but corresponding swap cash flows are not designed to adjust. Interest rate risk is hedged, but tax reform risk is not. The net effect to borrowers would be an increase in cost similar to the cost contemplated above for variable rate bonds.
  7. What are the rating implications of the elimination of the tax-exempt market? Rating implications will be varied. Hospitals with strong financial performance and liquidity are likely to absorb the increased interest expense of a taxable borrowing with little to no rating impact. In fact, over the past decade, many larger health systems in the AA rating categories have successfully issued debt in the taxable market without rating implications despite a higher borrowing rate. Even amid the pandemic chaos of 2021, numerous AA and A rated systems issued sizable, taxable debt offerings to bolster liquidity as proceeds were for general corporate purposes and not restricted by a third-party, such as a bond trustee.

    Lower-rated hospitals with modest performance and below-average liquidity will be at greater risk for a downgrade. These hospitals may not be able to absorb the increased interest expense and maintain their ratings. While interest expense is typically a small percentage of a hospital’s total expenses, it is a use of cash flow.

    We do not anticipate the rating agencies will take wholesale downgrade action on the rated portfolio as there would likely be a phase-in period before the elimination occurs. Rather, we expect the rating agencies will take a measured approach with a case-by-case evaluation of each rated organization through the normal course of surveillance, as they did during the pandemic and liquidity crisis in 2008. A dialogue on capital budgets and funding sources, typically held at the end of a rating meeting, would be moved to the top of the agenda, as it will have a direct impact on long-term viability.
  8. How would the loss of the tax-exempt market impact the pace of consolidation in the hospital industry? If a hospital cannot afford the taxable market, then large capital projects would need to be funded through cash and operations. This inevitably will limit organizational liquidity, which will lead to downward rating pressure. Some hospitals, in such a situation, will be unable to both fund capital and adequately serve their local community and, therefore, will need to find a partner who can. We anticipate that the loss of the tax-exempt bond market will lead to further consolidation in the industry.

Let’s indulge in one last bit of speculation. What is the probability that Congress will pass legislation that eliminates tax-exempt financing? Sources in Washington tell us that it is premature to wager on any of the items put forth by the Budget Committee. And it should be noted that over the years the elimination of tax-exempt financing has been proposed on several occasions and never advanced in Congress. However, one well-informed source noted that as the tax and related legislation moves forward, there is likely to be significant horse-trading (especially in the House) to secure the necessary votes to pass the entire package. What happens during that horse-trading process is anybody’s guess. So the best advice to our hospital readership right now is to not take anything for granted. But be absolutely assured that the maintenance of tax-exempt financing is an essential strategic component for the successful future of America’s hospitals.

The Perfect Storm facing the Healthcare Workforce: Eight Current Issues frame the Challenge

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The Perfect Storm facing the Healthcare Workforce: Eight Current Issues frame the Challenge

Tonight at midnight, thousands of federal workers face the possibility their jobs will be eliminated as part of the Department of Government Efficiency (DOGE) federal cost reduction initiative under Elon Musk’ leadership. Already, thousands who serve in federal healthcare roles at the NIH, CDC and USAID have been terminated and personnel in agencies including CMS, HHS and the FDA are likely to follow.

The federal healthcare workforce is large exceeding more than 2.5 million who serve agencies and programs as providers, clerks, administrators, scientists, analysts, counselors and more. More than half work on an hourly basis, and 95% work outside DC in field offices and clinics. For the vast majority, their work goes unnoticed except when “government waste” efforts like DOGE spring up. In those times, they’re relegated to “expendables” status and their numbers are cut.

The same can be said for the larger private U.S. healthcare workforce. Per the U.S. Bureau of Labor Statistics, industry employment was 21.4 million, or 12.8% of total U.S. employment in 2023 and is expected to reach 24 million by 2030. It’s the largest private employer in the U.S. economy and includes many roles considered “expendable” in their organizations.

Facts about the U.S. healthcare workforce:

  • More than 70% of the healthcare workforce work in provider settings including 7.4 million who work in hospitals.
  • More than half work in non-clinical roles.
  • Home health aides is the highest growth cohort and hospitals employ the biggest number (7.4 million).
  • 29% of physicians and 15% of nurses are foreign born, almost three-fourths of the workforce are women, two-thirds are non-Hispanic whites, and the majority are older than 50.
  • Its licensed professions enjoy public trust ranking among Gallup’s highest rated though all have declined:
 % 2023‘19-‘23’23 Rank % 2023‘19-‘23’23 Rank
Nurses78-71Pharmacists55-96
Dentists59-2 Psychiatrists36-79
Medical doctors56-95Chiropractors33-810

The Perfect storm

The healthcare workforce is unsteady: while stress and burnout are associated with doctors and nurses primarily, they cut across every workgroup and setting.

Eight fairly recent issues complicate efforts to achieve healthcare workforce stability:

Increased costs of living: 

Consumers are worried about their costs of living: it hits home hardest among young, low-income households including dual eligible seniors for whom gas, food and transportation are increasing faster than their incomes, and rents exceed 50% of their income. The healthcare workforce takes a direct hit: one in five we employ cannot pay their own medical bills.

