Like virtually all states, Ohio does not require nonprofit hospitals to report the value of their tax breaks. And Ohio — like 35 other states — does not require a set amount of charity care from hospitals in return for their nonprofit status.
In the absence of such accountability, “I believe that there’s a wide range in community benefit and community responsibility among the hospitals” statewide, said Cathy Levine, executive director of the Universal Health Care Action Network of Ohio. “You can’t compare two hospitals now because there’s no standard for reporting.”
The hospitals say they more than make up for their tax breaks by shouldering much of the community’s considerable unmet health care needs. Dayton is the second largest U.S. metro area — after Orlando, Fla. — without a publicly funded hospital to care for the poor, according to the Greater Dayton Area Hospital Association.
Premier Health Partners, whose largest hospitals are Miami Valley and Good Samaritan, provides the bulk of the region’s uncompensated care.
“Our board is totally locally controlled and ... has said we’re mission-driven,” said Mary Boosalis, Premier’s executive vice president. “And that mission is to provide care, regardless of ability to pay.”
Kettering Health Network, whose hospitals include Kettering and Grandview medical centers, also makes a significant contribution to the community’s safety net for the indigent. For example, it took over a health clinic and began offering behavioral health services for adolescents after Franciscan Medical Center (formerly St. Elizabeth) closed in 2000. Neither service is profitable but is in keeping with the organization’s faith-based mission, network officials said.
The Children’s Medical Center of Dayton said its tax-exempt status is key in enabling it to provide a wide range of pediatric specialists in a single location, as well as teaching opportunities.
Shifting costs
The $350 million estimate of community benefits is offset by cost-shifting done to keep hospitals viable.
To remain financially sound, hospitals shift costs, negotiating higher payments with commercial health insurers such as Anthem Blue Cross and Blue Shield in Ohio and UnitedHealthcare to make up for shortfalls in government reimbursement. As a result, businesses and privately insured individuals pay higher rates to offset the cost of the community benefit that hospitals provide.
“Those of us who pay for health care pay for those unmet health needs,” Levine said.
Hospitals must shift costs in the Dayton region more than in any other urban area in Ohio. The region has the highest percentage of government (Medicare and Medicaid) hospital patients in the state: 72.6 percent. The U.S. average is 65.6 percent.
Hospitals say their ability to shift costs to the private sector, however, is increasingly limited.
“If you can’t make it up through cost-shifting, which is not easily done these days, then you have to make it up through expense reduction,” said Roy Chew, executive vice president of Kettering Health Network. “Expense reduction is either programs or people.”
In other words, the hospitals say, their nonprofit status protects jobs. The region’s hospitals directly employ more than 30,000 people, and claim their combined economic impact is greater than that of Wright-Patterson Air Force Base. They also note a robust health care sector is a business recruiting tool, and, as one executive described it, “an underpinning for Dayton’s future.”
Local nonprofit hospitals typically have revenues that exceed expenses by 3 percent to 5 percent — money that hospital leaders point out is reinvested in the community instead of pocketed by shareholders. The Greater Dayton Area Hospital Association said margins are slimmer than in other nearby cities.
The hospitals also hold significant sums as reserves. In 2010, Premier had $919 million, while Kettering Health Network had $400 million. Dayton Children’s has about $164 million in operating reserves.
With slim margins, a reduction in government reimbursements for health care can tip hospitals into the red, Chew said. He noted the demise of Franciscan Medical Center, which at the time attributed its closing to reduced reimbursement rates from Medicare and managed-care plans.
“It’s important that the hospitals be vigilant and have appropriate financial strength to be able to withstand some of the financial buffetings that we’re going to encounter,” Chew said.
Growing scrutiny
As nonprofit hospitals take on the characteristics of for-profit businesses, they’ve come under growing scrutiny in states like Illinois.
In March 2010, the Illinois Supreme Court ruled state officials were justified in denying the tax exemption of a hospital for not providing enough charity care, putting nonprofit hospitals nationwide on notice of a possible new regulatory environment.
Earlier this year, an Illinois state senator proposed legislation that would require nonprofit hospitals to spend at least 3.5 percent of their total revenue on charity care. Those that fell short of that threshold would be subject to a fee.
And just last month, the Illinois Department of Revenue denied property tax exemptions for three hospitals after determining they did not meet the state constitutional requirement that exempt property be “used exclusively for charitable purposes.”
“The fundamental question is whether hospitals operate as businesses or as charities,” one Illinois state document reads.
The Ohio Hospital Association opposes charity care requirements. Spokeswoman Tiffany Himmelreich said charity care doesn’t give a complete picture when it comes to community benefit, and said hospitals across the state serve different socioeconomic populations, which could make it harder for some hospitals to meet statewide benchmarks.
