Nonprofit Hospitals Under Examination in Congress and in Court

Nonprofit hospitals are coming under increasing scrutiny in Congress and in the courts over their performance.

Underlying the questioning is whether the hospitals provide sufficient services to warrant their exemption from taxes, and some experts say that additional attention may soon be given to whether other types of nonprofit organization also deserve tax-exempt status.

In Washington, the chairman of a powerful House of Representatives committee last month held a hearing on the practices of nonprofit hospitals, questioning whether uninsured and underinsured patients are charged higher prices than those with health coverage.

At the same time, nonprofit hospitals in 15 states are facing a series of lawsuits alleging they have violated their duty to provide charitable care.

Bill Thomas, the California Republican who chairs the House Ways and Means Committee, said his committee’s inquiry into hospital policies is just the beginning of what he called a need to “investigate the entire 501(c) section” of the federal tax code, which bestows tax-exempt status on a wide range of nonprofit organizations, including charities, hospitals, and universities. His hearing was held the same day the Senate Finance Committee held a session on legal abuses by donors, charities, and foundations. Senators are considering a wide range of ideas that could increase regulation of nonprofit organizations.

Mr. Thomas said he chose to begin examining the issue by looking at hospitals because they account for more than 40 percent of the taxes the federal government loses by granting organizations nonprofit status.

“If I blindfolded you, took you into a hospital, took the blindfold off, and led you around to look at the hospital, you would be hard-pressed, I believe, to determine whether it is a not-for-profit or a for-profit,” he said at the hearing. “Here are two institutions, structured fundamentally differently in the tax code, carrying out virtually identical duties, responsibilities, and functions as a hospital. What is it that nonprofit hospitals do differently than people who pay taxes? I think we owe it to the taxpayers to explore that question.”

Serving Society

In response, representatives of nonprofit hospitals said their institutions provide many services that are not available from profit-making institutions.

“The long-term stability of the health-care system is served by the tax-exempt nature of hospitals,” said Richard Morrison, a vice president of the Adventist Health System, which operates 38 nonprofit hospitals in 10 states.

“Both sides have a valid point,” said Frances Hill, a law professor at the University of Miami who specializes in nonprofit issues. Ms. Hill said government and nonprofit organizations should be discussing what activities justify a tax exemption. “I’m hoping the nature of this debate will not just be nonprofit groups trying to justify themselves, but rather really thinking about what is a public benefit.”

The federal tax exemption, she added, should focus more narrowly on the activities an organization carries out, rather than being granted to the entity itself. “We need to target the exemption to activities that truly are of benefit to society.”

The provision of charity care is a central issue in lawsuits filed against 27 nonprofit hospitals in 15 states on behalf of people without health insurance by Richard Scruggs, an Oxford, Miss., lawyer.

The lawsuits say that the hospitals charged patients who don’t have insurance or who have insufficient coverage far higher rates than they charged patients with insurance, and then aggressively used bill-collection agencies to try to force them to pay. Those efforts to collect payment from patients of limited means, Mr. Scruggs said, violate nonprofit hospitals’ obligation to provide charity care to the poor.

Nonprofit hospitals provide many other benefits that justify their tax exemption, however, said Jill R. Horwitz, an assistant professor at the University of Michigan Law School who has studied the differences between nonprofit and for-profit hospitals. She found, for example, that nonprofit hospitals are far more likely to provide trauma centers and psychiatric emergency care — services that are not generally profitable.