Slowdown in consolidation: 

The Federal Trade Commission’s new pre-merger notification mandate that went in effect today essentially requires greater pre-merger/acquisition disclosures and a likely slowdown in deals.  Organizations anticipating deals might default to layoffs to strengthen margins while the regulatory consolidation dust settles. Expendables will take a hit.

Uncertainty about Medicaid cuts: 

In the House’ budget reconciliation plan, Medicaid cuts of up to $880 billion/10 years are contemplated. A cut of that magnitude will accelerate closure of more than 400 rural hospitals already at risk and throw the entire Medicaid program into chaos for the 79 million it serves—among them 3 million low-hourly wage earners in the healthcare workforce and at least 2 million in-home unpaid caregivers who can’t afford paid assistance. The impact of Medicaid cuts on the healthcare workforce is potentially catastrophic for their jobs and their health.

Heightened attention to tax exemptions for not-for-profit hospitals: 

Large employers sent this recommendation to Congressional leaders last week as spending cuts were being considered: “Nonprofit hospitals, despite their tax-exempt status, frequently prioritize profits over patient care. Many have deeply questionable arrangements with for-profit entities such as management companies or collections agencies, while others have “joint ventures” with Wall Street hedge funds or other for-profit provider or staffing companies. Nonprofit hospitals often shift the burden of their costs onto taxpayers and the communities they serve by overcharging for health care services, or abusing programs intended to provide access to low-cost care and prescription drugs for low-income patients. By eliminating nonprofit hospital status, resources could be more evenly distributed across the healthcare system, ensuring that hospitals are held accountable for their charitable care both to their communities and the tax laws that govern them.” Pressures on NFP hospitals to lower costs and operate more transparently are gaining momentum in state legislatures and non-healthcare corporate boardrooms. Belt tightening is likely. Layoffs are underway.

Heightened attention to executive compensation in healthcare organizations: 

Executive compensation, especially packages for CEO’s, is a growing focus of shareholder dissent, Congressional investigation, media coverage and employee disgruntlement. Compensation committee deliberations and fair market comparison data will be more publicly accessible to communities, rank and file employees, media, regulators and payers intensifying disparities between “labor” and “management”.

Increased tension between providers and insurers:

Health insurers are now recovering from 2 years of higher utilization and lower profits; hospitals did the same in 2022 and 2023. Neither is out of the woods and both are migrating to tribal warfare based on ownership (not-for-profit vs. investor owned vs. government owned), scale and ambition. Bigger, better-capitalized organizations in their ranks are faring better while many struggle. The workforce is caught in the crossfire.

Increased pressure on private equity-backed employers to exit: 

The private equity market for healthcare services has experienced a slow recovery after 2 disappointing years peppered by follow-on offerings in down rounds. Exit strategies are front and center to PE sponsors; workforce stability and retention is a means to an end to consummate the deal—that’s it.

The AI Yellow Brick Road: 

Last and potentially the most disruptive is the role artificial intelligence will play in redefining healthcare tasks and reorganizing the system’s processes based on large-language models and massive investments in technology. Job insecurity across the entire healthcare workforce is more dependent on geeks and less on licensed pro’s going forward.

These eight combine to make life miserable most days in health human resource management. DOGE will complicate matters more. It’s a concern in every sector of healthcare, and particularly serious in hospitals, medical practices, long-term and home care settings.

‘Modernizing the healthcare workforce’ sounds appealing, but for now, navigating these issues requires full attention. They require Board understanding and creative problem-solving by managers. And they merit a dignified and respectful approach to interactions with workers displaced by these circumstances: they’re not expendables, they’re individuals like you and me.

Citing lax enforcement, senators ramp up scrutiny of nonprofit hospitals’ tax exemptions

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https://www.fiercehealthcare.com/providers/citing-lax-enforcement-senators-ramp-scrutiny-nonprofit-hospitals-tax-exemptions

A bipartisan quartet of influential senators is tapping tax regulators within the U.S. Treasury for detailed information on nonprofit hospitals’ reported charity care and community investments, the latest in legislators’ increasing scrutiny of tax-exempt hospitals’ business practices.

In a pair of letters (PDF) sent Monday, Sens. Elizabeth Warren, D-Massachusetts, Raphael Warnock, D-Georgia, Bill Cassidy, M.D., R-Louisiana, and Chuck Grassley, R-Iowa, wrote they “are alarmed by reports that despite their tax-exempt status, certain nonprofit hospitals may be taking advantage of this overly broad definition of ‘community benefit’ and engaging in practices that are not in the best interest of the patient.”

The missives referenced a bevy of news reports as well as an investigation conducted by Grassley’s office detailing tax-exempt hospitals and health systems’ aggressive debt collection practices.

They also outlined studies from academic and policy groups highlighting that the tax-exempt status of the nation’s nonprofit hospitals collectively was worth about $28 billion in 2020 and how this tally paled in comparison to the charity care most of those hospitals had provided during that same period.  

Such studies have been quickly contested by the hospital lobby, which highlights that charity care is just one component of the broader activities that constitute a nonprofit hospital’s community benefit spending.

However, that ambiguity was squarely in the crosshairs of the legislators who said the long-standing community benefit standard “is arguably insufficient in its current form to guarantee protection and services to the communities hosting these hospitals.”

They cited a 2020 report from the Government Accountability Office that found oversight of nonprofit hospitals’ tax exemptions was “challenging” due to the vague definition of community benefit.

