October 18, 2023
Can Data Finally Resolve the Great Hospital Tax Exemption Debate?
As a cub healthcare business reporter, I covered the first state and local challenges to tax exemptions for not-for-profit hospitals. Hospitals won some. States and local municipalities won some. Occasionally the two sides settled with hospitals agreeing to make payments in lieu of taxes and keeping their exemptions.
That was more than 35 years ago. We’re still arguing about it. Do not-for-profit hospitals provide enough community benefits to justify their exemptions from federal, state and local taxes?
The most recent debate over this question happened last week. On Oct. 10, Sen. Bernie Sanders (D-Vt.), who chairs the Senate’s Health, Education, Labor and Pensions Committee, released a report that said no, hospitals don’t deserve their exemptions as they spend “paltry amounts” on charity care. Charity care is care provided with no expectation of payment. It’s free. No strings attached. It’s the bullseye of community benefits.
The same day, Oct. 10, the American Hospital Association (AHA) released a report that said yes, hospitals earn their exemptions as they spend billions of dollars each year on community benefits. The report is based on the cost of community benefits that tax-exempt hospitals report on Schedule H of Form 990, filed annually with the IRS. What hospitals can claim as a community benefit is broad. The 10-page schedule comes with 24 pages of instructions. The AHA said the 2,790 hospitals in the report’s study pool provided nearly $130 billion in community benefits in 2020.
Nothing was settled. It’s more than a week later. Other than some next-day media coverage, the debate dropped out of the news. That is, until the next brief flare-up.
There may be a way to end this debate once and for all. Please don’t ask me how I know this as the back story would make me seem like a nerdy old healthcare business reporter who likes to read Medicare cost reports, but there may soon be data available to precisely know how much charity care and bad debt all hospitals incur in providing care to patients. Again, charity care is care provided with no expectation of payment. Bad debt is care provided for which payment was expected but not received. Combined, the two are uncompensated care. When I say all hospitals, I mean taxable for-profits and tax-exempt not-for-profits.
On Dec. 29, 2022, CMS issued something called Transmittal 18. The directive added two new exhibits that hospitals must attach to their S-10 worksheets, which are part of hospitals’ annual Medicare cost reports. Worksheet S-10 is where hospitals report their uncompensated care costs to Medicare.
Hospitals must now break out uncompensated care and report their charity care expenses on Exhibit 3B and report their bad debt expenses on Exhibit 3C.
What that means is, in a few short years, there will be enough publicly available data that can be culled from the two new exhibits to know exactly how much hospitals spend on charity care and bad debt and know exactly which sector spends more on each, for-profits or not-for-profits.
Then lawmakers, policymakers and regulators can make informed, objective decisions about hospital tax exemptions based on the data, not on special interest or political leanings.
Thanks for reading.