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Should Charitable Care Tax Breaks Be Part of Healthcare Reform?

Janice Simmons, for HealthLeaders Media, May 13, 2009

In its third and final roundtable addressing healthcare reform issues, the Senate Finance Committee on Tuesday discussed how to pay for it—a decidedly difficult task.

Chairman Max Baucus (D-MT) noted that the first place to look for savings is within the healthcare system itself.

One area the panel examined is whether tax breaks should continue to be offered to hospitals if universal coverage is approved. Federal tax breaks for charitable hospitals amount to billions of dollars each year for those organizations, said Sen. Charles Grassley (R-IA), the committee's ranking minority member.

"If as a result of healthcare reform, everyone has health insurance- presumably hospitals should see a steep decline or elimination of uncompensated care," he said. So, given this trend, does it make sense for the federal government to retain those tax exemptions, he asked.

Since healthcare reform legislation was approved in Massachusetts, uncompensated care has sharply dropped in the state, according to Jonathan Gruber, PhD, a professor of economics at Massachusetts Institute of Technology.

However, under any reform, some type of uncompensated care provisions are needed—even in Massachusetts, he said.

"About a third of uncompensated care today actually goes to insured [individuals] who don't pay their copays and deductibles," Gruber said. Also, the number of uninsured is not going to be zero—either in Massachusetts or the nation as whole. "We can definitely move to a more rationalized system [of healthcare], but it has to be a system that recognizes that there will be some need for uncompensated care—even in a universal coverage world."

In the average community hospital, uncompensated care is on average between 2% to 4% of their revenue, although some hospitals may see it as high as 12% to 15%, said Stuart Altman, PhD, a professor of national health policy at Brandeis University in Waltham, MA.

"[But] the issue isn't going to be that part—it's going to be the extra payments that we now give these institutions -[under] disproportionate share ... We need [to take] a substantial look at that," Altman said.

But the hospital tax breaks provides community benefits "far in excess of just the issue of uncompensated care," Altman said. "I think it would be a mistake to totally wipe it out—but we can substantially reduce it.”

"At the same time as we are asking for an enormous change from the hospital industry in terms of restraining costs," removing the tax exemptions could "destabilize the basic delivery system," said Gerald Shea, assistant to the president for governmental affairs with the AFL CIO in Washington.

Shea suggested focusing on reform efforts first—then focusing on tax exemption issues later. "We should not try to do two things together."


Janice Simmons is a senior editor and Washington, DC, correspondent for HealthLeaders Media Online. She can be reached at jsimmons@healthleadersmedia.com.

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