Though the IRS implemented several of the office’s recommendations from the report, “more is required to ensure nonprofit hospitals’ community benefit information is standardized, consistent and easily identifiable.” Included here could be additional updates to Form 990’s Schedule H, where nonprofits detail their community benefits and related activities.

To get a better handle on the agencies’ current oversight, the legislators requested from the IRS and the Treasury’s Tax Exempt & Government Entities Division a laundry list of information related to nonprofits’ tax filings from the last several years, including “a list of the most commonly reported community benefit activities that qualified a nonprofit hospital for tax exemptions in FY2021 and FY2022.”

They also sought lists of the nonprofit hospitals that were flagged, penalized or had their tax-exempt status revoked for violating community benefit standard requirements.

In another letter to the Treasury’s inspector general for tax administration, they asked the auditor to update their upcoming reviews to evaluate existing standards for financial assistance policy and other “practices that reduce unnecessary medical debt from patients who qualify for free or discounted care.”

The lawmakers also asked the inspector general to explore how often nonprofit hospitals bill patients with “gross charges” and to make sure the IRS is doing enough to ensure hospitals are making “’reasonable efforts’ to determine whether individuals are eligible for financial assistance before initiating extraordinary collection actions.”

Both letters from the senators gave the tax regulators 60 days to provide the requested information.

RELATED

As nonprofit hospitals reap big tax breaks, states scrutinize their required charity spending

Allina Health not alone in refusing treatment for indebted patients, Lown Institute says

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https://www.beckershospitalreview.com/finance/allina-health-not-alone-in-refusing-treatment-for-indebted-patients-lown-institute-says.html

Minneapolis-based Allina Health System’s move to turn away patients with outstanding debt is a cost-saving measure is not uncommon, according to the Lown Institute.

Allina provides emergency care to indebted patients, but they can be cut off for other services if they have a certain amount of unpaid debt, The New York Times found. A spokesperson for Allina confirmed to the Times that it cut off patients only if they have at least $1,500 of unpaid debt three separate times. 

A 2022 investigation from KFF Health News found 55 hospitals allow denials of nonemergency care for patients with medical debt, and 22 said the practice is allowed but not current practice. 

Allina’s refusal of care for indebted patients could contribute to medical debt, the Lown Institute said in a June 2 report. Allina is a nonprofit hospital and is required to offer financial assistance to patients who cannot afford services. However, there are no federal regulations regarding how much hospitals have to spend on financial assistance or who can be eligible. When groups refuse care, it can make it harder for patients to get help.

According to the Lown Institute, Allina skirted $266 million in taxes in 2020 from its nonprofit status and spent $57 million on financial assistance and community investment. It could have spent $209 million more to reach its tax exemption value.

Not for Profit Health Systems are Soft Targets: Here’s Why

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Not for Profit Health Systems are Soft Targets: Here’s Why

Large, not-for-profit hospitals/health systems are getting a disproportionate share of unflattering attention these days. Last week was no exception: Here’s a smattering of their coverage:

Approximate Savings from Lowering Indiana Not-for-Profit Commercial Hospital Facility Prices to 260% of Medicare March 20, 2023 https://employersforumindiana.org/media/resources/Savings-from-Lowering-Indiana-Not-for-profit-Commercial-Hospital-Facility-Prices.

Jiang et al “Factors Associated with Hospital Commercial Negotiated Price for Magnetic Resonance Imaging of Brain” JAMA Network Open March 21. 2023;6(3):e233875. doi:10.1001/jamanetworkopen.2023.3875

Not-for-profit benefits top charity care levels for hospitals: report Bond Buyer March 22, 2023 www.bondbuyer.com/news/not-for-profit-benefits-top-charity-care-levels-for-hospitals-report

What’s Behind Losses At Large Nonprofit Health Systems? Health Affairs March 24, 2023 www.healthaffairs.org/content/forefront/s-behind-losses-large-nonprofit-health-systems

Whaley et al What’s Behind Losses At Large Nonprofit Health Systems? Health Affairs March 24, 2023 10.1377/forefront.20230322.44474

A Pa. hospital’s revoked property tax exemption is a ‘warning shot’ to other nonprofits, expert says KYW Radio Philadelphia March 24, 2023 ww.msn.com/en-us/news/us/a-pa-hospital-s-revoked-property-tax-exemption-is-a-warning-shot-to-other-nonprofits-expert-says

These hospitals are ‘not for profit’ but very wealthy — should the state get more of their cash? News Sentinel March 26, 2023 www.news-sentinel.com/news/local-news/2019/09/26/kevin-leininger-these-hospitals-are-not-for-profit-but-very-wealthy-should-the-state-get-more-of-their-cash

These come on the heals of the Medicare Advisory Commission’s (MedPAC) March 2023 Report to Congress advising that all but safety-net hospitals are in reasonably good shape financially (contrary to industry assertions) and increased lawmaker scrutiny of “ill-gotten gains” in healthcare i.e., Moderna’s vaccine windfall, Medicare Advantage overpayments and employer activism about hospital price-gauging in several states.

