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Are Non-Profit Hospitals Earning Their Tax-Exempt Status?

By Jill Zorn

On the last day of 2017, Politico published an article about Yale New Haven Hospital, A Tarnished Hospital Tries to Win Back Trust, focused on whether or not the hospital is giving back sufficiently to the community to earn it’s not-for-profit status.

This is the third in a series of articles Politico has published on other prominent non-profit hospital systems:  How the Cleveland Clinic Grows Healthier While its Neighbors Stay Sick and  Tax-Exempt Mayo Clinic Grows, but Rural Patients Pay a Price.

Providing Community Benefits

Compared to the Mayo Clinic and Cleveland Clinic stories, the piece on Yale New Haven is less critical.  The article emphasizes the work the hospital has done to recover its reputation after being severely criticized for aggressive debt collection practices in the past.

It cites the many charitable efforts the hospital undertakes in New Haven:

The hospital has poured millions of dollars into clinics and free care, but also into nontraditional investments, like homes and college scholarships, in an effort to help its impoverished neighbors.

But do they do enough?  As the article also points out:

While Yale New Haven may be a model for other teaching hospitals in extending its health care mission beyond its walls, some local political leaders, health care providers and even national critics say its community programs, while generously funded, don’t begin to offset the tens of millions of dollars in state, local and federal taxes that it would have paid on its annual profits of $460 million and its New Haven campus.

Non-Profit Hospitals Make Profits

Yale New Haven is part of the largest health system in the state, a very profitable health system, at least in 2016.

The Yale health system reported nearly $460 million in revenue above expenses in 2016, a profit margin of more than 11 percent. It sat on more than $1.2 billion in tax-exempt property, sparing it from paying approximately $50 million in local taxes. Meanwhile, more than 10 executives collected over $1 million in compensation apiece, including nearly $3.85 million in compensation for the CEO.

While the profit data in the article looks at the entire Yale system, which includes multiple hospitals, Yale New Haven Hospital itself had a lower total margin: 5.9% in 2016.  And it’s important to consider that not all hospitals and hospital systems in Connecticut are financially healthy and several are operating at a loss.  Go HERE to see 2016 hospital profits by hospital and HERE to see hospital system profits.

Questions

Both at the state and national level, there is continued controversy over how much profit is too much for non-profit hospitals to make.  After all, spiking health insurance rates are mainly due to the cost of care and hospital care represents 32% of those expenditures.  Equally important, in these days when tax revenues are insufficient to cover the needs of our state, is the extent to which their contribution to society justifies their tax-exempt status.

These are some of the policy questions being asked:

  • As hospitals consolidate into bigger and bigger systems, do they have too much bargaining power to raise their rates well above the rate of inflation?
  • Medicaid and Medicare set rates, but in most states, private insurance rates are determined by negotiation between insurers and hospitals. Should states be more active in setting prices for what hospitals can charge private insurers?
  • When is non-profit hospital executive compensation too high?
  • How should tax policy change when it comes to non-profit hospitals?
  • Are their financially struggling hospitals that should receive extra support so that they do not go out of business and leave communities without critical to health care services?
  • Should hospital obligations to give back to their communities be codified and quantified?
  • Connecticut now has a for-profit system, Prospect Medical Holdings, which operates three hospitals in the state. To what extent can for-profit hospitals be required to serve their communities in addition to their customers and shareholders?

Finding Answers

The federal government as well as states, including Connecticut, are working on policy solutions to address these questions.  We plan to share some of those ideas in future blogs during 2018.

Answering these questions will be crucial if we are truly to achieve quality, affordable health care for all.