Category Archives: Tax Exempt Status

Nonprofit hospitals lifted by $28B in tax exemptions: KFF

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https://www.beckershospitalreview.com/finance/nonprofit-hospitals-lifted-by-28b-in-tax-exemptions-kff.html?origin=BHRE&utm_source=BHRE&utm_medium=email&utm_content=newsletter&oly_enc_id=2893H2397267F7G

Tax exemptions for nonprofit hospitals amounted to $27.6 billion in value for 2020, according to new data from the Kaiser Family Foundation. 

Federal tax exemptions in 2020 made up $14.5 billion and state and local tax-exemptions amounted to $13.2 billion. Combined, the $27.6 billion represents 43 percent of net income earned by nonprofit hospitals in 2020, the foundation found.

Nonprofit hospitals may see renewed or heightened scrutiny of their tax-exempt status due in part to how much the value of tax-exemption has grown in recent years. The foundation’s analysis shows the value of tax exemption grew from about $20 billion in 2011 to about $27.6 billion in 2020 — a 41 percent increase.

“The rising value of tax exemption means that federal, state, and local governments have been forgoing increasing amounts of revenue over time to provide tax benefits to nonprofit hospitals, crowding out other uses of those funds,” KFF analysts wrote. “This has raised questions about whether nonprofit facilities provide sufficient benefit to their communities to justify this tax benefit.”

The $27.6 billion in estimated value of tax exemption exceeded nonprofit hospitals’ total estimated charity care costs of $16 billion in 2020, although KFF points out that charity care makes up one portion of nonprofit hospitals’ community benefits.

2020 was a standout year with the largest single-year increase — $4 billion — to the value of nonprofit hospitals’ tax-exemption. KFF analysts note that while COVID-19 caused disruptions that lowered net income from patient care, government relief funds and increased charitable contributions and investment income “more than offset those losses” and increased net income increased the value of not having to pay federal and state income taxes.  

“Even when setting aside the strong financial performance of nonprofit hospitals in 2020 as a potential outlier, total net income among nonprofit facilities increased from $19.4 billion in 2011 to $47.0 billion in 2019, a 143 percent increase, before jumping to $64.5 billion in 2020,” the analysts wrote. “Although we are not able to directly observe the value of the real estate owned by hospitals, the estimated value of exemption from local property taxes — which is based on our analysis of property taxes paid by for-profit hospitals — increased by 29 percent from 2011 to 2019. Finally, the supply expenses in our analysis increased by 44 percent and charitable contributions increased by 49 percent from 2011 to 2019.”

Melinda Hatton, general counsel for the the American Hospital Association, shared the following statement with Becker’s in response to the KFF analysis: 

“A more comprehensive report by the international firm EY has consistently found that the value of hospitals’ federal tax exemption was far outstripped by the community benefits provided. In the most recent analysis, the value was 9 to 1: for every one dollar in tax exemption hospitals provided nine dollars of community benefit. 

“A narrow reading of community benefit limited to financial assistance misses the important work hospitals do to close the pervasive gaps between federal reimbursements for care and the actual cost of care as well as the many other benefits hospitals provide directly to their communities. Whether it is public health activities, such as clinics and testing, training for the next generation of caregivers or efforts to prevent illness, including wellness education or more hand-on efforts to improve living conditions, hospitals continually give back to the communities they serve.”

Large nonprofit health systems in the spotlight again for not providing enough charity care

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https://mailchi.mp/ff342c47fa9e/the-weekly-gist-july-22-13699925?e=d1e747d2d8

A recent Wall Street Journal analysis, published this week, provides further evidence that large, nonprofit health systems often offer less charity care than their for-profit peers. It found that, on average, nonprofit systems spent 2.3 percent of their net patient revenue on financial aid for patients, whereas for-profit hospitals spent 3.4 percent.

