Texas Tax-Exempt Hospitals & Charity Care: Surprisingly Progressive

In 1985 -- one year before Congress added EMTALA to Medicare's Conditions of Participation -- Texas became the first state in the country to enact a prohibition against patient-dumping, the practice of for-profit hospitals to transfer unfunded emergency patients to local public hospitals. See Tex. Health & Safety Code § 311.022. When a patient needs emergency medical treatment, the consequences of transfer-related delays could be dire, including death. See this 1985 N.Y. Times story:

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This isn't the only progressive healthcare law in Texas. For decades now, we have also required nonprofit hospitals to provide a certain minimum amount of charity care, both to maintain its nonprofit status (Tex. Health & Safety Code, ch. 311(D)) and to qualify for tax-exempt status (Tex. Tax Code § 11.1801). If a nonprofit hospital meets any one of three measures of required charity care, it gets its exemption:

(A)  charity care and government-sponsored indigent health care (e.g., Medicaid] are provided at a level which is reasonable in relation to the community needs, as determined through the community needs assessment, the available resources of the hospital or hospital system, and the tax-exempt benefits received by the hospital or hospital system; 

(B)  charity care and government-sponsored indigent health care are provided in an amount equal to at least 100 percent of the hospital's or hospital system's tax-exempt benefits, excluding federal income tax;  or 

(C)  charity care and community benefits are provided in a combined amount equal to at least five percent of the hospital's or hospital system's net patient revenue, provided that charity care and government-sponsored indigent health care are provided in an amount equal to at least four percent of net patient revenue. 

The statutes aren't perfect. They are written so that, with enough uncompensated care provided to Medicaid patients, a hospital (in theory) could meet any of the three standards with no charity care whatsoever. In addition,  with careful planning most nonprofit community hospitals can meet one of these standards, and both statutes provide for fairly generous exceptions to the three measures. For example, a recent study concluded that nonprofit hospitals in Texas provide charity care at a level approximately equal to 60% of the value of their tax exemption. Part of the problem is the extremely limited enforcement procedures and budget. And the root of the entire problem is that very few health systems have the level of excess income to do more than put a dent in their community's need for charity care. Medicaid meets some of that need, but most state Medicaid programs are underfunded.

Tax-Exempt Hospitals & Charity Care: A Mixed Bag

Health Affairs just published (and re-published) a few articles on this topic. Their titles pretty much tell the whole story (but here are links so you can read them yourself):

• US Nonprofit Hospitals Have Widely Varying Criteria To Decide Who Qualifies For Free And Discounted Charity Care, Luke Messac et al. (current issue)
• Nonprofit Hospitals: Profits And Cash Reserves Grow, Charity Care Does Not, Derek Jenkins and Vivian Ho (June 2023)
• Analysis Suggests Government And Nonprofit Hospitals’ Charity Care Is Not Aligned With Their Favorable Tax Treatment, Ge Bai et al. (April 2021)
• In California, Not-For-Profit Hospitals Spent More Operating Expenses On Charity Care Than For-Profit Hospitals Spent, Erica Valdovinos et al. (August 2015)

Although some commentators insist that the provision of charity care is a requirement for obtaining and maintaining federal tax-exempt status, I think that's a serious misreading of § 501(r) of the Internal Revenue Code, which was added to the Code by the Affordable Care Act in 2010. Yes, the Code now requires tax-exempt hospitals to formulate, adopt, and widely publicize a financial assistance policy ("FAP"). But the minimum requirements for the FAP merely include the following: "Eligibility criteria for financial assistance, and whether such assistance includes free or discounted care" (emphasis added). 

1. It is at technically correct that an FAP may not provide for free or discounted care. A wise hospital administrator should probably avoid this option, but it is available. Charity care is still an audit item, even if it is not required, and it's an important part of a hospital's connection to the community it serves.
2. The FAP's eligibility criteria my be written in such a manner that little or no financial assistance is actually provided. Failure to meet the community need for health care requires an explanation, but it does not appear to be a basis for the revocation of tax-exempt status.
3. Discounted care alone would also satisfy the requirements of the FAP. So, presumably, would be a low- or no-interest loan program. Again, § 501(r) does not require the provision of any level of charity care; prudence does, but not the IRC. 
4. The IRS's 63-page final rule to implement the ACA's Community Health Needs Assessment mention charity care in exactly one paragraph of the rule's preamble, and it's in the discussion of the administrative burden on hospitals that have to implement the final rule's requirements. 

None of this is to say that the governing legal standard for federal tax-exempt status ("community benefit") doesn't include charity care. It does; it's just not required. The requisite level of "community benefit" can be satisfied without it, as long as other forms of community benefit (education, training, research, etc.) are deemed to be adequate. 

