Are Non-Profit Hospital Tax Exemptions Unfair to Taxpayers?

News Type: 

News Article

July 9, 2010

Issue Areas: 

Cost, Delivery System Reforms, Financing, Simplified Administration, Workforce Reforms / Human Capital

Non-profit hospitals are being asked to address fundamental questions as to why they should be treated differently than for-profit entities.  While many charitable hospitals and clinics – especially those with religious affiliations–have long served the poor and uninsured, the distinction between some non-profit and for-profit organizations is considerably murkier.

The Patient Protection and Affordable Care Act (ACA) creates section 504(r) of the Internal Revenue Code which adds new reporting requirements for charitable hospitals.  The new 504(r) rule requires non-profit hospitals to:

•          have a community needs assessment every three years and to implement a strategy to respond to the identified needs;

•          clearly define eligibility criteria for patients in need of assistance;

•          develop and publicize a financial assistance policy with free or reduced rates to eligible, needy patients and to provide emergency care to all without discrimination;

•          limit the amount those eligible are charged for emergency or medically necessary care; and

•          refrain from engagement in extraordinary collection actions before determining whether the patient is eligible for financial assistance.

This rule represents the beginning of a more intensive challenge of the tax exempt status of many hospitals as it requires non-profit tax exempt hospitals to justify their continued existence. 

However, the challenge is not surprising in the light of some recent compensation data based upon Form 990 IRS fillings.  For example, CEOs, at non-profit hospitals California, received an average compensation of $732,000 in 2007 and 2008; sixteen executives made over $1 million dollars per annum. Furthermore, in eleven California tax-exempt hospitals, which received between $12 and $20 billion worth of federal and state tax exemptions, CEOs, alone, received more compensation than the hospital spent on identified charitable care.

A similar analysis, showing that some non-profit hospital CEOs in New Hampshire took home over a million dollars per year, prompted New Hampshire Attorney General Michael Delaney to investigate the state’s non-profit hospital CEO compensation.