The American hospital: from volunteer charity to tax-exempt patronage pit

June 20, 2018

Why should hospitals get a special tax exemption when other healthcare entities that offer more affordable care, like physician offices and independent labs, don't?

Editor's Note: Welcome to Medical Economics' blog section which features contributions from members of the medical community. These blogs are an opportunity for bloggers to engage with readers about a topic that is top of mind, whether it is practice management, experiences with patients, the industry, medicine in general, or healthcare reform. The opinions expressed here are that of the authors and not UBM / Medical Economics.

Prior to the founding of the United States in 1776, the first hospital in the 13 colonies was founded in Philadelphia in 1751. Pennsylvania hospital, which became part of University of Pennsylvania Health System, was founded by Thomas Bond, MD, and Benjamin Franklin, "to care for the sick-poor and insane who were wandering the streets of Philadelphia."

The inscription "Take care of him and I will repay thee" was chosen and the image of the good Samaritan was affixed as the hospital seal. Little did anyone know how many second, third, and fourth parties would rise to take advantage of this new government and private-entity partnership.

As taxation increased throughout U.S. history, conferring a tax exemption on hospitals caring for the poor seemed compassionate and just. And there was historical precedent: according to Andrea Castro, writing in the Pace Law Review: "the policies that initially conferred tax-exempt status on hospitals can trace their roots to the Elizabethan Statute of Charitable Uses of 1601" which "bestowed exemptions upon hospitals and other 'charitable'" organizations which promoted the common general welfare." Hospitals took all comers as a “community benefit” to “earn” their tax exempt status by government.

But this tax-favored status has been compounded with a nexus of government subsidies and privilege and thus modern hospital operations can seem more like patronage pits instead of volunteer houses of healing.

The transformation didn't occur overnight. One of the lesser known policies that opened the taxpayer spigots was the Hill-Burton Act. Passed in 1946, the legislation provided government subsidies to hospital construction, laying groundwork to decades of other government-granted special favors for these institutions, to the detriment of less expensive, independent office-based care.

Initially a “one grant” emergency measure, Hill-Burton was "perpetuated by successive Congresses renewing the program and expanding it, even to providing for diagnostic and treatment centers," reported the newsletter of the Association of American Physicians and Surgeons (AAPS) in 1955. The doctors at AAPS warned, “[a]mong other valid reasons for rejecting the Act ... the proposal to establish hospital diagnostic-treatment clinics is but another form of socialized medicine whereby the hospital financed by the government will assume the dominant role in diagnosing and treating illnesses."

Hospitals win, private practices lose

Then came Medicare in 1965 and the spigot of taxpayer dollars became an ocean of money. Medicare was established to provide medical insurance for the “aged” over 65, then the life expectancy. Medicaid was also established at the same time, but to provide means-tested insurance benefits for the “poor and indigent.” Medicaid from its inception until today provided reimbursement that didn't cover the costs of care, so hospitals raised their asking list prices, called chargemaster pricing. In this way, they could recover a higher percent reimbursement from Medicare, private insurance, and self-pay patients.

Following the passage of Medicare, in 1969 the IRS removed the requirement that non-profit hospitals offer a portion of care without charge or at rates below cost. Revenue Ruling 69-545 created what has become known as the "community benefit standard." A further competitive advantage was thus handed to hospitals, not available to independent physicians or other medical facilities.

In recent decades, as the unsustainability of Medicare has become clear, Congress, hand in hand with the HHS, has fixed Medicare prices. In addition to securing higher payment levels for hospitals relative to other sites of care, the hospital cartel raised prices on other patients to compensate further.

Case in point: Pennsylvania Health System (PENN) now owns Children's Hospital of Philadelphia, (CHOP) and both are tax exempt. For a two view spine series they charge a “facility fee,” of $1,100. This simple X-ray can be obtained through private tax-paying radiology centers for $38. CHOP's actual “cost,” according to its vice president of billing is about $400 for spine X-rays while upcharging nearly 200 percent to $1,140, which includes $40 to pay the radiologist. Yet, CHOP commercials tout they are a charity and openly solicit donations and bequests.

And the disparity of the non-profit status combined with facility fees have encouraged hospital predatory acquisitions of independent physician practices.

An East Coast hospital system, here in my area, used what appeared to be anti-competitive tactics to coerce a private cardiology group I referred patients to into a partnership with the system. The result? Patients reported that $800 nuclear stress tests were now billed at the hospital chargemaster price of $6,000, on top of increased billing hassles and red tape for patients and referring physicians.

While independent practices close their doors, non-profit hospital systems are thriving:

“Seven of the top 10 most profitable hospitals in the United States are nonprofit facilities that each netted more than $150 million from caring for patients in 2013,” according to a 2016 Health Affairs study.

CEO salaries, surpluses test “not-for-profit” status

While CEOs of non-profit hospitals average base salary was $595,781 in 2009, according to JAMA, the top earners have upped the ante since.  In 2014, CHOP CEO Steven Altschuler received total pay of $4.7 million, according to a Philadelphia Inquirer report. In the same year, PENN CEO Ralph Mueller made $2.4 million dollars in salary and benefits, according to The Daily Pennsylvanian, and was the University of Pennsylvania's second highest paid executive, second only to the University President.

Things are just as bad across the country: "Providence, a non-profit system on the West Coast [and fourth largest non-profit system by # of hospitals], "has stockpiled nearly $6 billion in cash reserves. That's almost twice the amount of cash Nike reported in its most recent quarterly filing," according to Willamette Week.

This apparent graft is getting increased attention and calls for reform are becoming more frequent. “Policymakers should be aware that the tax exemption is a rather blunt instrument, with many nonprofits benefiting greatly from it while providing relatively few community benefits," states Bradley Herring, PhD, et.al, in the February 2018 issue of INQUIRY: The Journal of Health Care Organization, Provision, and Financing.

But as the Q1 2018 financials come in, it is business as usual with "not-show-a-profit" health systems.

Axios reported on June 6: "Kaiser Permanente accumulated $1.4 billion of profit in the first three months of this year-the 10th-highest amount of the 141 companies analyzed (higher than big-ticket names like Walgreens, Anthem, Eli Lilly, and Aetna)." Further "four systems (Hackensack Meridian Health in New Jersey, Indiana University Health, Ascension and Intermountain Healthcare in Utah) all had profit margins at or above 10 percent."

These shocking stats lead to an obvious question: Why should hospitals get a special tax exemption when other healthcare entities that offer more affordable care, like physician offices and independent labs, don't?

So, hospitals dodge taxes, overcharge patients with inflated chargemaster prices, pay executives millions, and leave the state taxpayers holding the bag. It is time for hospitals to post prices, compete on price and quality, cancel their cronyism with government, and pay their fair share of taxes.

Craig M. Wax, DO, is a primary care physician practicing in Mullica Hill, N.J. He is the host of the “Your Health Matters” radio show at RowanRadio.com. Wax is also the vice president for health policy at Practicing Physicians of America and a blogger on independent practices.