Editorial: Our not-so-not-for-profit hospitals

April 1, 2008

Are 'Not-for-Profits' providing a reasonable level of defined community benefits?

Key Points

A growing chorus of critics, from union and consumer activists to Republican members of Congress, is questioning just what it means to be a not-for-profit hospital. Recently, for instance, the Beth Israel Deaconess Medical Center in Boston was accused by the nearly 2 million-member Service Employees International Union for including bad debts in its tally of charity care.1 Charity care is generally defined as charges that are dropped or discounted by a hospital because a patient has neither medical insurance nor the financial resources to pay. In contrast, bad debts are considered revenues not collected despite earnest attempts to do so, including referral to collection agencies. Only patients initially deemed financially capable of paying and/or those having adequate insurance coverage can generate bad debts. One is true charity; the other is the price of doing business.

Critics of not-for-profit hospitals are concerned about more than just the confounding or misrepresentation of bad debts as charity care. Other common complaints include the purchase of land and buildings that, while no longer subject to property tax, are used for profitable enterprises such as parking garages, doctors' offices, and even health clubs. There are many examples of poor patients denied access to expensive procedures such as organ and bone marrow transplants or non-emergent though much needed surgery. Aggressive collection tactics, including liens against property, have also come under scrutiny. However, the most resonant argument is the failure of many not-for-profit hospitals to provide a reasonable level of defined community benefits.

Not-for-profit hospitals receive up to $20 billion in tax exemptions from federal, state, and local governments yet a recent Congressional Budget Office (CBO) report found they provided only slightly more uncompensated care than for-profit hospitals.2 On average, not-for-profit hospitals use about 4.7% of their operating expenses for uncompensated care. However, more than half provide far less. In fact between 1995 and 1999, 132 hospitals provided NO charity care whatsoever and 307 provided less than 1%.3 To begin to assess the magnitude of the problem, the IRS is now asking not-for-profit hospitals to provide details about the specific community benefits they provide, as part of their annual 990 tax return form filing (the form used by all US nonprofit organizations).

COGNIZANT OF THIS increased scrutiny, many hospitals have long resorted to elaborate sleight of hand and accounting tricks to hide profits.4 This permits them to demand higher insurance payments and pressure various government agencies to support their funding requests and plead poverty to potential donors. Tricks include diverting surpluses into expensive equipment purchases and robust construction projects. This practice has the added benefit of allowing large depreciation expenses that further conceal profit without affecting cash flow. Excess cash is also sequestered in "Board Designated Funds" that often exceed $50 to $100 million. These funds can languish in money markets and other short-term investment instruments earning interest but not appearing as operating income.

Lest I sound like some wild-eyed consumer activist, some of these practices are justified, after all no margin-no mission. Building financial reserves allows for continued operations during economic downturns and supports the purchase of needed medical equipment. Moreover, many not-for-profit hospitals, particularly academic medical centers, do divert large sums of money to support neighborhood clinics, population screening, medical research, and the training of medical students, residents, and fellows. However, these accounting practices also contribute to our out of control health-care inflation rate.