Many if not most communities in this country have some level of need for charity care. Section 501(r) requires that the level of need be documented along with an exempt hospital's efforts to meet that need. Unfortunately, reporting does not mean the same as providing. Maybe someday it will, but not yet.

Mark Hall on HCA's Acquisition of Tax-Exempt Health System

Wake Forest law professor Mark Hall has released the latest chapter in his exhaustive preliminary report on the 2019 acquisition of Asheville, North Carolina's tax-exempt Mission Health System. As he writes in this new chapter: "As a result, Mission’s flagship facility became the fifth largest for-profit hospital in the country. Prior to HCA’s purchase, Mission had been operated as a nonprofit “charitable” organization ever since its founding in 1885." Prof. Hall's goal is to describe in as much detail as possible the decision-making process that led to the acquisition, how Mission Health performed before the acquisition, and how the system has performed over the next 5 years. (McKenzie Wicker wrote a comprehensive piece for the Asheville Citizen Times in 2020. Mission Health has been a major news story for the five years since the acquisition. See also NBC News, Nov. 13, 2023 and related stories.)

 

The hospital world is divided into three types of entity: public hospitals, private for-profit hospitals, and private nonprofit (and almost always tax-exempt) hospitals. For-profits are expected to generate net revenues that may be put to various uses but are also expected to be distributed to investors (increased share values, dividends, etc.). Nonprofits are also expected to generate net revenues, but are barred from benefitting private interests by state and federal laws (including § 501(c)(3) of the Internal Revenue Code, which is applicable to most nonprofit hospitals). A major question that garners the attention of state courts and legislatures as well as members of Congress from time to time is whether the tax subsidies that flow to tax-exempt hospitals are justified by a corresponding benefit to the public (principally but not exclusively improved access to care, higher quality of care, lower prices for that care, medical education, medical research, and charity care). Across the country, the answer appears to be mixed: sometimes yes, sometimes no.

These three categories are not impermeable spheres. Various combinations are permitted and mostly take the form of joint ventures, mergers, or acquisitions. These different arrangements raise all sorts of legal and public-policy issues. To perform any sort of useful analysis, however, we need facts. 

With mergers and joint ventures, policy-makers tend to be most concerned with making sure the nonprofit/tax-exempt entity doesn't become a profit-making (and profit-distributing) arm of its for-profit partner. 

With outright acquisitions, the issues are different because the acquired tax-exempt entity will be operated as a for-profit business. Prof. Hall is analyzing each one in a separate release. As described by the Nonprofit Law Blog (as of May 30, 2024), the entries so far are these:

• Mission Hospital’s Financial Performance Under HCA. Working Draft (2024).
by Professor Mark Hall
• Mission Hospital’s Quality Ratings Following HCA’s Acquisition. Working Draft (2024).
by Professor Mark Hall
• Mission Hospital Charity Care Following HCA’s Acquisition. Working Draft (2024).
by Professor Mark Hall
• Private Equity and the Corporatization of Health Care (abstract). Stanford Law Review (2024).
by Professors Erin Brown and Mark Hall ("These investors seek to earn handsome profits by rapidly increasing revenues before selling off the investment. Private equity’s incursion into health care is especially concerning. The drive for quick revenue generation threatens to increase costs, lower health care quality, and contribute to physician burnout and moral distress. These harms stem from market consolidation, overutilization and up-coding, constraints on physicians’ clinical autonomy, and compromises in patient care."). My recent blog post on this topic is here.
• Rediscovering the Importance of Free and Charitable Clinics. New England Journal of Medicine (202[3]; abstract).
by Professor Mark Hall

To this list we can now add Thursday's entry, Mission Hospital’s Decision to Sell to HCA. Working Draft (2024). by Professor Mark Hall.

AHLA Podcast on Tax-Exempt Joint Ventures

AHLA has a nice, 19-minute podcast that offers a useful overview of the types of issues that arise when a tax-exempt entity enters into a joint venture (mostly ancillary jv's rather than whole-hospital jv's) with a for-profit entity. The participants include the indefatigable Gerry Griffith, Partner, Jones Day (Detroit), as well as Jennifer Noel, Corporate Director of Tax, Christiana Care Health System, and Robert Friz, Partner, PricewaterhouseCoopers. Nerd that I am, I love these tax issues and look forward to teaching them in my Health Law course each year. 

This podcast is actually a teaser for AHLA’s upcoming "Tax Issues for Health Care Organizations" program in Washington, DC on October 23-24. The program and faculty all look great.

Disclaimer: AHLA didn't ask me to post this plug for the program. 