Like every sector in healthcare, hospitals enter budget battles with good stories to tell about cost-reductions and progress in price transparency compliance. But in the current political and economic environment, large, not-for-profit hospitals and health systems seem to be targets of more adverse coverage than others as illustrated above. Like many NFP institutions in society (higher education, organized religion, government), erosion of trust is palpable. Not-for-profit hospitals and health systems are no exception.

The themes emerging from last week’s coverage are familiar:

  • ‘Not-for-profit hospitals/health systems, do not provide value commensurate with the tax exemptions they get.’
  • ‘Not for profit hospitals & health systems take advantage of their markets and regulations to create strong brands and generate big profits.’.
  • ‘Not for profit hospitals & health systems charge more than investor-owned hospitals: the victims are employers and consumers who pay higher-than-necessary prices for their services.’
  • ‘NFP operators invest in risky ventures: when the capital market slumps, they are ill-prepared to manage. Risky investments, not workforce and supply chain issues, are the root causes of NFP financial stress. They’re misleading the public purposely.’
  • ‘Executives in NFP systems are overpaid and patient collection policies are more aggressive than for-profits. NFP boards are ineffective.’

The stimulants for this negative attention are equally familiar:

  • Proprietary studies by think tanks, trade associations, labor unions and consultancies designed to “prove a point” for/against not-for-profit hospitals/health systems.
  • Government reports about hospital spending, waste, fraud, workforce issues, patient safety, concentration and compliance with transparency rules.
  • Aggressive national/local reporting by journalists inclined to discount NFP messaging.
  • Public opinion polls about declining trust in the system and growing concern about price transparency, affordability and equitable access.
  • Politicians who use soundbites and dog whistles about NFP hospitals to draw attention to themselves.

The cumulative effect of these is confusion, frustration and distrust of not-for-profit hospitals and health systems. Most believe not-for-profit hospitals/health systems do not own the moral high ground they affirm to regulators and their communities (though religiously-affiliated systems have an edge). Most are unaware that more than half of all hospitals (54%) are not-for-profit and distinctions between safety net, rural, DSH, teaching and other forms of NFP ownership are non-specific to their performance.

What’s clear to the majority is that hospitals are expensive and essential. They’re soft targets representing 31.1% of the health system’s total spend ($4.3 trillion in 2021) increasing 4.9% annually in the last decade while inflation and GDP growth were less.

So why are not-for-profit systems bearing the brunt of hospital criticism?

Simply put: many NFP systems act more like Big Business than shepherds of community health. In fact, 4 of the top 10 multi-hospital system operators is investor owned: HCA (184), CHS (84), LifePoint (84), Tenet (65). In addition, 3 others are in the top 50: Ardent (30), UHS (26), Quorum (22). So, corporatization of hospital care using private capital and public markets for growth is firmly entrenched in the sector exposing not-for-profit operators to competition that’s better funded and more nimble.  And, per industry studies, not-for-profits tend to stay in markets longer and operate unprofitable services more frequently than their investor-owned competitors. But does this matter to insurers, community leaders, legislators, employers, hospital employees and physicians? Some but not much.

My take:

There are no easy answers for not-for-profit hospitals/heath systems. The issue is about more than messaging and PR. It’s about more than Medicare reimbursement (7.5% below cost), protecting programs like 340B, keeping tax exemptions and maintaining barriers against physician-owned hospitals. The issue is NOT about operating income vs. investment income: in every business, both are essential and in each, economic cycles impact gains/losses. Each of these is important but only band-aids on an open wound in U.S. healthcare.

Near-term (the next 2 years), opportunities for not-for-profit hospitals involve administrative simplification to reduce costs and improve the efficiencies and effectiveness of the workforce. Clinical documentation using ChatGPT/Bard-like tools can have a massive positive impact—that’s just a start. Advocacy, public education and Board preparedness require bigger investments of time and resources. But that’s true for every hospital, regardless of ownership. These are table stakes to stay afloat.

The longer-term issue for NFPs is bigger:

It’s about defining the future of the U.S. health system in 2030 and beyond—the roles to be played and resources necessary for it to skate to where the puck is going. It’s about defining the role played by private employers and whether they’ll pay 220% more than Medicare pays to keep providers and insurers solvent. It’s about how underserved and unhealthy people are managed. It’s about defining systemness in healthcare and standardizing processes. It’s about defining sources of funding and optimal use of resources. Not-for-profit systems should drive these discussions in the communities they serve and at a national level.

MedPAC’s 17 member Commission will play a vital role, but equally important to this design process are inputs from employers, consumers and thought leaders who bring fresh insight. Until then, not-for-profit health systems will be soft targets for unflattering media because protecting the status quo is paramount to insiders who benefit from its dysfunction. Incrementalism defined as innovation is a recipe for failure.

It’s time to begin a discussion about the future of the U.S. health system—all of it, not just high-profile sectors like not-for-profit hospitals/health systems who are currently its soft target.

New Jersey may be the first state to impose per-bed fees on nonprofit hospitals for municipal services

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https://www.inquirer.com/business/property-taxes-nonprofit-hospitals-new-jersey-fees-atlanticare-inspira-20201223.html

New Jersey lawmakers approved an unusual measure last week that requires many nonprofit hospitals to pay per-bed fees to their local governments, while preserving their increasingly contested property-tax exemptions.

