How nonprofit hospitals get away with the biggest rip off in America

All across the nation, cities big and small are having their pockets picked and their communities decimated by their local nonprofit hospitals.

How so? Nearly two-thirds of our nation’s 5,000 hospitals, or around 3,900, call themselves nonprofit, a designation that allows them to avoid paying taxes. Unlike for-profit companies, including for-profit hospitals, nonprofit hospitals pay no taxes. They pay no property tax, no state or federal income tax, and no sales tax.

In exchange, these charitable organizations are supposed to plough what they would have paid in taxes back into the community, largely by way of lowering healthcare costs or providing free care for those who can’t otherwise afford it.

But that’s not what happens.                                                                                            

Instead, those would-be tax dollars go into seven-figure executive salaries, boondoggle retreats, extravagant galas, private jets, billboard ads, skyboxes, offshore bank accounts, and to fund special interest lobbyists whose job it is to make sure Congress keeps the sweet deal the way it is.

Meanwhile, these same “charitable” institutions send patients struggling to pay high medical bills to collections and put liens on their houses.

America, we are being scammed.

“It’s the biggest abuse of the U.S. tax code by far,” said Tom Thomas, a Florida CPA, and founder of the Association of Independent Doctors, a national trade association working to stop the injustice.

According to the IRS, to qualify as a tax exempt 501(c)(3), organizations must meet these criteria:

·       No part of their net earnings is allowed to inure to the benefit of any private shareholder or individual. (This specifically includes earnings by way of profit distribution or excessive salaries.)

·       No substantial part of their activities can consist of carrying on propaganda or otherwise attempting to influence legislation.

Yet, nearly half of the CEOs of America’s leading nonprofit health systems last year had salaries that exceeded $2.5 million. The highest paid, the top executive at Banner Health, in Phoenix, received $21.6 million. In St. Louis, the chief at Ascension Health made $13.6 million; and $10.6 million went to the top paid executive of Northwestern Memorial HealthCare in Chicago. Those salaries sure seem excessive in a country where medical bills are the leading cause of bankruptcy.

Meanwhile, Atrium Health Foundation, the allegedly charitable arm of the tax-exempt Atrium Health System, in Charlotte, NC, had so much spare change, they parked $52 million of it in the Cayman Islands, according to the nonprofit’s 2017 990. See page 31 of this report.

To keep the money flowing their way, last year the American Hospital Association, historically one of the top five spenders in Washington, paid $24 million to lobby Congress. Over the last 10 years, the AHA has spent almost $400 million on lobbying, according to the Center for Responsive Politics. So much for not using money to influence legislation.

Now let’s imagine if all the money that has gone to excess compensation, offshore accounts, executive perks, and currying political favor actually went to lowering healthcare costs and helping the poor with their medical bills.

A

by researchers at Yale, University of Pennsylvania, Carnegie Mellon and the London School of Economics looked at how nonprofits charge, and found they don’t price any less aggressively than for-profits, a finding that prompted study co-author Zack Cooper, of Yale, to write: “We subsidize not-for-profits to the tune of $30 billion annually, in the form of tax exemptions, and we have to ask what that money is getting us?”

Not much.

But it could. A few years ago a business columnist at the Orlando Sentinellooked into what Advent Health (formerly Florida Hospital) and Orlando Health, another nonprofit hospital in the same community, would pay in property taxes in just five Central Florida counties. The reporter found that if these institutions paid property taxes alone, the community would net an additional $45 million a year.  

In a mid-sized metro like Orlando, $45 million would pay for a lot of schoolteachers, police officers, and, yes, community health care and financial aid for those who need it.

But instead the community has seen medical costs go up, property taxes increase, health systems get bigger, and healthcare executives get richer.

Nonprofit hospitals also use their tax-free surplus in more insidious ways. They use it to buy up independent medical practices in their communities, and turn independent doctors into employed physicians. This consolidation decreases market competition and increases the hospitals’ market power, meaning they can negotiate higher payments from insurers. It also allows them to layer in facility fees, which independent doctors don’t charge. These added fees cause costs to increase three to five times. Oh, and the taxes those previously independent medical practices used to pay into the community? They all come off the tax rolls. 

We pick up the slack.

One way nonprofits hospitals get away with this is by using Chargemaster prices when filling out the charitable contribution section on their 990-tax forms. These are made up prices that nobody actually pays that are many times higher than what commercial insurance or Medicare would pay for the same service or procedure. Because nonprofits can make this number up, they can inflate how much they “give back” to the community as much as they want. This would be like you getting to invent what you paid in mortgage interest and making the number so high it zeroed out your income tax.

And by the way, for-profit hospitals provide charitable care to the community and pay taxes.

Ostensibly, the IRS is beginning to crack down and enforce the laws that exist to prevent just this kind of abuse. Sen. Chuck Grassley (R-Iowa), chair of the Senate Finance Committee, has allegedly written the IRS Commissioner Charles Rettig and asked him to step it up.

He’d better because we can’t count on Congress to fix this. They are bought and paid for. Getting the IRS to better enforce its own tax code and to make nonprofit hospitals that behave like for profits to either pay taxes, or provide true (not inflated) charitable care to its community is a critical next step.

In addition, American patients need to wake up to what’s happening, get angry, and demand that the nonprofit hospitals that profess to be charitable institutions stop paying their executives outsized compensation packages, and start giving back to the communities they take from. Either that or pay taxes like the rest of us. Eliminating the abuses of the tax-exempt status would help take the financial burden of healthcare off the backs of U.S. workers and employers. It would also pour needed healthcare dollars back into communities that sorely need the relief, the very ones that were ripped off in the first place.  

Marni Jameson Carey is the Executive Director of the Association of Independent Doctors. You may reach her at marni@aid-us.org.