More on Nonprofit Hospitals and Tax-Exempt Status

Just a quick followup on my previous posting on this topic (July 13). On July 15 the New England Journal of Medicine posted an on-line "Perspectives" piece (possibly free) that examines the question whether nonprofit hospitals deserve their tax-exempt status. The article covers much of the same ground as my post, but it adds some data to further the policy discussion, such as:

[I]n previous work we compared nonprofit and for-profit hospitals on measures of charity care and Medicaid shortfalls — the two largest components of community benefit by amount of spending. For-profit hospitals don’t receive tax exemptions and aren’t legally obligated to provide community benefit. In 2018, for every $100 of expenses incurred, nonprofit hospitals in aggregate spent $2.30 on charity care, as compared with $3.80 spent by for-profit hospitals. And in 2019, nonprofit and for-profit hospitals had similar Medicaid shortfalls as a share of total expenses. . . . These data suggest that many nonprofit hospitals don’t provide enough charity care or have a substantial enough Medicaid shortfall (relative to for-profit hospitals) to justify their favorable tax treatment. 

The article continues with additional policy-based concerns and ends with a valuable suggestion:

There are insufficient data to compare the amount of community benefit provided by individual nonprofit hospitals with the subsidies they receive. To close this information gap, the IRS could revise Schedule H of Form 990 to require nonprofit hospitals to report on forgone federal, state, and local taxes (broken out separately); savings associated with using tax-exempt bonds; gross profits from the 340B program, if applicable; and charitable contributions received by the hospital, with standardized reporting for each of these elements. . . .  Disclosure might not be sufficient to catalyze changes in hospital behavior, but we believe greater visibility is a prerequisite for policy action. 

 

Nonprofit hospitals: state and local tax authorities are again questioning tax-exemptions

Here's a great article from Kaiser Health News (July 11) on recent controversies over tax exemptions for hospitals. 

Tax-exempt status is not a "right"; it has to be earned. That means -- among other things -- that executive pay can't be excessive (or else the tax authorities will conclude the hospital is being run for private and not public benefit) and there has to be a convincing showing of tangible public benefit (uncompensated charity care, educational programs, research, etc.). 

The Kaiser piece starts with an example of the stakes involved in a typical case:

The public school system [in Pottstown, PA] had to scramble in 2018 when the local hospital, newly purchased, was converted to a tax-exempt nonprofit entity.

The takeover by Tower Health meant the 219-bed Pottstown Hospital no longer had to pay federal and state taxes. It also no longer had to pay local property taxes, taking away more than $900,000 a year from the already underfunded Pottstown School District, school officials said.

The district, about an hour’s drive from Philadelphia, had no choice but to trim expenses. It cut teacher aide positions and eliminated middle school foreign language classes.

“We have less curriculum, less [sic] coaches, less transportation,” said Superintendent Stephen Rodriguez. 

The school system appealed Pottstown Hospital’s new nonprofit status, and earlier this year a state court struck down the facility’s property tax break. It cited the “eye-popping” compensation for multiple Tower Health executives as contrary to how Pennsylvania law defines a charity.  

The court decision, which Tower Health is appealing, stunned the nonprofit hospital industry, which includes roughly 3,000 nongovernment tax-exempt hospitals nationwide.

The nonprofit hospital industry should not have been stunned. A wave of official scepticism over claims of tax-exempt status was ushered in at least 38 years ago with the case of Utah County v. Intermountain Healthcare, Inc., 709 P.2d 265 (Utah 1985). And jurisdiction after jurisdiction has viewed tax-exempt hospitals through a critical lens, often concluding that the hospitals in question were virtually indistinguishable from their for-profit competitors and that the public benefits from the nonprofits were too scant to justify the foregone tax receipts. 

This might be less of a problem if the IRS still required some level of charity care for a hospital to qualify for federal tax exemption, as it did from 1956 to 1969. (Compare Rev. Ruling 56-185 (exempt hospital must be operated "to the extent of its financial ability for those not able to pay for the services rendered") with Rev. Ruling 69-545 ("Revenue Ruling 56-185 is hereby modified to remove therefrom the requirements relating to caring for patients without charge or at rates below cost").) See GAO, Tax Administration: IRS Oversight of Hospitals' Tax-Exempt Status (April 26, 2023).

Obamacare added § 501(r) to the Internal Revenue Code to address certain aspects of the problem created by Rev. Rul 69-545, but it did not change the fundamental rule that a hospital may obtain tax-exempt status without offering a drop of unreimbursed charity care.

For its part, Texas (for once) far exceeds the federal standard by requiring minimum amounts of community benefit -- specifically including unreimbursed charity care and government-sponsored indigent health care -- in order for a hospital to qualify as a nonprofit entity under § 311.045 of the Health & Safety Code and for tax-exempt status as a charity under § 11.1801 of the Tax Code.