Senator Questions Operating Practices of Nonprofit Hospitals, Asks for Changes

Nonprofit hospitals are reviewing the way they operate and considering changes amid growing pressure from lawmakers and regulators to justify their tax-exempt status.

The American Hospital Association is now crafting its response to a letter a key member of Congress sent last month that asked for such proposals.

In the letter, Sen. Charles E. Grassley, chairman of the Senate Finance Committee, asked the organization for ideas on how Congress should define what constitutes “charity care” — the subsidies hospitals provide to care for the needy — and regulate billing and debt-collection practices, executive pay, and profit-making activities, among other issues.

Senator Grassley last year began looking into nonprofit hospitals, which represent 41 percent of the nonprofit world’s revenue, as part of a broader inquiry into possible abuses by nonprofit organizations.

Many lawmakers are concerned about the plight of the uninsured in the wake of recent news-media reports that some people who lack health insurance have been bankrupted by their medical bills, according to a Senate Finance Committee staff member who declined to be named. Congress could pass new rules this year outlining the responsibility of nonprofit hospitals to provide charity care or discounted fees for the uninsured, according to the staff member.

At issue is how a nonprofit hospital defines its mission.

Until 1969 nonprofit hospitals were required to provide charity care to qualify for tax-exempt status. Since then, they have been able to qualify by providing other types of benefits to the locations they serve, such as emergency care and health education. Some politicians and members of the public now question whether such benefits are enough.

‘Spell Out’ Ideas

The American Hospital Association began working with the Senate Finance Committee in January to answer questions, such as how much “community benefit” charity hospitals should provide and what prices they should charge low-income, uninsured patients, said Thomas Nickels, the association’s senior vice president for federal relations.

Mr. Grassley’s letter “is asking us to spell out some ideas,” he said.

Senator Grassley’s concerns echo those raised by Rep. Bill Thomas, Republican of California, who has announced that he will not seek re-election this fall. Mr. Thomas, chairman of the House Ways and Means Committee, began investigating nonprofit hospitals two years ago, and has questioned whether they deserve tax-exempt status (The Chronicle, April 28, 2005).

Hospital representatives in several states say they already have voluntary rules that might serve as models for other states.

For example, in Minnesota hospitals have agreed to monitor their billing and collection practices and charge discounted fees to uninsured people who earn too much to qualify for certain types of government aid. The discounts apply to people earning more than the federal poverty level but less than $125,000 a year.

Hospitals in Illinois have agreed to voluntary guidelines for charity care and for billing and collection practices.

But some officials expressed concern that a federal law incorporating such models could unfairly burden hospitals in states that have large numbers of poor or uninsured patients. “None of us looks forward to federal legislation,” said Bruce J. Rueben, president of the Minnesota Hospital Association. “It’s a lot easier to deal with if it’s created at a state level.”

States, IRS Take Action

Scrutiny of charity hospitals continues on other fronts as well: The Internal Revenue Service, the courts, and state regulators are also examining the organizations.

IRS officials say they are investigating pay at nonprofit hospitals to see whether it is excessive. At the same time, they are checking to see if the hospitals provide benefits to society that set them apart from for-profit hospitals and justify their tax-exempt status.

States are looking into whether to impose stricter requirements on charity hospitals.

In Illinois, Attorney General Lisa Madigan in January proposed a law that would require the hospitals to spend at least 8 percent of their total operating costs on charity care each year to retain their state tax exemptions. Officials in Minnesota and Kansas have also expressed concern about the level of charity care provided by nonprofit hospitals.

Some low-income patients have sued nonprofit hospitals, saying that the hospitals failed in their charitable mission by overcharging the poor for services. Some of the lawsuits have been dismissed by federal courts. Others are pending.

The American Hospital Association’s Mr. Nickels said hospitals are now providing $27-billion worth of free care annually, in addition to many other benefits, to the cities and towns where they are located.

He said that hospitals need to make sure that their billing practices are well understood and make sure that low-income people who lack health insurance are not saddled with excessive bills.

But he warned that Congress needs to be careful not to go too far in writing new laws.

A third of the nation’s hospitals are losing money, he said, adding that federal payments for health care for the very poor and elderly are often not enough to cover the hospitals’ costs of treating them.

“You already have hospitals in dire financial condition,” Mr. Nickels said.

Imposing more requirements on them could put some out of business, he said.