Hospitals face off with the tax man

by Kristi Park, July 25th, 2007, 6:41 am

Ben Franklin maintained that death and taxes are life’s only certainties, but he’d have to revise that thesis to take not-for-profit hospitals into account. They’ve rather successfully avoided half of the axiom for years, escaping federal and state taxes in return for reinvestment in their communities, often in the form of free medical care for the poor.

The IRS (no doubt a fan of Franklin’s truism) has sounded a warning bell for the industry, issuing a report last week questioning whether communities are getting their money’s worth out of that deal. The report will likely buoy the efforts of Senator Chuck Grassley, an Iowa Republican, to strengthen oversight on not-for-profits and the amount of charity care they provide.

Grassley and the IRS are joined by state regulators and local governments, who have also increased scrutiny in recent years. Illinois regulators actually revoked the property tax exemptions of Provena Health and Carle Foundation Hospital, claiming that the hospitals didn’t provide enough charity care. (Provena regained its tax-exempt status on appeal just last Friday.)

But the questions remain: Why aren’t not-for-profit hospitals spending more on charity care? And how much is enough to justify their drain on tax coffers?

Maggie Mahar at the Health Care Blog provides excellent context on this issue, pointing to some industry realities that have led to the current state of affairs. Among other things, she points to the role location plays in determining demand for charity care and the competitive pressures that have led not-for-profits to invest in high-margin services like bariatric surgery. She also reminds us that charity care is not the only way hospitals reinvest in their communities.

Her conclusion? Not-for-profit hospitals should be held accountable to their charitable mission, but audits should take local circumstances into account. Sounds reasonable to me, though it remains to be seen how that balance can be struck. In the meantime, not-for-profits should start getting their shoeboxes full of receipts ready for the inevitable audits to come.