How Much Charity Care Must Hospitals Give To Stay Tax-Exempt?

"Part of the argument I'm making is that there's a lot of services that are reportable as a community benefit that are for all practical purposes charity care; they're just not defined that way," Gray says.

They include:

• Spending on graduate medical education, or training for nursing or allied health professional students. Like charity care, this amounts to about one-third of the overall community benefit spending in Maryland for a total of two-thirds.
• "Misson-driven" health services, about 20% of community benefit expenses, includes services that lose money, and which probably would not be available to the community if the hospital didn't provide them. Such programs may include hospice, cardiac rehabilitation, and mental health treatment or programs targeting immigrants, seniors, substance abusers or the homeless. They may generate some revenue, but are provided at nominal fees for people with limited ability to pay and often are provided outside the hospital.

Also in the mission-driven category are hospital's payments to physicians for being on call to provide services to a large portion of people with no ability to pay.

"To make an implicit point explicit, many services in the 'mission-driven' category are forms of charity care that do not get counted as charity care, which includes only hospital services provided to charity patients. Hospitals' expenses for providing other services, including their payments to physicians, are not counted as charity care," the authors wrote.

Another problem involves the lack of uniform requirements for what level of poverty makes an individual or family member qualify for charity care. Some may qualify at 400% of the federal poverty level, while some may qualify at 300%.

"There is no consensus in Maryland (or nationally) about how the adequacy of charitable performance should be assessed, and low-spending hospitals are not asked for explanations. This should change, particularly if the national numbers show as much variability as Maryland's do," the authors wrote.

But how do other states fare? A check of California's Office of Statewide Health Planning and Development, which keeps track of "charity care" expenditures for 174 nonprofit general acute care hospitals, finds that many wouldn't meet the Grassley test either, because charity care averaged 1.58% of expenses.

"If bad debts and/or county indigent program contractual adjustments are factored in, and they are generally not included in the definition of charity care, the percentage increases to 3.13% and 4.3%," said OSHPD spokesman David Byrnes.

Reporting community benefit is beneficial
Overall, the new trend toward public reporting of community benefit is a good thing, the authors wrote.

"When hospitals begin reporting on the IRS's new Schedule H in 2010, the revealed variability is likely to create pressure for improved performance on the measured categories," they said. "A new era of accountability begins when nonprofit hospitals start reporting on Schedule H in 2010. It would be wise now to defer further policy changes regarding tax exemption of nonprofit hospitals until the effects of Schedule H are seen. Given also the possibility of larger policy changes to address the problems of cost and the uninsured, we should hesitate to impose new charitable expectations."

Jim Bentley, senior vice president for strategic policy planning for the American Hospital Association, agreed that the issue of how much charity care should be required is an issue that is expected to become increasingly thorny.

"What we're talking about are services that hospitals provide which—were we not to do them—either the health of the public would suffer or Montgomery County would have to open up and provide the service through the taxpayers' dollars. The hospitals relieve the community of that expense."