Local hospitals, however, would fare well in meeting charity care benchmarks that other states have proposed or have in place, said Bryan Bucklew, president and CEO of the Greater Dayton Area Hospital Association.
Candice Christenson, a member of Kettering Health Network’s board, said every major business change under consideration at KHN is “held side-by-side with ‘How does this meet our mission?’ ” she said.
Nonprofit hospitals aren’t completely tax-exempt. For example, Premier said it paid more than $3 million in real estate taxes in 2010, while Kettering Health Network paid $2.28 million.
If hospitals lost their nonprofit status, unprofitable programs would close, many health care needs would go unmet, and many people would have to seek medical care elsewhere, Premier’s Boosalis said. Even at well-run hospitals, she said, many programs lose money.
“You don’t see proprietary hospitals setting up a burn unit,” Boosalis said. “There’s a reason for that.”
The benefits conferred to hospitals because of their nonprofit status makes it harder for others to compete, several executives said.
In addition to more than $100 million in tax breaks and $7.5 million in reimbursement for indigent care from Montgomery County’s human services levy, the region’s nonprofit hospitals receive gifts that donors can deduct from their taxes. They also can issue tax-exempt bonds.
“It’s not a level playing field between the nonprofits and the for-profits,” said Alex Rintoul, CEO of the Medical Center at Elizabeth Place in Dayton, whose physician owners sold a 50 percent stake in the for-profit hospital to Kettering Health Network in early 2009 to keep the hospital financially viable.
In addition to being subject to taxes, MCEP and other for-profit hospitals have found it difficult to establish a foothold in Ohio’s nonprofit-dominated metro areas, Rintoul said. As a for-profit, he said, “certainly the cost of doing business is driven up, and we are not able to get any leverage with the private payers (insurance companies) to help defray some of that cost.”
Calculating benefits
Only three states — Utah, Texas and Pennsylvania — require their nonprofit hospitals to report the value of their tax exemptions. Julie Trocchio, senior director of community benefit and continuing care at the Catholic Health Association of the United States, said all hospitals should be prepared to answer the question.
“It’s an important piece of information that communities are going to want,” Trocchio said.
It’s not an easy question to answer, however, because there are no standard ways to report community benefit.
Premier Health Partners reported a tax exemption of $33 million in federal corporate income tax. But Kettering Health Network — whose revenues in 2009 were about 60 percent of Premier’s — reported an exemption of just $2.5 million for that category.
In contrast, KHN reported a state sales tax exemption of $23.5 million. Despite being a larger network, Premier reported state sales tax of just $3.09 million.
Tom Duncan, Premier’s chief financial officer, said the health network is not the “end user” of many of the items it purchases, and he believes Premier therefore wouldn’t be subject to sales tax even if it were for-profit. He said Premier likely overstated the amount of federal corporate income tax it would owe if it were a nonprofit because it would qualify for deductions.
Dayton Children’s provides a relatively small amount of charity care, but David Kinsaul, the hospital’s president and CEO, said that’s because the hospital relies on Medicaid patients for more than 50 percent of its revenue. Dayton Children’s officials have said Medicaid reimburses only 79 percent of what it costs the hospital to care for those covered by Medicaid.
For that reason, when evaluating a hospital’s community benefit, various factors have to be considered out of fairness, Kinsaul said.
The IRS requires hospitals to quantify their community benefit. Charity care is included, as is unreimbursed Medicaid, for which hospitals are more likely to incur losses. Hospitals may include unreimbursed Medicare and even some bad debt in their community benefit, but are asked to justify why they are including it.
The federal health care overhaul — and the increase in insured patients that it is expected to generate — raises fresh questions about how hospitals will provide a community benefit large enough to justify their tax exemption. An additional 32 million people who are currently uninsured are expected to gain coverage as part of the overhaul.
Hospitals, however, say their mission of providing care to the indigent will remain just as relevant in a few years as it is now.
“There is nothing in the health care reform act that is financially positive for hospitals from an operating margin perspective,” Chew said. “The pressure that we are all under to reduce our costs is immense and it’s ongoing.”
Access will likely become an even greater problem even as more people gain coverage, hospital leaders said. It’s already an issue in Dayton. Kinsaul said, as Dayton Children’s emergency department last year saw nearly 70,000 children.
“They have coverage, but they don’t have access,” Kinsaul said. “Every physician in town that I know takes Medicaid, but they can only take so much or they’ll go out of business. (So the patients) show up in our emergency rooms.”
Levine, whose organization advocates for universal health care, said the public needs more input on hospital decision-making. The health care overhaul provides for that by requiring hospitals to complete a community health needs assessment with input from the community.
Levine said the public also should have input on hospital decisions dealing with issues such as balancing rate increases with building cash reserves.
“If we’re going to rebuild our health care system around comprehensive, coordinated, high-quality care for all Ohioans, the hospitals are going to have to be more accountable for how they spend their money,” she said.
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