The legislation, which requires hospitals to pay a fee of $3 a day for each licensed bed, is in response to a landmark 2015 New Jersey Tax Court ruling involving Morristown Medical Center that “the operation and function of nonprofit hospitals do not meet the criteria for property tax exemption” under state law. A 300-bed hospital subject to the fee would pay $328,500 a year.

The New Jersey Legislature passed a similar per-bed payment system four years ago, soon after the Morris County tax-court decision, but Gov. Chris Christie vetoed it. In the meantime, at least 40 of New Jersey’s 60 or so nonprofit hospitals have been taken to tax court. Some have reached settlements and agreed to help pay for municipal services.

Murphy’s office has not responded to emails this week requesting comment on whether he intends to sign the legislation.

Cathy Bennett, chief executive of the New Jersey Hospital Association, described the legislation as the result of cooperation by the legislature, municipalities, and the hospital industry.

“I think people realized, we can’t allow this property tax issue to spiral out of control and result in policy that would drain hospital finances, particularly now, where we’ve seen the impact to the bottom line,” Bennett said, referring to the financial hit hospitals have taken from the coronavirus pandemic. “Hospitals are operating with [negative] margins that we haven’t seen since the late ’90s,” she said.

Bennett estimated that per-bed payments, plus an additional $300 per day payments for satellite emergency departments, would total $22 million a year, including $6.9 million in southern New Jersey. Other states have assessments on hospitals, typically to help pay for care for the poor, but Bennett said she didn’t know of any other states with assessments that support municipal services.

The New Jersey League of Municipalities has urged its members to ask Murphy to veto the legislation because the “community service contribution” called for in the legislation amounts in aggregate to far less than it would be if the hospitals were taxed fairly.

The association favors a legislative fix for the problem of modern hospitals not qualifying for property tax exemption, but would prefer a complete reexamination of New Jersey’s tax-exemption law, said Frank Marshall, associate general counsel at the league.

“It hasn’t been modernized in a long time. It needs to be updated to reflect the current business practices of every industry, not just hospitals, but any other nonprofits or not-for-profits that are exempt from property taxes,” he said.

The question of whether nonprofits deserve property-tax exemptions is an increasingly contested area of the law, especially in towns that are hard-pressed to pay for services.

Qualifying as a charity under section 501(c)(3) of the federal tax code — as a religious, educational, or charitable organization, for example — is not enough to automatically receive a local property-tax exemption. A key aspect to federal nonprofit income-tax exemptions is that profits must be put back into the charitable enterprise instead of benefiting private shareholders.

All states allow nonprofits to be eligible for property-tax exemptions, but each sets its own rules for how to qualify.

In New Jersey, a 1984 Supreme Court decision established a three-part test for whether a property should be tax exempt. The owner must be organized exclusively for a tax-exempt purpose, the property must be used for that purpose, and the activities there must not be conducted for profit.

The last prong of that test tripped up Morristown Medical Center, owned by Atlantic Health System, which is based in Morristown. The hospital’s operations were too entangled with for-profit physicians groups and other for-profit subsidiaries of the hospital’s owner to meet the third requirement for property-tax exemption, Tax Court Judge Vito Bianco ruled.

“This commingling of effort and activities with for-profit entities was significant, and a substantial benefit was conferred upon for-profit entities as a result,” he wrote.

That decision, which resulted in a $15 million settlement between Morristown and the medical center to be paid over 10 years through 2025, spurred cases throughout the state.

Among the most significant cases still pending are those between Vineland and Inspira and between Plainsboro Township and Princeton Healthcare System, which the University of Pennsylvania Healthcare System acquired in 2016.

Those cases will be moot if Murphy signs the legislation, which also calls for the formation of a Nonprofit Hospital Community Service Contribution Study Commission.

Hospitals, such as AtlantiCare Regional Medical Center in Galloway Township, that already have a deal in place to help pay for municipal services, will have to pay the greater amount of the new fees or the amounts due under earlier agreements, which will be allowed to run their course.

AtlantiCare’s 2017 agreement with Galloway called for increasing per-bed payments each year through 2022. This year the amount was $274,000. The health system will have to pay more under the new system. Since 2016 AtlantiCare has been in tax litigation with Atlantic City.

It is difficult to calculate the number of beds that would be subject to the fee. The count excludes skilled nursing, psychiatric, sub-acute, and newborn beds, plus an undefined set of “acute-care beds not commissioned for use.”

The legislation carves out the 89-bed Deborah Heart & Lung Center in Browns Mills, Burlington County, from having to pay the per-bed fees. That’s because Deborah meets two requirements, involving patient billing and the value of community benefits that the hospital provides.

First, Deborah does not bill patients, but rather accepts whatever its patients’ insurance companies pay or provides charity care to those who qualify. Second, its community benefit, as calculated on its 990 tax return, amounts to more than the required 12% of expenses. Deborah’s community benefit was close to 18% in 2018, according to its tax return.

Christine Carlson-Glazer, vice president for government relations at Deborah Heart & Lung, said Browns Mills had not sued it in tax court, but Deborah still wanted to preserve its charitable mission. She said Shriners Hospitals for Children and St. Jude Children’s Research Hospital are two others that do not bill patients.

“It’s not a mission that a lot of other places embrace,” Carlson-Glazer said.

