Are Non-profit Hospitals Fulfilling Their Charitable Obligation?

The recent Fredericksburg Planning commission hearing about Mary Washington Healthcare’s application for approval of a $10 million building project got me thinking about the expenditures of nonprofit hospitals, and do they give a fair shake in fulfilling their charitable obligation?

The medical literature is suggesting that tax exemption for non-profit hospitals should be reformed. 

How it Works

If you are not familiar with the whole business of how non-profit hospitals work, let me explain.

Nonprofit hospitals don’t pay taxes. Don’t pay federal or state income tax, property taxes or sales tax – all those taxes we have to pau, but grumble about. These taxes provide an endless list of local and federal necessities like schools, roads, defense, law enforcement. An endless list. 

The tradeoff for nonprofit hospitals is that there is an expectation to provide charitable care to the community they serve. Originally that meant giving un-insured and under-insured a break on their medical bills. But The Affordable Care act expanded this to allow a wide range of expenses to qualify as community benefit. Countrywide, nearly two thirds of hospitals are nonprofit – including Mary Washington Healthcare (MWHC). 

The Troublesome Profits of Non-Profit Hospitals

Despite the name, non-profit hospitals make profits – a paradox I first learned about in an article I have frequently cited. An article in TIME Magazine titled Bitter Pill, by journalist Steven Brill. 

He wrote about the non-profit Texas Medical Center, that is on the campus of the University of Texas. In the year he was writing about, they had an operating profit of $531 million – “a profit margin of 26% on revenue of $2.05 billion” which he called “an astounding result for such a service-intensive enterprise.”

The “trouble” for non-profit hospitals is what to do with the profits.

They cannot do what companies usually do and distribute them as dividends, because, in the tongue-twisting words of the IRS, “no part of their net earnings is allowed to inure to the benefit of any private shareholder or individual.” Nor are they meant to pay “excessive salaries” or attempt to “influence legislation.” 

According to Brill, one of the favorite ways to spend this money is on expensive buildings. He writes as he was leaving the Texas campus “I noticed a group of glass skyscrapers about a mile away lighting up the evening sky. The scene looked like Dubai” - a place that “exudes abundance and opulence.”

This was part of “a nearly 1,300-acre, 280-building complex of hospitals and related medical facilities.”

Another way non-profits spend their would-be tax dollars, according to an article Medical Economics titled How nonprofit hospitals get away with the biggest rip off in America, is by paying “seven-figure executive salaries” – which seems to fit with MWHC CEO receiving a salary that hovers around $2 million a year and total executive compensation for the corporate officers of some $12 million a year – which is reported to be above industry norms for the size of hospital.

The litany of how to spend profits goes on. The article notes hospitals buy up independent medical practices which “decreases market competition, increases the hospitals’ market power, meaning they can negotiate higher payments from insurers. It also allows them to layer in facility fees” – a new charge I have heard people complaining about getting hit up for recently.

The article also notes profits are spent on “boondoggle retreats, extravagant galas, private jets, billboard ads, skyboxes, offshore bank accounts, and to fund special interest lobbyists whose job it is to make sure Congress keeps the sweet deal the way it is” despite the admonition of the IRS to not influence legislation – or pay excessive salaries. 

Never Enough

Another report – in Politico - notes the Affordable Care Act not only broadened what hospitals could claim as charitable care but brought millions more paying customers. The result was “revenue in the top seven nonprofit hospitals (as ranked by U.S. News & World Report) increased by 15 percent.” But at the same time “charity care — the most tangible aspect of community benefit — decreased by 35 percent.”

Maybe not surprisingly, the American Hospital Association wants to maintain the gravy train. Over the last 10 years, the AHA has spent almost $400 million on lobbying, according to the Center for Responsive Politics. But this “explosive growth has many questioning how we define ‘nonprofit’ and what sort of responsibility these hospitals have to the communities that provide this financial dispensation.”

This was my question when I went to Fredericksburg Planning Commission hearing about MWHC’s proposed plan to spend $3.5 million on an expansion of Snowden House – partly to create a residence for someone, though it’s not very clear who. And spend a total of $10 million for this and a conference center, and a clinic (knocking down Kid’s Station in the process)

I probably did not increase my popularity with MWHC executives and board members who came to speak in favor of the project, by questioning if they were really being responsible stewards of their obligation to provide charitable care. 

I question if this expenditure of $10 million couldn’t be put to better use to provide immediate support for the medically underserved in the community – rather than what seems like an extravagant “boondoggle” plan to provide facilities for their Graduate Medical Education program.

A study in the New England Journal of Medicine titled Do Nonprofit Hospitals Deserve Their Tax Exemption? notes “tax exemption for nonprofit hospitals is a long standing -but poorly targeted policy” that “provides no assurance that these hospitals will behave in accordance with their charitable mission.” 

I agree with the Medical Economics article which tells us “American patients need to wake up to what’s happening, get angry, and demand that the nonprofit hospitals that profess to be charitable institutions stop paying their executives outsized compensation packages, and start giving back to the communities they take from.”

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