Tax-Exempt Status of Nonprofit Hospitals Under Increasing Scrutiny

Although federal law requires nonprofit health systems to provide community benefits and care to the needy, it does not specify how much care should be provided, leading a growing number of officials in cash-strapped states like Illinois to question the tax-exempt status of some nonprofit hospitals, the St. Louis Post-Dispatch reports.

BJC Healthcare, which operates thirteen hospitals in Missouri and Illinois, is exempt from paying taxes on most of the $1.5 billion in property it owns, the $3.6 billion in revenue it generates annually, and the $372 million it made from investments last year. But while charity care at the largest nonprofit health systems in the St. Louis area — including BJC Healthcare, SSM Health Care Corporation, Mercy Health, and Ascension Health — accounts for only between 1.7 percent and 2.6 percent of their total operating revenue, BJC's chairman and CEO Steve Lipstein defended his system's tax-exempt status by pointing to other benefits it provides as well as things it cannot do. For example, BJC must reinvest its earnings in hospital improvements rather than distribute profits to shareholders. And in addition to the $230 million worth of medical research, physician education, and free clinic services it provides, it is reimbursed by the state for only 80 percent of the cost of Medicare.

Nonprofit hospital officials argue that their institutions provide a vital safety net to the communities they serve, and that if they lost their tax exemption the cost of providing health care would rise. But Ray Alvey, the CFO of for-profit St. Louis University Hospital and a former employee of two BJC hospitals, argues that it is a hospital's culture — not its tax status — that determines how much charity care it provides. "There's no difference between for-profit and nonprofit when it comes to charity care," said Alvey. "The only difference is their tax status."

Still, while congressional interest in revisiting the tax status of nonprofit hospitals has been sporadic, recent efforts have gained some traction. In 2006, for example, Sen. Chuck Grassley (R-IA) succeeded in getting the Internal Revenue Service to form a task force to examine the charity care, community benefits, and executive compensation of nonprofit hospitals.

"The IRS is trying to sort this out and refine it," said Jason Turner, an assistant professor of health management and policy at St. Louis University's School of Public Health. "Realistically, I think many health systems are viewing this as the potential groundwork of regulation. Illinois, I would argue, has been more opaque in its rules. It has also been a bit more aggressive."

Jim Doyle. "Nonprofit Hospitals' Huge Tax Breaks Under Increasing Scrutiny." St. Louis Post-Dispatch 10/23/2011.