California’s more than 200 non-profit hospitals claim billions of dollars in federal and state tax exemptions annually. In exchange for that tax relief, they’re required to offer free and discounted health care for the poor and benefits like free vaccinations or disease prevention programs for their communities.
Non-profits don’t distribute earnings to shareholders like for-profit hospitals do and instead plow them back into the organization.
But critics argue that in most other ways, non-profit hospitals are more like businesses than charities and don’t deserve the breaks.
Two years ago, the California Nurses Association released a report that found that in 2010, the state’s not-for-profit hospitals took in $3 billion in tax breaks and other subsidies, while giving back about $1 billion in free and discounted health care.
Now, two state lawmakers, Bob Wieckowski (D-Fremont) and Rob Bonta (D-Oakland) are attempting to shed light on the issue for the second year running with AB 503, a bill that defines charity care and community benefits and requires tighter reporting on them by hospitals.
A similar bill by Wieckowski failed on the Assembly floor last year, receiving just 28 of the 41 votes needed for passage.
“We go back to our historic idea of what hospitals are supposed to do—provide for the needy and the poor,” Wieckowski said.
Currently, the state’s most successful non-profit hospitals provide relatively little free and discounted health care, according to their tax returns.
For example, Stanford University Hospital finished 2011 with $1.6 billion in reserves and netted nearly $500,000 that year. Free and discounted health care accounted for slightly more than one percent of its total expenses.
The hospital, meanwhile, paid its top executive more than $3 million that year.
Cedars Sinai Medical Center in Los Angeles devoted just 1.2 percent of its total expenses to charity care.
Other institutions made larger contributions relative to their size.
White Memorial, which is part of Adventist Health, reported that charity care amounted to 4.3 percent of its total expenses, while St. Francis Medical Center, a Daughters of Charity hospital in Lynwood, south of Los Angeles, allocated 4.4 percent to free or reduced-cost care.
Neither federal nor state law specifies how much money non-profit hospitals must devote to charity care or community benefits.
AB 503 doesn’t either.
It establishes uniform standards for reporting charity care and community benefits, and requires hospitals to place dollar values on each of the community services they offer, like health screenings or diabetes management classes.
Currently, Wieckowski said, hospitals account for the services they offer using different methods, and it’s hard for the public to understand what they’re getting for their tax dollars.
“They get to tell you what the benefit is,” Wieckowski said. “There’s no standard methodology. They just make it up.”
The bill would also bar hospitals from counting as charity care the difference between Medi-Cal rates and the costs of providing services to Medi-Cal patients.
The state could fine hospitals that fail to comply.
The California Hospital Association has targeted the bill for defeat, said its spokesperson Jan Emerson-Shea.
“It’s just another unfunded mandate on hospitals at a time when we’re trying to adjust to a new reality,” Emerson Shea said, adding that many hospitals in the state are struggling to meet the requirements of the Affordable Care Act.
The group has spent $3.8 million on lobbying so far this legislative session, including attempts to stop a bill by Assemblyman Richard Pan (D-Sacramento) that would have required non-profit hospitals to allocate five percent of patient revenue to charity care.
In East Los Angeles, White Memorial Medical Center’s senior vice-president Mary Anne Chern called AB 503’s mandates expensive and unnecessary.
“We really want to be socially responsible,” she said. “It [AB 503’s requirements] would take money away from health care.”
Emerson-Shea argued that examining charity care alone gives a false impression of what hospitals actually contribute.
“It misses the bigger picture, which are community benefit programs outside the hospital that are intended to address community needs,” she said.
Community benefits can include medical research, medical education, health screenings, and obesity and diabetes prevention efforts, among many others.
White Memorial, for example, hired a gang-prevention worker to counsel gang-involved youth in the Emergency Room after shootings or following the birth of their children, when they would be most receptive to changing their lives.
Some hospitals like Stanford spent huge sums on medical education. Cedars Sinai has invested in research.
What’s more, Emerson Shea noted, some hospitals provide less charity care because their patients don’t need as much.
“If you’re a hospital in inner city L.A., you’ll have a lot more charity care required than if you’re in Newport Beach.”
“Show me,” Wieckowski countered, arguing that some non-profit hospitals likely do a good job and uniform reporting of the sort his bill requires would prove it.
John Colombo, interim dean of the University of Illinois College of Law, who has written extensively on tax exemptions for non-profit hospitals, would like to overturn the entire system.
He thinks hospitals are run like businesses and should pay taxes like for-profit companies.
Non-profit status for hospitals is a holdover from the late 1800’s when they were classic charities—places where poor people were attended by religious volunteers at the end of their lives, not the high-tech scientific institutions they are today, Colombo said.
Now, he said, government looks to non-profit hospitals to help patch a frayed health care system by providing free care and benefits, but Colombo said the policy is unworkable.
“We shouldn’t be looking at them to solve our health delivery system,” Colombo argued.
“Suppose we go back to the days before food stamps. And suppose someone said, we’ll deal with people who can’t afford food by giving grocery stores tax exemptions and asking them to give away food. Would anyone think that’s sensible? Anyone would look at you and say you’re insane. But that’s exactly what we do in health care.”
Still, Colombo said, no lawmaker would suggest stripping a big non-profit hospital of its tax-exemption. It’s too politically perilous.
AB 503 doesn’t go that far. But it likely faces a tough battle, beginning with a Senate Health Committee hearing June 25.
Note. This article was edited after posting to correct the vote total for AB 975 on the Assembly floor last year.