New IRS rules target nonprofit hospital exec pay

Posted on by • Posted in American Hospital Association (AHA), Deferred Compensation Plans, Deferred Retirement Bonus, Executive Compensation, Health System, Hospital, Hospital Industry, Internal Revenue Service (IRS), Tax Burden, Tax Exempt Status, Tax-Exempt Status • Leave a comment

https://www.beckershospitalreview.com/compensation-issues/new-irs-rules-target-nonprofit-hospital-exec-pay.html?utm_medium=email

Those distinctive brown signs outside federal buildings in D.C. ...

The Internal Revenue Service has issued guidance that implements a change in the 2017 tax overhaul that imposed a 21 percent excise tax on compensation paid to executives at some nonprofit organizations, according to Bloomberg Tax.

Under the 2017 law, there’s a tax on a nonprofit organization’s five highest-paid employees earning at least $1 million. The tax, paid by the organization, has been in effect since 2018, but the new guidance provides details on how to calculate employee wages and other compensation to determine if the tax applies, according to the report.

Under the proposed rule, any deferred compensation or retirement bonus not vested before the first taxable year beginning after Dec. 31, 2017, is subject to the tax, according to the American Hospital Association. 

The AHA urged Congress to provide an exception for existing contracts or nonqualified deferred compensation plans for tax-exempt healthcare organizations. 

Access the full Bloomberg Tax article here.

 

 

 

 

Why Are Nonprofit Hospitals So Highly Profitable?

Posted on by • Posted in Charity Care, Community Benefit, Executive Compensation, Health Policy, Health System, Hospital, Hospital Industry, Internal Revenue Service (IRS), Market Consolidation, Market Power, Mergers & Acquisitions, Monopoly, Monopoly Behavior, Social Determinants of Health, Tax Exempt Status, Tax-Exempt Status • Leave a comment

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These institutions receive tax exemptions for community benefits that often don’t really exist.

“So, how much money do you guys make if I do that test you’re ordering for me?” This is a question I hear frequently from my patients, and it’s often followed by some variant of, “I thought hospitals were supposed to be nonprofit.”

Patients are understandably confused. They see hospitals consolidating and creating vast medical empires with sophisticated marketing campaigns and sleek digs that resemble luxury hotels. And then there was the headline-grabbing nugget from a Health Affairs study that seven of the 10 most profitable hospitals in America are nonprofit hospitals.

Hospitals fall into three financial categories. Two are easy to understand: There are fully private hospitals that mostly function like any other business, responsible to shareholders and investors. And there are public hospitals, which are owned by state or local governments and have obligations to care for underserved populations. And then there are “private nonprofit” hospitals, which include more than half of our hospitals.

Nearly all of the nation’s most prestigious hospitals are nonprofits. These are the medical meccas that come to mind when we think of the best of American medicine — Mayo Clinic, Cleveland Clinic, Johns Hopkins, Mass General.

The nonprofit label comes from the fact that they are exempt from federal and local taxes in exchange for providing a certain amount of “community benefit.”

Nonprofit hospitals have their origins in the charity hospitals of the early 1900s, but over the last century they’ve gradually shifted from that model. Now their explosive growth has many questioning how we define “nonprofit” and what sort of responsibility these hospitals have to the communities that provide this financial dispensation.

It’s time to rethink the concept of nonprofit hospitals. Tax exemption is a gift provided by the community and should be treated as such. Hospitals’ community benefit should be defined more explicitly in terms of tangible medical benefits for local residents.

It actually isn’t much of a surprise that nonprofit hospitals are often more profitable than for-profit hospitals. If a private business doesn’t have to pay taxes, its expenses will be lower. Additionally, because nonprofit hospitals are defined as charitable institutions, they can benefit from tax-free contributions from donors and tax-free bonds for capital projects, things that for-profit hospitals cannot take advantage of.

The real question surrounding nonprofit hospitals is whether the benefits to the community equal what taxpayers donate to these hospitals in the form of tax-exempt status.

On paper, the average value of community benefits for all nonprofits about equals the value of the tax exemption, but there is tremendous variation among individual hospitals, with many falling short. There is also intense disagreement about how those community benefits are calculated and whether they actually serve the community in question.

Charity medical care is what most people think of when it comes to a community benefit, and before 1969 that was the legal requirement for hospitals to qualify for tax-exempt status. In that year, the tax code was changed to allow for a wide range of expenses to qualify as community benefits. Charitable care became optional and it was left up to the hospitals to decide how to pay back that debt. Hospitals could even declare that accepting Medicaid insurance was a community benefit and write off the difference between the Medicaid payment and their own calculations of cost.

An analysis by Politico found that since the full Affordable Care Act coverage expansion, which brought millions more paying customers into the field, revenue in the top seven nonprofit hospitals (as ranked by U.S. News & World Report) increased by 15 percent, while charity care — the most tangible aspect of community benefit — decreased by 35 percent.

Communities are often conflicted about the nonprofit hospitals in their midst. Many of these institutions are enormous employers — sometimes the largest employer in town — but the economic benefits do not always trickle down to the immediate neighborhoods. It is not unusual to see a stark contrast between these gleaming campuses and the disadvantaged neighborhoods that surround them.

In some communities, nonprofit hospitals are beloved institutions with a history of caring for generations of families. In other communities, the sums of money devoted to lavish expansions, aggressive advertising and eye-popping executive compensation are a source of irritation.

