The Untold Stories of Non Profit Hospitals

Holly Lang, Hospital Accountability Project Manager for Georgia Watch, spends most of her days examing the 990 tax forms of non profit hospitals all throughout Georgia. She also keeps a close watch of events more than one thousand miles away in Springfield, Illinois. Late in 2009, the Illinois Supreme Court heard arguments in the case of Provena Covenant Medical Center V the Illinois Department of Revenue. Lang believes the outcome of this case will have reverberations about the way non profits tax status will be treated all over the country.

Provena Medical Center is non profit hospital conglomerate based out of Champaign. It has hospitals all throughout the state of Illinois including much of the Chicagoland area including hospitals in Aurora, Bolingbrook, New Lenox, and Bourbonnais. Much of the expansion occurred throughout the 1990’s and the beginning of this decade. Because Provena was classified as a 501 © 3, it was exempt from paying any property taxes on any of the property they own, including nearly twenty different hospital locations. As such, their expansion deprived much of the state of Illinois of much needed tax revenue. Meanwhile, in 2003, Provena only provided .7% of their totally revenues in charity care. Charity care is defined as medical provided for free or at a reduced cost to those without the financial means to afford the health care. Since their inception, the primary responsibility of non profits in order to earn their non profit status (which exempts them from all taxes: municipal, county and federal) was to provide a sufficient amount of charity care. Lang believes that non profits should strive to make that number 6%, almost ten times what Provena was providing all while making major expansions.

So, in 2003, the Champaign County Board of Review challenged Provena’s property tax exemption. The County argued that Provena was a non profit acting as a for profit hospital. The case has since been heard by the Illinois Department of Revenue, the 4th Circuit, and finally the Illinois Supreme Court late last year and a decision is expected there soon. The case has been championed by Illinois Attorney General Lisa Madigan. In short, Provena was accused of being a non profit that acted like a for profit.

Heather O’Donnell of Chicago’s Center for Tax and Budget Accountability is also keeping a close eye on the decision of the Illinois Supreme Court. She agrees with Lang that the decision will reverberate to non profit hospitals all over the country. In fact, the CTBA wrote an amicus brief in this case that largely mirrored the arguments of Madigan.

O’Donnell is in the forefront of the non profit issue in another way. In 2006, she was the lead author of the CBTA’s analysis of 21 Cook County non profit hospitals and the tax exemptions granted and compared it to the charity care provided. Using a method first developed by Harvard professors Nancy Kane and William Wubbenhorst, the study set out to analyze just how much benefit the tax payers were receiving for the tax exemption. That study found that while these 21 hospitals received $325.6 million in tax breaks, they only provided $105.2 million in charitable services. The study was was done again in 2009 and this time the CTBA estimated that these hospitals received $489.5 million in tax exemptions while only providing $175.7 million in charity care. The study estimated that by simply enforcing the exemption so that the level of charity care is equal to the exemption, 47836 more of Cook County’s one million uninsured would receive charity care.

In O’Donnell’s estimation, Cook County, like much of the country, faces two significant problems in enforcing charity care upon non profits. When asked why the CTBA, a watchdog group, and not the government itself did this intensive study, O’Donnell replied “good question”. Governments themselves have never analyzed any non profit hospitals the way the CTBA did in 2006 and 2009. O’Donnell considers the $303.8 million gap to be an abuse of the system. Yet, without this sort of analysis, this abuse can’t even identified let alone rooted out. The CTBA’s landmark study has lead to other watch dog groups like Georgia Watch to commission their own study but as of yet, no government agency itself has done a study.

The other problem that O’Donnell sees are vague laws that define the care non profits are supposed to provide in order to qualify for their tax exempt status. Non profit hospitals have been around since the 1800’s. In their infancy, they were the primary providers for health care for those that couldn’t afford for care on their own. That all changed in 1965 with the advent of Medicare and Medicaid. As it turns out, this fear was unfounded. While nearly 50 million poor folks rely on Medicaid, there still remain nearly that many without health care still eligible for charity care today. At the time, experts predicted that Medicare/Medicaid would make charity care obsolete. As such, in 1969, the IRS created another standard:community benefit. O’Donnell calls this “nebulous” and ill defined. In fact, Provena once argued that simply operating a hospital was itself a community benefit.

The worst problem is that in Illinois none of these activities are quantified. For instance, Provena was singled out because it was only providing .7% of its revenues in charity care. Yet, there’s nothing in law that sets a minimum amount. Provena was flagged because of a unique set of events. Not only was the hospital expanding exponentially but they were doing it all while providing almost no charity care whatsoever. Still, it’s rare that a hospital would abuse the system so flagrantly. Currently Illinois law doesn’t mandate for any minimum amount of either charity care or community benefit. It’s up to government officials to evaluate each hospital on a case by case basis. Without clear guidelines, O’Donnell believes we’ll continue to see abuse in the system. O’Donnell believes it’s possible that the Illinois Supreme Court would set minimum quantities for such things as charity care in their Provena decision. Without clear guidelines, O’Donnell believes there’s no motivation for any hospital to be a for profit.

Chicago area film maker Rebecca Shanberg just got back from Arizona. She attended a screening of her most recent work, Do No Harm at the Sedona Film Festival at the end of February. The themes of that film are entirely rooted in the issues that both Lang and O’Donnell find in analyzing non profit hospitals. That film tracks Albany, Georgia surgeon Dr. John Bagnato and his accountant, Charles Rehberg. Starting in 2003, the two examined the tax returns of more than a hundred non profits all over the country and they were startled to find that most non profits were abusing their non profit status. They found a pattern of exorbitant health care costs, strict enforcement of collections against patients that lacked an ability to pay, massive expansions, all while executives received healthy salaries and these hospitals spent tens of millions on lobbying.

The film focuses on Rehberg and Bagnato’s battle with Phoebe Putney, Albany’s largest non profit. After the two sent out anonymously a series of faxes critical of the hospital, they faced a $60 million civil suit and were charged repeatedly criminally. Both believe this was done as retaliation for their whistle blowing. Holly Lang has plenty of experience with Phoebe Putney. In 2007, she lead an analysis for Georgia Watch to analyze how well Phoebe Putney was living up to its obligation as a non profit. She found that health care costs in Dougherty County (where Albany is located) increased by 17.6% in 2005 while the national average was 7.6%. According to the Coalition for Competitive Health Care, Phoebe Putney’s aggressive pricing is a major factor for the excessive costs. One plant owner described it like this, “it’s basically a health care tax to do business in Albany, because the health care costs are so far above the average for the nation and the Southeast”. Georgia Watch hosted two screenings of Do No Harm in October. One of the first screenings of the movie was held in Chicago in May of 2009 at the Museum of Contemporary Art where Illinois Attorney General Lisa Madigan introduced the film.

While Shanberg, O’Donnell, and Lang have seen up close the crisis in non profit hospital care, the issue has received scant attention even as the health care debate has raged into its second year. Just one section of the Senate bill, Section 9007, even addresses non profits. All three believe this is unfortunate as they all believe the non profit health care system is broken and in serious need of reform. Lang believes that the nations 1300 non profit hospitals receive tax exemptions of roughly $35 billion yearly. Since there’s scant studies of the matter, no one can say just how much charitable services these hospitals perform to earn these exemptions. O’Donnell is even more stark. Unless there is strict oversight, clear rules, and enforcement, “there’s simply no reason for any hospital to be for profit” because in the current environment, like it’s alleged against Provena, far too many non profits “act as for profit”. With their advantageous tax benefits, that simply gives them a competitive advantage over any for profit.