June 18, 2009

The Honorable Max Baucus
Chairman, Senate Committee on Finance
United States Senate
Washington, DC 20510

Dear Mr. Chairman:

Introduction

The Healthcare Financial Management Association fully supports your committee’s efforts to simultaneously expand health insurance coverage to the uninsured while reducing the cost of health care for all Americans. We particularly applaud your deliberative approach to such sweeping reforms.

We would like to add some information and perspective to the discussion on not-for-profit hospitals’ tax-exempt status. This is an area where HFMA continuously works with its members to develop best practices and provide guidance for the provision and reporting of charity care and broader community benefits. As an example, HFMA’s Principles and Practices Board recently published sample charity care policies and procedures for hospitals to use as a guide for their charity care programs. Other relevant examples of our activities in this area are included in an attachment.

While we believe not-for-profit hospitals’ tax-exempt status bears examination and transparency, we are concerned the current debate is narrowly focused on charity care only. The discussion should be broadened to consider hospitals’ organizational attributes, the full range of societal benefits provided, and possible negative consequences of revoking not-for-profit hospitals’ tax-exempt status.

Organizational Attributes of Tax-Exempt Healthcare Providers

Tax-exempt healthcare organizations are formed to address the specific needs of their communities; therefore, the organizational attributes that merit tax-exemption are not standard across all institutions. In 1991, an HFMA Chairman's Task Force released a report identifying the major attributes of tax-exempt organizations, which include:

  • Mission to Provide Community Benefit: Mission is a cornerstone of granting tax-exemption. According to federal law, the tax-exempt provider must have a clearly defined mission statement committing the institution to charitable endeavors. Both the institution's historical background and the community's needs are important in determining the mission statement. 
  • Use of Financial Surpluses: No individual may receive any portion of a tax-exempt institution's financial surpluses as a result of ownership. Both federal and state laws require that all financial surpluses must go toward furthering the organization's charitable purpose. Compensation arrangements must be carefully constructed to reflect fair market value for services rendered. 
  • Accountability: The organization's board of trustees must hold itself answerable to its community for maximizing the entity's contribution to the community. 
  • Goodwill: Goodwill is an intangible attribute characteristic of successful tax-exempt hospitals continuing their mission of providing care and meeting their community responsibility over a long period of time. Such organizations usually have stable ownership and governance structures and regularly receive significant philanthropic and volunteer support. 

Societal Benefits Provided by Not-For-Profit Hospitals

Offering free or discounted care is an important component of many not-for-profit hospitals' missions. However, HFMA believes it is only one of many community benefits provided by hospitals that merit tax-exempt status. Failure to recognize the broad basis of community benefit could lead to a specific trade-off, which would undermine important and cumulative community benefits that tax-exempt healthcare institutions deliver. Examples of wider community benefits that HFMA believes merit tax-exempt status include:

  • Reduction of Government Burden: Many tax-exempt hospitals provide services that federal, state, and local government otherwise would have to provide. Services especially demanded from tax-exempt healthcare providers include high-tech, high-intensity services, emergency care, chronic care, and long-term care. 
  • Provision of Essential Healthcare Services: Tax-exempt healthcare providers are often the sole providers of healthcare services that are so essential to community health that tax-exempt status is warranted. Examples of essential services include emergency rooms and outpatient clinics serving low-income patients. 
  • Provision of Unprofitable Services: The provision of unprofitable services is commonly a provider's charitable response to a community need. Unprofitable services in this sense lose money because of high costs combined with low volume or inadequate payment rather than inefficient operations. Common examples of unprofitable services include burn, neonatal, and trauma centers and community mental health centers. 
  • Public Education: Teaching institutions, of course, are exempt because of their role in the advancement of education and science. Most tax-exempt healthcare providers, however, also provide a range of educational programs to enhance public health. Examples of such programs include public health education, wellness programs, and the sponsorship of educational activities. 
  • Serving Other Unmet Human Needs: Some tax-exempt hospitals provide important services that are tangential to health care but that are unmet by any other entity in the service area. Examples of these activities include senior citizen education and outreach programs, care for "boarder" babies, or the operation of a "meals on wheels" program. 

