Should nonprofit hospitals be forced to stop behaving like greedy corporations?

Health and medicine explained.
June 19 2009 7:05 AM

Tax Breaks Under the Microscope

Should nonprofit hospitals be forced to stop behaving like greedy corporations?

Last month, Senate finance committee Chairman Max Baucus, D-Mont., and ranking member Chuck Grassley, R-Iowa, released several policy options for health care reform. Buried on Page 31 of the document was a proposal to "Modify the Requirements for Tax-Exempt Hospitals," which would require nonprofit hospitals to maintain minimal levels of charitable activity, limit aggressive collections, and restrict charges to the uninsured and indigent. The proposed penalties for noncompliance are severe: Hospitals that can't prove their "community benefit" will lose the tax benefits associated with nonprofit status.

Photograph of US Democratic Senator from Montana Max Baucus and Republican Senator from Iowa Chuck Grassley. Click image to expand.
Sens. Max Baucus (left) and Chuck Grassley

In the era of billion-dollar government bailouts to defunct corporations, why would the government target hospitals that supposedly serve the public good? The reason is big money. In fact, $93.5 billion in federal subsidies are provided every year in the form of tax breaks. But research shows that nonprofit hospitals behave no differently from for-profit ones. And in some cases, nonprofits have been caught mistreating the poor for the sake of financial gains. One example: A nonprofit academic hospital in Connecticut aggressively pursued "deadbeat" elderly patients by placing liens on their homes. More recently, several nonprofit Chicago hospitals were reportedly transferring uninsured patients to the county emergency room. Stories like this are what sets off Grassley.

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We think that the government should demand good behavior in exchange for tax benefits, but it is important to consider what may happen to patients if nonprofits find their tax breaks in jeopardy. This depends on how nonprofit hospitals respond.

Ideally, the change would result in increased access for the uninsured, expanded emergency rooms so that those awaiting care won't languish on hallway stretchers and in packed waiting rooms, and a reconsideration of policies that push out the indigent and elderly in favor of those with more profitable diseases, like cancer and organ transplants. Because of the litmus test for charitable care, former "undesirables" would suddenly become desirable. Also, by discouraging aggressive collection practices, the uninsured wouldn't be further impoverished when they couldn't pay. But even these good changes could have a negative effect: longer waiting times for elective procedures as more E.R. cases eat up hospital beds. Lengthy delays for elective care are still the norm in the National Health Service in the United Kingdom, which places a high priority on E.R. access.

A different response to the policy would be grimmer. Hospitals that believe stricter nonprofit rules would constrain their ability to compete may cut their losses and become for-profit specialty hospitals. By discontinuing the "community benefit" charade, they could choose to serve only those with good insurance and diseases that reimburse well. For-profit specialty hospitals don't have all-purpose E.R.s to service the community, nor do they maintain unprofitable services such as general medicine and psychiatry. This would clearly reduce access for many patients who need hospital services for serious but low-paying conditions: diabetic complications, congestive heart failure, pneumonia, severe schizophrenia. Driving nonprofit hospitals to become for-profit specialty hospitals probably won't improve the population's health.

Hospital groups, which have mobilized to fight this new proposal, argue that rules mandating "minimal levels of charitable care" don't take into account the true community benefit of certain hospitals, including teaching, community services, and disproportionate care for patients with government insurance. However, the current proposal excludes certain institutions, including educational and research hospitals. The policy also comes at a bad time for hospitals, when many are seeing declines in revenue. Some are on the brink of closure, like Shriners Hospital for Children in Greenville, S.C., which provides free care to kids. * Shriners is funded by an endowment, which took a hit in the recent stock market collapse and has seen a big decline in donations. In a down economy, increased taxes would make staying open even more difficult for nonprofits with already-thin operating budgets.

Another question is how this policy will interact with additional changes that come along with health reform. Current efforts include plans to expand health insurance coverage to all Americans and reverse incentives that disproportionately reward sub-specialized, high-tech, and unproven care. How nonprofits could balance policy changes with a huge influx of newly insured patients is unclear.

What is evident is the current system that incentivizes these hospitals to act like for-profit corporations needs reform. But it is important to consider that major changes in incentives can have unintended consequences. Government policies with the best intentions often do, like when the use of doctors' report cards for heart surgery patients resulted in a worsening of racial disparities in New York.

New rules like those proposed by Baucus and Grassley will make it bad business for nonprofit hospitals to drop off uninsured patients on skid row. But it's also uncertain whether incentivizing hospitals to go round them up will make health care any cheaper or outcomes any better.

Correction, June 19, 2009: Due to an editing error, the article originally and incorrectly stated that a Shriners hospital in danger of closing is in Greenville, N.C. The hospital is in Greenville, S.C. (Return  to the corrected sentence.)

Zachary F. Meisel is a practicing emergency physician, a Robert Wood Johnson Foundation clinical scholar at the University of Pennsylvania, and a senior fellow at the Leonard Davis Institute of Health Economics.

Jesse M. Pines is a practicing emergency physician and an associate professor of emergency medicine and health policy at George Washington University in the Center for Health Care Quality.