The American Hospital Association criticized the analysis, arguing that it doesn’t fully capture the broader community benefits that nonprofit hospitals provide. Earlier this year the Lown Institute, a Boston-based think tank, also found that most nonprofit hospitals invest less in their communities and spend less on charity care than the amount they receive from tax exemptions.

The Gist: The issue of whether hospital systems should continue to enjoy tax-exempt status is a perennial stalking horse in the health policy community. The topic often gets conflated with whether nonprofit systems are truly “nonprofit”, since many larger systems make robust profits. 

There’s no question that nonprofit systems enjoy a huge economic advantage from not being subject to taxation, in return for which we should expect them to provide “community benefit” at a level commensurate with the status.

The difficulty is in defining and measuring community benefit— for example, should serving Medicaid patients count? Is it fair to count discounts for the uninsured as “charity care”, if we know prices are artificially inflated in the first place? These are thorny questions with no obvious answers, but ones that would benefit from clearer guidance and more transparency from policymakers.

Questions resurface about nonprofit hospitals’ tax-exempt status

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https://mailchi.mp/df8b77a765df/the-weekly-gist-may-6-2022?e=d1e747d2d8

A report from The Lown Institute, a Boston-based think tank, finds that many health systems—227 of the 275 evaluated—spend less on providing “community benefit” than the value of their tax exemptions. The American Hospital Association (AHA) criticized the report’s methodology, claiming it “cherry-picks categories of community investment.” This report builds on previous analyses that have found that, taken together, nonprofit hospitals spend less on charity care than government or for-profit hospitals.      

The Gist: Policymakers and academics, prompted by massive capital projects, high executive salaries, and—especially—aggressive pricing and billing strategies, are increasingly questioning whether nonprofit health systems provide sufficient community benefit to retain their tax-exempt status. A recent piece in Health Affairs suggests updating the community benefit standard, which the Internal Revenue Service (IRS) uses to evaluate nonprofit status, to focus on social determinants of health and measurable health outcomes. 

We’d expect tougher scrutiny on this topic in the future, especially if state budgets come under pressure from a deterioration in the broader economy.

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

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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?

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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?

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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

 

WHAT TO DO WHEN CONVERTING A HOSPITAL FROM NONPROFIT TO INVESTOR-OWNED

Posted on by • Posted in Charity Care, Culture, For-Profit, Governance, Health Policy, Health System, Hospital, Hospital Industry, Non-Profit Healthcare Industry, Tax Exempt Status, Tax Incentives, Tax Status • Leave a comment

https://www.healthleadersmedia.com/strategy/what-do-when-converting-hospital-nonprofit-investor-owned

While perhaps not as controversial as it once was, the ‘conversion’ of a nonprofit hospital to a for-profit venture can raise questions and spark unhelpful rumors.

KEY TAKEAWAYS

There may be an opportunity to highlight increased revenues for the benefit of local government, since investor-owned hospitals pay taxes.

Remember: Every hospital, regardless of its tax status, must bring in more dollars than it spends in order to be financially healthy and reinvest.

In most communities, the conversion of a hospital from a not-for-profit to an investor-owned enterprise no longer stirs the heated debate that it did decades ago. Instead, you’re much more likely today to see not-for-profit and investor-owned hospital organizations working in partnership.

Renowned not-for-profit health systems such as Duke Health and the Cleveland Clinic have formed strong affiliations with investor-owned hospital companies. In these and other partnerships, not-for-profits and investor-owned organizations are working together to strengthen hospitals, invest in communities, and serve patients.

In fact, the issues facing investor-owned hospital systems during a partnership are the same as those faced by not-for-profit health systems during a partnership discussion: Local control and governance, cultural compatibility, charity care support, and commitment to local investment are leading hot buttons for both.

Still, the “conversion” of a not-for-profit to an investor-owned organization can represent a change that can raise questions and ignite unhelpful rumors.

To help you be prepared, start by answering these basic questions: What’s the difference? How are not-for-profit and for-profit (investor-owned) hospitals different from one another?

