Minority of Tax-Exempt Hospitals Provide Most Charity Care

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FEBRUARY 13, 2009

Minority of Tax-Exempt Hospitals Provide Most Charity Care
By BARBARA MARTINEZ and JOHN CARREYROU
WSJ

A report from the Internal Revenue Service found that a small minority of nonprofit hospitals provide the bulk of uncompensated care for the poor, rekindling concerns about the tax-exempt industry at a time when government aid to corporations is drawing fire. The IRS also found that the top executives at a group of 20 hospitals it examined more closely earned an average of $1.4 million a year. At least one of the 20 hospitals was compensating its top executive excessively, the agency said. It declined to name any of the hospitals in the report. The American Hospital Association called the report "seriously flawed," saying the agency is "undercounting community benefit" and "overcounting executive compensation."

The IRS report may renew efforts in Congress to develop firm rules about how much community benefit nonprofit hospitals must provide to maintain their tax exemptions. Nonprofit hospitals account for the majority of hospitals in the U.S. In return for not paying taxes, they are expected to provide benefits to their communities, including charity care. Some nonprofit hospitals have drawn criticism for posting big profits, amassing large cash piles and paying their top executives handsomely while not providing enough free care to poor patients. Nonprofit hospitals receive an estimated $12.6 billion of annual tax exemptions, on top of their share of the $32 billion in federal, state and local subsidies the hospital industry as a whole receives each year, according to a 2006 report by the Congressional Budget Office.

Sen. Charles Grassley is considering introducing legislation that would hold nonprofit hospitals more accountable for their tax breaks, aides to the Iowa senator, who is the ranking Republican on the Senate Finance Committee, have said. The legislation would require them to spend a minimum amount on free care for the poor and set curbs on executive compensation and conflicts of interest, the aides have said. Commenting on the IRS report Thursday, Mr. Grassley called on the Treasury Department to re-establish charity-care requirements that were scrapped in 1969 following the creation of Medicare and Medicaid. "If it looks like that can't get done, then Congress will have to step in," he said.

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The agency also found that total compensation for the top official at each of the 489 hospitals averaged $490,000 a year. But among a smaller group of 20 large hospitals it selected for a closer examination, the top executive's compensation was much higher, averaging $1.4 million a year. The 20 hospitals the IRS audited weren't necessarily the hospitals with the highest executive compensation, the agency said. If it had chosen the 20 hospitals with the largest pay packages, the figure would likely have been higher than $1.4 million. The IRS deemed one or more of the 20 hospitals it audited to have "excessive compensation," said Lois Lerner, the agency's director of tax-exempt organizations.

On average, the study found, the 489 hospitals spent 9% of their revenue on community benefit. Overall, 58% of the hospitals reported uncompensated care amounts of less than or equal to 5% of total revenue. A little more than one-fifth of the hospitals reported aggregate community benefit expenditures of less than 2% of total revenue. But a major limitation of the report is the difference in how hospitals define community benefit and uncompensated care. For instance, only some of the hospitals included their Medicare shortfalls -- the difference between what the federal program pays for a service or procedure and what the hospital says it costs to provide it.

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Printed in The Wall Street Journal, page A3