Some Nonprofit Hospitals Aren’t Earning Their Tax Breaks, Critics Say

This article originally appeared on Stateline.

CHICAGO — On a recent morning at John H. Stroger Hospital, hardly a seat was to be had in any of the first-floor clinic waiting rooms. Not in audiology. Not in heart and vascular. Not in the pharmacy or ophthalmology.

In other words, it was a typical day at Stroger, the central pillar of the Cook County Health system. Cook County Health is Chicago’s “safety net” health system, which means it treats all patients — a million each year — regardless of their ability to pay.

Cook County Health, which also includes Stroger’s much smaller sister hospital, Provident, spent $377 million in uncompensated charitable care in 2019. It’s projecting that number will rise to $409 million this year.

That can’t continue, Cook County Health’s interim CEO Debra Carey said in an interview in her office on a dreary, drizzly morning last month. “There will be a limit when we won’t be able to provide the same levels of care with the dollars we bring in,” she said. “We’ve pretty much already reached that limit.”

Her predecessor, Dr. John Jay Shannon, made the same point in an October speech at the City Club that garnered a lot of attention here. In it, Shannon, who left the hospital system in December after the board of Cook County Health declined to renew his contract, pointedly said that other Chicago-area hospitals weren’t living up to their responsibilities toward the uninsured and underinsured, leaving a disproportionate share of the burden on Cook County Health, whose financial health is precarious.

Nonprofit hospitals that are not safety net hospitals are obliged to care for non-paying patients only in life-threatening circumstances.

Nearly 45% of Cook County Health patients are uninsured, meaning that the health system covers their costs. By dint of their low income, another 33% are covered by Medicaid, the federal-state health care program for the poor. But Illinois hospitals say Medicaid doesn’t fully cover the cost of treatment they provide to beneficiaries.

“We have to see more effort from the other hospitals in Cook County,” Shannon said, referring to the county that includes Chicago, not the health system of the same name. “We simply have to.”

Shannon’s remarks reignited a perennial question relating to nonprofit hospitals, not just in Chicago but around the country: Do they do enough to justify their tax-exempt status?

One Chicago alderwoman, Jeannette Taylor, has an answer: “Their charity care doesn’t even things out,” she said recently in her South Side district office. “It’s not fair.”

Taylor has introduced a resolution that would require nonprofit hospitals in Chicago that are not part of Cook County Health to make “payments in lieu of taxes” to the city if they are not providing sufficient community benefits. She said the bill is meant to spur a broad discussion about whether nonprofit hospitals merit their tax exemptions and what should be done if they do not.

Challenging Tax-Exempt Status

Nearly 3,000 U.S. hospitals are nonprofits, about two-thirds of all the country’s hospitals (not counting government or psychiatric hospitals), according to the American Hospital Association. The AHA reported last month that all hospitals — for-profit and nonprofit — provided $41 billion worth of uncompensated care in 2018.

In recent years, there have been at least a handful of challenges to nonprofit hospitals’ tax-exempt status:

• In 2013, Pittsburgh’s then-Mayor Luke Ravenstahl, a Democrat, sued the University of Pittsburgh Medical Center to challenge its exempt status. The suit was ultimately dropped.
• In 2015, a New Jersey judge ruled that the Morristown Medical Center had to pay property taxes because it wasn’t fulfilling its obligations for receiving an exemption.
• And in 2017, the Internal Revenue Service revoked the tax-exempt status of an undisclosed hospital.

One 2018 study from researchers at the Johns Hopkins School of Public Health found that nonprofit hospitals in the aggregate did not deliver community benefits that outweighed the value of their tax exemptions.

Overall, according to the study, 62% of the hospitals did provide community benefits that outweighed the value of their exemptions. However, the poor performance of the remaining nonprofits took the total into negative territory, said Bradley Herring, the lead author.

On average, tax exemptions saved each nonprofit hospital nearly 6% of total expenses, or about $11.3 million per hospital, according to the Johns Hopkins study.

Stroger spends far more on charitable care than other nonprofit hospitals in the Chicago area. According to documents filed with the state, the University of Illinois Hospital in fiscal 2018 spent 1.7% of its net revenue on charitable care.

Northwestern Memorial Hospital spent 1.2%, the University of Chicago Medical Center spent 1% and the Loyola University Medical Center spent 0.6%.

By comparison, Stroger spent 54% of its net revenue on charitable care.

The University of Chicago Medical Center referred Stateline’s request for comment to the Illinois Health and Hospital Association, and Northwestern and Loyola did not respond. A spokesman for the University of Illinois Hospital did not address the large gap between its charitable care spending and that of Stroger.

However, in a statement to Stateline, the CEO of the University of Illinois Health System, Mike Zenn, stressed that it refers 79% of its uninsured patients to Medicaid or other programs for low-income people.

Danny Chun, a spokesman for the Illinois Health and Hospital Association, forcefully defended nonprofit hospitals, arguing that they are living up to their legal obligations under Illinois law of providing more charitable care than the value of their property tax exemption.