  • Taxes: First, a (very) broad definition: “Not-for-profit” and “for profit” are tax-related designations. A not-for-profit hospital does not pay certain taxes, including those on property used for care, income, and sales. How- ever, it usually does pay payroll and other federal employee taxes. A for- profit hospital pays property, sales, and income taxes as well as payroll taxes. Not-for-profits sometimes make payments in lieu of taxes to help offset the costs of providing important community services, such as police and fire coverage.
  • Capital: Not-for-profit and investor-owned hospitals are also differentiated by where they get capital to invest in their facilities for infrastructure improvements, new equipment, staff, and the like. Not-for-profit hospitals usually go to the bond market for capital. Investor-owned hospitals go to the public stock market, the bond market, or investment groups for capital.
  • Analysts: Now for a word about financial ratings. Both types of organizations have outsiders judging the hospital’s financial performance. To help investors monitor their portfolios and make buying and selling decisions, not-for-profits are graded by credit rating agencies, such as Moody’s Investors Services and Standard & Poor’s. Publicly traded, investor-owned hospital stocks are watched by analysts and valued daily in stock exchanges.
  • Ownership: Who “owns” the hospital after such a sale is an important question and can reflect a community’s concerns about having a future voice in the care provided at its hospital. The answer can be complicated and inconsistent from hospital to hospital and community to community.

Here’s an overview: Independent, not-for-profit hospitals are, in a sense, owned by the communities they serve. The boards are usually comprised of local leaders and physicians. Excess revenues—profits—are fully reinvested into the community’s care after debt payments, payroll, and other expenses. Hospitals that join a regional or national not-for-profit health system, however, may or may not have a local board with a say in the direction of the facility and may or may not share their profits with the system. (In fact, if your local hospital is in financial trouble, the money flows into your hospital, not out of it!)

Investor-owned hospitals are, as you might guess by the name, owned by investors, who can be private individuals or stockholders. Investors traditionally benefit as the value of the company’s hospitals increases over time, through effective operations and local investments, and as the company overall grows by adding more hospitals.

Adding to this complexity is the trend for hospitals to pursue joint venture partnerships where ownership is shared by two or more organizations, including the “seller.” These partnerships call for strong and trusting relationships by every party. Communications is key to success.

Familiarize yourselves with these terms and issues as you move through a partnership. Be prepared for some myth busting.

That’s where the fundamental structural differences end. The driving forces of both organizations, however, are precisely the same:

  • No matter your tax status, every hospital must take in more dollars than it spends to be financially healthy and to reinvest in the care it provides.
  • Every hospital must offer quality care, provide current medical equipment and facilities, and support a trained staff to attract (and keep) patients  and serve the needs of physicians, payers, and others.

Now, consider some specific questions you may hear related to the structure of a not-for-profit to investor-owned conversion.

WHAT HAPPENS TO THE PROCEEDS OF THE SALE?

When there are funds left over from a sale, they are often referred to as the proceeds. These proceeds exist once the hospital’s debt and any other obligations (e.g., a pension fund) have been paid.

The answer as to what happens to those dollars depends on the ownership structure of the selling organization and the terms of the transaction. Here are a few scenarios:

  • The sale of a stand-alone, not-for-profit community hospital to an investor-owned company may lead to the creation of a community foundation. The creation of the foundation—including its board and mission—may be directed by your state attorney general’s office, and the proceeds from the sale will fund it.
  • When two not-for-profits merge, it is rare that there are proceeds. Instead, the common practice is for all assets from both organizations to combine for the good of the new system.
  • From the sale of a hospital owned by a religious organization, the remaining proceeds will likely return to that order or denomination.
  • When a government-owned hospital is sold, money left over may return to the city’s or county’s coffers, which may deposit it into the government’s general operating fund or create a new organization for meeting the charitable healthcare needs of the community.

WILL CHARITY CARE CONTINUE AT ITS CURRENT LEVEL?

