Nonprofit hospitals constitute approximately 58% of all community hospitals and enjoy extensive tax breaks that often form a substantial part of their net income. Yet they often don’t reflect their tax charity status in their contributions to charity care. A fall 2023 report from the Senate Committee on Health, Education, Labor and Pensions found that many nonprofit hospitals spend far less than 1% of their revenue on charity care.
Viewed as a simple transaction between society and hospitals, society is getting a bad deal.
In a health-care system where nonprofit hospitals play a vital role in care provision, it’s concerning when there’s a disparity between enjoyed tax benefits and allocations to charitable care. And many of these hospitals offer substantial compensation to their executives.
These conflicting dynamics require policy reforms to realign tax benefits and societal obligations. Enhanced financial transparency and real-time reporting are needed. And reforms may create a role for artificial intelligence in establishing equitable benchmarks for charity care.
Policy Solutions
Policy reforms should ensure that nonprofit hospitals’ tax advantages are adequately balanced. Granular real-time or near-real-time reporting of financial information, coupled with an accessible public platform, will help nonprofit hospitals stay more transparent.
Under current regulations, nonprofit hospitals as tax-exempt entities are required to file Form 990 and Schedule H—but their reporting requirements are insufficient to give the public a true picture of charity care expenditures compared to, say, executive compensation or capital improvements.
Nonprofit hospitals should be required to report total compensation for top executives as well as a corresponding breakdown of salary, bonuses, incentives, and non-cash benefits. Similarly, an outline of expenditures on administrative costs, marketing and advertising expenditures, and consulting and legal fees would clarify where tax expenditures are being allocated—especially those paid to professionals affiliated with top executives.
There are as many ways to funnel funds away from charity care as there are red blood cells in the body. As such, financial transparency must be the general rule rather than only being for specific expenditures. Capital projects and property investments—including acquisition and construction—as well as outsourced costs for services, should all require detailed reporting.
Large-scale transparency requires an extreme reimagining of the relationship between tax expenditures and the kind of social returns we can expect. However, especially in the case of nonprofit hospitals, the degree that expenditures are being redirected into already well-lined pockets represents a grave injustice.
As Hippocrates opined, “extreme remedies are very appropriate for extreme diseases.” Before a policy cure can be crafted, the public needs an accurate understanding of the full scope of the disease.
Using Technology
Open-source public algorithms and AI models could be a game changer in eliminating areas of fund misallocation that would otherwise take much longer to uncover through traditional methods—or may go unnoticed entirely.
AI and other high technology solutions can carry some of the heavy lifting of reporting and compliance auditing. These systems are capable of efficiently processing the large volumes of data required under such an enhanced transparency initiative. They aren’t perfectly accurate—but managing large datasets is one of the areas where they are most effective.
AI also can help develop and apply equitable benchmarks of individual facility charitable care. Nonprofit hospitals can be analyzed against preset industry standards, their peers, and regulatory expectations to ensure that deviations from such requirements can quickly be identified and addressed.
Such a program would require substantial human oversight, but technology can winnow down the universe of issues that an individual auditor needs to focus on. Technologies such as AI and machine learning can make continuous financial monitoring, which detects and flags anomalies or discrepant patterns of spending, a feasible possibility.
Conditioned Tax Status
Because of their tax-exempt status, nonprofit hospitals are required to meet the general requirements for tax exemption and additional higher-level requirements specific to organizations operating nonprofit hospitals under Section 501(r) of the tax code.
Under existing regulations, facilities must conduct a community health needs assessment at least once every three years and thereafter adopt implementation strategies to meet those needs. Each nonprofit facility must adopt a formal financial assistance policy that details eligibility requirements for patients requiring financial assistance, and lays out the calculation methods for amounts charged to those patients.
Nonprofit facilities must then limit the amounts charged for emergency or medically necessary care provided to individuals eligible under the financial assistance policy—to no more than the amounts billed to insured patients. Section 501(r) requires facilities consider whether a patient may be eligible prior to engaging in extraordinary collections actions for existing amounts due.
These requirements demand a rigid set of criteria to ensure a patient who claims financial indigence is actually in need. But the requirements and thresholds controlling other expenditures, such as capital improvements and executive compensation, are far laxer.
Patients are expected to thoroughly document why they need care—an answer that they allocated their resources to an area other than health care wouldn’t suffice. Hospitals aren’t held to a similar standard for their expenditures on charity care.
Balanced Accountability
The path forward requires a recalibration of the nonprofit hospital sector’s priorities and society’s expectations of them. Technology can be a catalyst, offering tools that were previously unfeasible. But such an initiative requires public awareness and demand.
Funds devoted to public health are investments, not mere expenditures. Consequently, misallocated resources are a loss of the underlying investment funds and an opportunity loss for the returns that could have been realized had those resources been appropriately allocated.
When the opportunity loss amounts to human lives lost, no policy reforms can be said to be too stringent.
Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social
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