In addition to reducing or eliminating access to the “societal benefits” discussed, communities served by not-for-profit hospitals would also suffer economic hardship and constrained access to care as a result of the revocation of tax-exempt status.

Revocation of Tax-Exempt Status: Impact on Communities

The loss of tax-exempt status would have serious implications for hospitals’ operating and capital expenditures that will ultimately impact the well-being of their communities.

Operating Expenditures
Healthcare services by their nature are labor intensive, therefore any reduction in community benefits required to satisfy new income tax liabilities will ultimately result in job losses. This is especially deleterious in rural communities where hospitals are an important source of good jobs with stable benefits.

Healthcare services by their nature are labor intensive, therefore any reduction in community benefits required to satisfy new income tax liabilities will ultimately result in job losses. This is especially deleterious in rural communities where hospitals are an important source of good jobs with stable benefits.

Individual states will further exacerbate this financial impact as they levy property taxes on all hospitals, not just profitable ones. This has the potential to push unprofitable hospitals into bankruptcy, resulting in additional job losses and reduced access to care for all members of the community. Unfortunately, this is not the only way in which access to quality care will be jeopardized by loss of tax-exempt status.

Capital Expenditures
With the loss of tax-exempt status, access to two important sources of financing necessary to meet capital needs would either be severely reduced or eliminated. First, it is widely anticipated that charitable donations used to fund both capital improvements and community programs would be redirected to other organizations that can provide donors with an income-tax shield.

Second, not-for-profit hospitals would be precluded from accessing municipal capital markets. This would drive up the cost of capital (and ultimately the cost of providing care) as investors demanded higher returns to compensate for the lack of preferential tax treatment on municipal bond coupon payments. Additionally, it could also trigger call provisions embedded in existing debt covenants requiring hospitals to immediately repay outstanding debt. Under this scenario, even hospitals with strong balance sheets would struggle to meet their obligations and avoid bankruptcy.

Conclusion

The loss of tax-exempt status for not-for-profit hospitals has serious consequences for the communities they serve. By eliminating tax-exemption, Congress would not only weaken the safety net that the most vulnerable in our communities rely upon for health and wellness services, but would simultaneously increase the number of people dependent on the safety net and reduce services available to all citizens.

Tax-exemption is often considered a subsidy for costs the federal and local governments would otherwise incur to provide important but costly health services. Given the role that not-for-profits play in filling this void, we urge the Senate Finance Committee to proceed in the same cautious and deliberative manner as in other aspects of healthcare reform. Before any decision is made, HFMA believes the Committee should understand the full costs of “societal benefits” provided by not-for-profit hospitals – not just the cost of providing charity care. As articulated in HFMA’s white paper Healthcare Payment Reform: From Principles to Action, a fair payment system is one that reimburses healthcare providers for the full range of services they provide for the greater benefit of society.

HFMA takes pride in its long history of providing balanced, objective financial technical expertise to Congress, HHS, and advisory groups. We hope that these comments are useful as the Finance Committee pursues the best interests of patients, taxpayers, and the nation’s healthcare system.

We are at your service to help the Finance Committee gain a balanced perspective on this complex issue. If you have additional questions, you may reach me, or Richard Gundling, Vice President of HFMA’s Washington, DC, office, at (202) 296-2920. The Association and I look forward to working with you.

Sincerely,

Richard L. Clarke, DHA, FHFMA
President and Chief Executive Officer
Healthcare Financial Management Association

About HFMA

HFMA is the nation's leading membership organization for more than 35,000 healthcare financial management professionals. Our members are widely diverse, employed by hospitals, integrated delivery systems, managed care organizations, ambulatory and long-term care facilities, physician practices, accounting and consulting firms, and insurance companies. Members' positions include chief executive officer, chief financial officer, controller, patient accounts manager, accountant, and consultant.

HFMA is a nonpartisan professional practice organization. As part of its education, information, and professional development services, HFMA develops and promotes ethical, high-quality healthcare finance practices. HFMA works with a broad cross-section of stakeholders to improve the healthcare industry by identifying and bridging gaps in knowledge, best practices, and standards.

HFMA Resources on Charity Care and Community Benefits 

Fact Sheet on Attributes of Tax-Exempt Status, based on HFMA’s 1988 Chairman’s Task Force.

Publication Date: Thursday, June 18, 2009