This is really a question of community commitment and may be an indicator of how much the community-based culture is or is not going to change under the new ownership. In most cases, a commitment to either a specific level of charity care or a guarantee to continue the hospital’s existing charitable mission and policy is written into the deal documents. Expect the question and know the answer.

HOW MUCH MONEY IN LOCAL TAXES WILL THE NEW HOSPITAL OWNER PAY?

An investor-owned hospital pays taxes that benefit local government. This question is an opportunity to highlight the added contribution as a distinct benefit of investor-owned partnerships.

In many cases, the fire department, police force, schools, parks, and other community assets will benefit on an annual basis from an investor-owned partner paying state and local property and sales taxes.

One cautionary note: In some cases, new hospital owners may seek appropriate tax incentives when entering a new community and investing in a hospital. Be sure you understand the local government strategic thinking before you answer the tax question.

 

 

 

 

Bruising labor battles put Kaiser Permanente’s reputation on the line

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Bruising labor battles put Kaiser Permanente’s reputation on the line

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The ongoing labor battles have undermined the health giant’s once-golden reputation as a model of cost-effective care that caters to satisfied patients — which it calls “members” — and is exposing it to new scrutiny from politicians and health policy analysts.

Kaiser Permanente, which just narrowly averted one massive strike, is facing another one Monday.

The ongoing labor battles have undermined the health giant’s once-golden reputation as a model of cost-effective care that caters to satisfied patients — which it calls “members” — and is exposing it to new scrutiny from politicians and health policy analysts.

As the labor disputes have played out loudly, ricocheting off the bargaining table and into the public realm, some critics believe that the nonprofit health system is becoming more like its for-profit counterparts and is no longer living up to its foundational ideals.

Compensation for CEO Bernard Tyson topped $16 million in 2017, making him the highest-paid nonprofit health system executive in the nation. The organization also is building a $900 million flagship headquarters in Oakland. And it bid up to $295 million to become the Golden State Warriors’ official health care provider, the San Francisco Chronicle reported. The deal gave the health system naming rights for the shopping and restaurant complex surrounding the team’s new arena in San Francisco, which it has dubbed “Thrive City.”

The organization reported $2.5 billion in net income in 2018 and its health plan sits on about $37.6 billion in reserves.

Against that backdrop of wealth, more than 80,000 employees were poised to strike last month over salaries, retirement benefits and concerns over outsourcing and subcontracting. Nearly 4,000 members of its mental health staff in California are threatening to walk out Monday over the long wait times their patients face for appointments.

“Kaiser’s primary mission, based on their nonprofit status, is to serve a charitable mission,” said Ge Bai, associate professor of accounting and health policy at Johns Hopkins University. “The question is, do they need such an excessive, fancy flagship space? Or should they save money to help the poor and increase employee salaries?”

Lawmakers in California, Kaiser Permanente’s home state, recently targeted it with a new financial transparency law aimed at determining why its premiums continue to increase.

There’s a growing suspicion “that these nonprofit hospitals are not here purely for charitable missions, but instead are working to expand market share,” Bai said.

The scrutiny marks a disorienting role-reversal for Kaiser, an integrated system that acts as both health insurer and medical provider, serving 12.3 million patients and operating 39 hospitals across eight states and the District of Columbia. The bulk of its presence is in California. (Kaiser Health News, which produces California Healthline, is not affiliated with Kaiser Permanente.)

Many health systems have tried to imitate its model for delivering affordable health care, which features teams of salaried doctors and health professionals who work together closely, and charges few if any extraneous patient fees. It emphasizes caring and community with slogans like “Health isn’t an industry. It’s a cause,” and “We’re all in this together. And together, we thrive.”

Praised by President Barack Obama for its efficiency and high-quality care, the health maintenance organization has tried to set itself apart from its profit-hungry, fee-for-service counterparts.

Now, its current practices — financial and medical — are getting a more critical look.

As a nonprofit, Kaiser doesn’t have to pay local property and sales taxes, state income taxes and federal corporate taxes, in exchange for providing “charity care and community benefits” — although the federal government doesn’t specify how much.