Chun said other nonprofit hospitals are willing to discuss the disproportionate burden that falls on Stroger and other safety net hospitals, but that they “are working every day to serve their patients and communities to make sure their needs are addressed.”

Chun noted that nearly half of the hospitals in Cook County operate with negative operating margins, and that the Illinois Supreme Court has ruled against plaintiffs who have challenged the state’s nonprofit hospital statute, most recently in 2018 in a case brought by a taxpayer against the state Department of Revenue and Chun’s association.

And just this week, an Illinois judge ordered the return of Urbana’s Carle Health System’s tax-exempt status, which local and state taxing authorities had removed more than a decade ago.

But critics say the Illinois law on hospital tax exemptions was heavily influenced by the hospital association and provides too many loopholes that enable nonprofits to receive their exemptions without delivering benefits of equal or greater value.

“It’s a moral issue,” said Greg Kelley, president of the Service Employees International Union chapter covering Illinois, Indiana, Missouri and Kansas, which represents health care workers and has made an issue of the tax-exempt status of nonprofit hospitals. “Nonprofits benefit greatly from their tax exemptions and pay poverty wages while their CEOs make quite a bit of money.”

Although Illinois nonprofit hospitals are required to file disclosure forms with the state to justify their tax exemptions, according to the SEIU’s analysis, only 23% of hospitals in Cook County complied in 2015, 48% in 2016 and 58% in 2017. The Cook County assessor’s office did not respond to requests for comment.

In addition to being exempt from local, state and federal property, sales and income taxes, nonprofit hospitals get preferential interest rates on bond issues, which, according to Larry Singer, director of the Beazley Institute for Health Law and Policy at Chicago’s Loyola University, “can literally save them tens upon tens of millions of dollars” when they borrow money. 

Hospital Obligations

Different levels of government impose different obligations on hospitals in exchange for their tax exemptions.

At the federal level, the Affordable Care Act specified previously vague requirements, said Mark Rukavina, a manager at Community Catalyst, a nonprofit in Boston that works with government agencies and others to increase access to health care for underserved populations.

To be exempt from federal taxes, hospitals now must assess the health needs of their surrounding communities and create plans for how to address those needs. But the ACA doesn’t establish a way to evaluate the hospitals’ performance.

“The ACA added substantial improvements,” Rukavina said. “Could there be more? Of course.”

The federal law also requires tax-exempt hospitals to maintain emergency rooms and include community members on their boards of directors.

Under the Illinois law, nonprofit hospitals seeking tax exemptions get credit for any expenses or services to address the health care needs of low-income or otherwise undeserved people.

The SEIU argues the state’s definitions give hospitals too much leeway to count activities that are not genuinely charitable, such as free informational sessions on weight loss surgery that would attract paying customers to the hospitals’ operating rooms.

Practices like that cry out for tighter laws, said Haider Warraich, a physician and researcher at Brigham and Women’s Hospital in Boston who has written about hospital tax exemptions.

“Honestly, I don’t think this whole area has been regulated much,” Warraich said. “It’s largely left to hospitals to regulate themselves. I think government needs to step in. If you look at the practices of nonprofit hospitals, they are nearly indistinguishable from for-profit hospitals.”

Oregon last year stiffened its requirements, mandating that nonprofit hospitals provide free care to all patients with incomes under 200% of the federal poverty line, or $43,500 for a family of three. They also must give discounts to people making between 200% and 400% of poverty.

Singer said that all states impose some requirements on nonprofit hospitals in exchange for favorable tax treatment, but some are less specific than others.

The ACA itself implicitly raised questions about the justification for hospitals to enjoy the full advantages of their tax-exempt status. Thirty-six states have expanded Medicaid under the law, and it has brought millions more Americans into the commercial health insurance market. That lessened the burden of uncompensated care on many nonprofit hospitals, although it did not eliminate it.

In 2013, when the ACA was still being implemented, Cook County hospitals aside from Cook County Health spent $433 million on uncompensated care. That number dropped to $281 million in 2017.

But at Cook County Health, spending on charitable care rose, from $257 million in 2013 to $273 million in 2017. In that span of time, Cook County Health’s share of charitable care among all Chicago-area hospitals jumped from 37% to 49%.

Hospital officials expect that the 2019 numbers, which are still being calculated, will stand close to 60%.

Under federal law, all hospitals must stabilize patients in an emergency, regardless of their ability to pay. But non-safety-net hospitals can send patients elsewhere if they need additional treatment. In the Chicago area, many of them end up at Stroger and Provident.

“All the major centers do that to us,” said Faran Bokhari, who chairs the trauma unit at Stroger. “There are no exceptions.”

It’s legal, he said, “but ethically it’s completely wrong.”

Perhaps surprisingly, County Health’s Carey said she doesn’t support Taylor’s resolution to force other nonprofit hospitals to make payments in lieu of taxes. “They’re not talking about raising taxes from other hospitals and giving it to us,” she said, noting the money would go to the government.

So what would she like to see?

“We’d much rather see them providing the services,” she said. “Otherwise, what is the basis for them getting that tax-exempt status?”