The average chief executive’s package at nonprofit hospitals is worth $3.5 million annually. (According to I.R.S. regulations, “No part of their net earnings is allowed to inure to the benefit of any private shareholder or individual.”) From 2005 to 2015, average chief executive compensation in nonprofit hospitals increased by 93 percent. Over that same period, pediatricians saw a 15 percent salary increase. Nurses got 3 percent.

A number of communities that think nonprofit hospitals take more than they give back have started to sue. The University of Pittsburgh Medical Center fought off one lawsuit from the city’s mayor to revoke its tax-exempt status. Last year it faced another from the Pennsylvania attorney general, alleging that the medical center, valued at $20 billion, did not fulfill “its obligation as a public charity” (the lawsuit was dismissed).

Morristown Hospital in New Jersey lost most of its property-tax exemption because it was found to be behaving as a for-profit institution. The judge in the case wrote that if all nonprofit hospitals operated like this, then “modern nonprofit hospitals are essentially legal fictions.”

It’s important to recognize the extreme variance in hospitals’ financial status. Many nonprofit hospitals, especially in rural areas, struggle mightily; scores of rural hospitals have closed — and hundreds more are teetering — leading to spikes in local death rates. At the other end are hospitals that earn several thousand dollars in profit per patient.

The most profitable nonprofit hospitals tend to be part of huge health care systems. Consolidations are one of the driving forces behind the towering profits, because monopoly hospitals are known to charge more than nonmonopoly hospitals.

Should these highly profitable institutions be exempt from the taxes that pay for local roads, police services, fire protection and 911 services? Should local residents have to pay for the garbage collection for institutions that can afford multimillion-dollar salaries for top executives?

Tax exemption needs to be redefined. Low-impact projects such as community health fairs that function more like marketing shouldn’t be allowed as part of the calculation. Nor should things that primarily benefit the institution, like staff training.

Additionally, hospitals should not be allowed to declare Medicaid “losses” as a community benefit. While it’s true that Medicaid typically pays less than private insurance companies, Medicaid plays a crucial role for private insurance markets by acting as a high-risk pool for patients with severe illness and disability. Hospitals benefit mightily from this taxpayer-funded arrangement. These large medical centers also enthusiastically accept taxpayer money for research, something that burnishes their image and bolsters their rankings. That enthusiasm needs to be mandated to extend toward Medicaid patients and the face value of their insurance.

The I.R.S. states that charitable hospitals “must be organized and operated exclusively for specific tax-exempt purposes.” Thus charitable care should be front and center. Spending on social determinants of health can also be a legitimate community benefit, but the community that is footing the tax break needs to have a forceful say in how this money is spent, rather than leave it solely up to the hospital.

As many policy scholars have noted, tax exemption is a blunt instrument. For struggling hospitals, particularly in communities with a shortage of health care resources, tax exemption can make sense. In medically saturated areas, where profits and executive compensation approach Wall Street levels, tax exemption should raise eyebrows.

If society decides that tax exemption is a worthwhile means to improve health — and it certainly can be — then our regulations need to be far stricter and more explicitly tied to community health. As the United States continues to fall behind its international peers in terms of health outcomes in local communities, there is certainly no lack of opportunity.

 

 

 

What Makes A Non-Profit Hospital?

Posted on by • Posted in Community Benefit, Health Policy, Health System, Hospital, Hospital Industry, Internal Revenue Service (IRS), Tax Exempt Debt, Tax Exempt Status, Tax Status, Tax-Exempt Status • Leave a comment

What Makes A Non-Profit Hospital?

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What are non-profit hospitals and what is the community benefit standard?

Recently, several news outlets including ProPublica, Kaiser Health News, and Wall Street Journal have published stories on non-profit hospitals’ medical debt collection practices and the effects on low income patients. These news stories prompted me to take a closer look at non-profit hospitals, their tax-exempt status, the community benefits they must fulfill to qualify for it, and the impact on care.

This is the first piece of two posts that consider the requirements that non-profit hospitals need to fulfill to qualify for their tax-exempt status and the impact of these standards on non-profit hospitals and the communities they seek to serve.

Has the definition of a non-profit hospital evolved over time?

Short answer: yes.

To date, non-profit hospitals have significantly benefited from their tax-exempt status, saving $24.6 billion in taxes in 2011. Originally, hospitals were granted tax-exempt status because of affiliations with religious institutions and for serving a charitable purpose. It wasn’t necessarily related to medical care. However, in 1956, the Internal Revenue Service (IRS) implemented the charity care standard requiring hospitals to offer uncompensated care to patients unable to pay in order to qualify as a charitable organization under Internal Revenue Code 501c3.

Many believed charity care would no longer be necessary after the implementation of Medicare and Medicaid in 1965. Policymakers assumed the two programs would ensure insurance coverage for most people, obviating the need for a charity care standard. This wasn’t the case, and over the next decade, two events led to the elimination of the charity care standard and the introduction of its successor, the community benefit standard, in 1969.

First, the House of Representatives released a report citing concerns about the execution of the charity care standard and its effectiveness. Second, a hospital that did not provide free or discounted health care mounted a legal challenge. The hospital asserted that, because it had an emergency room open to all community members, it was already providing a charitable service and should qualify for non-profit, or 501c3, status. The courts agreed with the hospital, stating that the provision of an open-access emergency room promoted the health of the community. This fulfilled a charitable purpose according to its legal definition. Ultimately, the IRS agreed with the court’s decision and deemed it necessary to change the charity care standard to accommodate this decision.