As a percentage of its total spending, Kaiser Permanente’s charity care spending has decreased from 1.29% in 2012 to 0.8% in 2017. Other hospitals in California have exhibited a similar decrease, saying there are fewer uninsured patients who need help since the Affordable Care Act expanded insurance coverage.

CEO Tyson told California Healthline that he limits operating income to about 2% of revenue, which pays for things like capital improvements, community benefit programs and “the running of the company.”

“The idea we’re trying to maximize profit is a false premise,” he said.

The organization is different from many other health systems because of its integrated model, so comparisons are not perfect, but its operating margins were smaller and more stable than other large nonprofit hospital groups in California. AdventHealth’s operating margin was 7.15% in 2018, while Dignity Health had losses in 2016 and 2017.

Tyson said that executive compensation is a “hotspot” for any company in a labor dispute. “In no way would I try to justify it or argue against it,” he said of his salary. In addition to his generous compensation, the health plan paid 35 other executives more than $1 million each in 2017, according to its tax filings.

Even its board members are well-compensated. In 2017, 13 directors each received between $129,000 and $273,000 for what its tax filings say is five to 10 hours of work a week.

And that $37.6 billion in reserves? It’s about 17 times more than the health plan is required by the state to maintain, according to the California Department of Managed Health Care.

Kaiser Permanente said it doesn’t consider its reserves excessive because state regulations don’t account for its integrated model. These reserves represent the value of its hospitals and hundreds of medical offices in California, plus the information technology they rely on, it said.

Kaiser Permanente said its new headquarters will save at least $60 million a year in operating costs because it will bring all of its Oakland staffers under one roof. It justified the partnership with the Warriors by noting it spans 20 years and includes a community gathering space that will provide health services for both members and the public.

Kaiser has a right to defend its spending, but “it’s hard to imagine a nearly $300 million sponsorship being justifiable,” said Michael Rozier, an assistant professor at St. Louis University who studies nonprofit hospitals.

The Service Employees International Union-United Healthcare Workers West was about to strike in October before reaching an agreement with Kaiser Permanente.

Democratic presidential candidates Kamala Harris, Bernie Sanders, Elizabeth Warren and Pete Buttigieg, as well as 132 elected California officials, supported the cause.

California legislators this year adopted a bill sponsored by SEIU California that will require the health system to report its financial data to the state by facility, as opposed to reporting aggregated data from its Northern and Southern California regions, as it currently does. This data must include expenses, revenues by payer and the reasons for premium increases.

Other hospitals already report financial data this way, but the California legislature granted Kaiser Permanente an exemption when reporting began in the 1970s because it is an integrated system. This created a financial “black hole” said state Sen. Richard Pan (D-Sacramento), the bill’s author.

“They’re the biggest game in town,” said Anthony Wright, executive director of the consumer group Health Access California. “With great power comes great responsibility and a need for transparency.”

Patient care, too, is under scrutiny.

California’s Department of Managed Health Care fined the organization $4 million over mental health wait times in 2013, and in 2017 hammered out an agreement with it to hire an outside consultant to help improve access to care. The department said Kaiser Permanente has so far met all the requirements of the settlement.

But according to the National Union of Healthcare Workers, which is planning Monday’s walkout, wait times have just gotten worse.

Tyson said mental health care delivery is a national issue — “not unique to Kaiser Permanente.” He said the system is actively hiring more staff, contracting with outside providers and looking into using technology to broaden access to treatment.

At a mid-October union rally in Oakland, therapists said the health system’s billions in profits should allow it to hire more than one mental health clinician for every 3,000 members, which the union says is the current ratio.

Ann Rivello, 50, who has worked periodically at Kaiser Permanente Redwood City Medical Center since 2000, said therapists are so busy they struggle to take bathroom breaks and patients wait about two months between appointments for individual therapy.

“Just take $100 million that they’re putting into the new ‘Thrive City’ over there with the Warriors,” she said. “Why can’t they just give it to mental health?”