Consequently, the IRS issued Ruling 69-545, introducing the community benefit standard. From its implementation and onwards instead of being judged solely on the provision of free or discounted care, a hospital’s 501c3 status would be based on whether it “promoted the health of a broad class of individuals in the community,” including but not limited to just providing free or discounted care.

In 2010, additional requirements were included in the community benefit standard. Non-profit hospitals are now required to perform a community health needs assessment every three years and have both an accessible Financial Assistance Policy and Emergency Medical Care Policy (a charge limit for people who qualify for financial assistance and a billings) and a collections system that determines if individuals are eligible for financial assistance prior to engaging in extraordinary collection actions (applies to all emergency and medically necessary care).

What does non-profit status mean for hospitals?

Short answer: tax-exempt with charity donations required.

Most hospitals in the United States are recognized as charitable organizations, with 78 percent qualifying for 501c3 status. This means they are exempt from most taxes and benefit from tax-deductible charity donations and tax-exempt bond financing but they must meet general Internal Revenue Code requirements, including the community benefit standard aimed at improving the health of the surrounding community.

A variety of activities qualify as community benefits. Some examples are charity care, unreimbursed costs through means-tested programs (Medicaid, Medicare, CHIP, etc.), unreimbursed health professions education, unfunded research, and cash and in-kind contributions for community benefits. Hospitals must submit IRS Form 990 Schedule H annually to demonstrate their community benefit expenditures and maintain their 501c3 designations.

Are non-profit hospitals behaving like their for-profit counterparts?

Short answer: often times, yes.

Seven of the ten most profitable hospitals in the country are non-profits. Many of these exhibit for-profit characteristics such as being part of a larger hospital system, being located in urban areas, and not having a teaching program.

But these aren’t the only features of non-profit hospitals that resemble for-profits. A study conducted by the Kellogg School of Management found that non-profits regularly behaved like for-profits after financial shocks. In response to financial crises, non-profits cut back on unprofitable services to offset losses instead of increasing prices. This is not what we expect; the study authors argue that we should expect them to do the latter — forgoing financial gain by starting with lower prices with room to increase in times of financial stress. That they don’t suggests that non-profits are already maximizing profits, similar to for-profit hospitals.

While it is unusual for non-profit hospitals to experience large financial profits, it does happen. The question is whether these gains are then reinvested into the hospital’s charity care and community health and wellbeing initiatives.

How much of a non-profit hospital’s revenue goes back into care and its community?

Short answer: some.

Herring, et al. found that, on average, 7.6 percent of non-profit hospitals’ 2012 total expenses were community benefit expenditures, 3 percent were unreimbursed Medicaid costs, and about 2 percent were charity care. (These findings are consistent with past studies.)

In some cases, non-profit hospitals receive tax benefits that far outweigh their community benefit investments. For example, in fiscal year 2011-2012, the University of Pennsylvania Medical Center made approximately $1 billion in profits, spent less than $20 million on charity care, and received $200 million in tax benefits. Cases like these have increased public scrutiny on hospitals’ non-profit status and whether current 501c3 requirements go far enough to ensure that hospitals provide sufficient charity care and community benefits.

Non-profit hospitals maintain their tax exempt status through the fulfillment of the community benefits standard. In the next piece we will look at the impact of these standards on the hospitals and the communities they serve.

 

Another reality check on hospital beds

Posted on by • Posted in Conflicts of Interest, Fee for Service Reimbursement, Financial Incentives, Health Policy, Health System, Hospital, Hospital Industry, Tax Exempt Debt, Tax Exempt Status, Tax-Exempt Status, Value-Based Healthcare • Leave a comment

https://www.axios.com/newsletters/axios-vitals-1a6dd9a6-5198-4abf-812f-dbf8dd8e67cb.html

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Hospital beds are not filling up like they used to, but that doesn’t mean hospitals want their beds to be empty, Axios’ Bob Herman reports.

What they’re saying: Even though more patients are being treated in outpatient clinics rather than hospitals, “we’ll still be able to keep our beds pretty full,” Don Scanlon, chief financial officer at Mount Sinai Health System, said this week at an investor lunch held at Goldman Sachs headquarters in New York City.

Details: Mount Sinai, a not-for-profit hospital system based in Manhattan with $5 billion in annual revenue, is preparing to sell $475 million in bonds, and was making its pitch to bondholders about why buying that debt would be a good deal.

Between the lines: Mount Sinai’s discharges have trended down, but the hospital doesn’t want to lose the bigger dollars tied to inpatient stays. And the system wants to reassure municipal investors they will see returns.

  • As a result, Mount Sinai has invested more money in outpatient centers in other parts of New York that serve as “feeders” for its main city hospitals, Scanlon said.

The bottom line: Mount Sinai, Trinity Health, Banner Health and a host of other hospital systems have openly touted plans to boost or retain admissions even though they say they want to keep people out of the hospital. This is a fundamental disconnect between “value-based care” and the system’s financial incentives.

Go deeper: How banks and law firms make millions from hospital debt