Should hospitals with charitable tax status designations be seen as public trusts whose mission is to care for the sick even at the expense of profits?
Obviously, the answer ought to be a categorical "yes."
Unfortunately, a growing number of hospitals is exploiting tax-free designations to dishonestly sidestep Uncle Sam, while failing to provide reasonable charity care to needy members of their communities.
A troubling trend that has recently emerged in healthcare: Major hospital networks are increasingly seeking charitable status under the federal tax code to shield profit-making entities within those networks from tax liability.
The move by these hospital systems represents a break with the longstanding practice of hospitals seeking and securing nonprofit, or charitable, designations on the basis of their stated missions to promote the overall health of the communities they serve.
It is, in fact, a perversion of that practice, since the Internal Revenue Service confers nonprofit status only on institutions with altruistic goals — be they churches, charitable foundations, research centers, colleges, universities and, of course, hospitals.
Many nonprofit hospitals have employed this scheme below the public radar, usually by creating a constellation of for-profit entities that operate under them.
In one instance, a hospital affiliated with Atlantic Health System Inc. in Morristown, N.J., failed to properly demonstrate that the hospital in question had been organized as a nonprofit entity. The scheme was disclosed in court proceedings during which the judge, Vito L. Bianco, harshly criticized it as an underhanded attempt to accrue tax benefits.
In addition to declaring that the nonprofit Atlantic Health System had "entangled its activities and commingled its efforts" with for-profit operations, Judge Bianco also found that the hospital had unreasonably compensated its executives, who in some cases were making over $5 million along with other big perks.
Another example of this kind of abuse can be found in the University of Colorado Health system. In setting up a similarly elaborate network of corporate, for-profit, and tax exempt entities, UC attempted to fashion the optimal legal circuitry for monetary advantages.
During its consolidation, UC's debts service payments were processed within a 501(c) 3 tax-exempt outfit, which permitted greatly lower interest rates that are not ordinarily available to multi-billion corporations. Not only did UC Health save millions of dollars through this mechanism, the State Colorado also generously issued nearly $2 billion to help finance operations.
Through it all, UC Health even maintained an apparatus for political action to facilitate its statewide campaign efforts. In partnership with an affiliated charity, a physician staffing firm (University Physicians Inc.), and a 501 (c)4 entity, UC funneled $600,000 in donations to support cigarette sales tax hikes that would set up a new funding stream for hospitals like UC Health.
Despite massive public resources at its disposal, UC Health pursued controversial charity care practices that contradicted its public commitments to treat low-income patients at all of its facilities. With accusations of cherry-picking patients and disregarding many others, the hospital placed massive logistical and financial predicaments for local first-responders and other medical centers attempting to absorb patient diversions.
UC has also been found to take advantage of its patients. In fact, the network was implicated in a myriad of complaints by federal audits that highlighted inappropriate overcharges for treatment administered to elderly patients enrolled in Medicare.
In another example, University of Pittsburgh Medical Center also allowed its profit-driven ambitions to obscure its charitable obligations. UPMC, which describes itself as a $10 billion global health enterprise, effectively established a complex system of subsidiaries performing healthcare-related roles to yield immense tax benefits.
Specifically, the hospital's property exemption and exceedingly low 0.55 percent payroll tax allowed the corporation to escape what would have been an estimated $20 million per year obligation to the city, as part of a total $200 million statewide subsidy. Lamentably, Pittsburgh's low-income communities gained almost nothing from UPMC's tax latitude as the hospital's charity care remained a meager 2 percent of its net patient revenues.
The approach undertaken by these hospital networks is not only dishonest and costly to taxpayers. It also runs contrary to the spirit of laws and regulations established to foster charitable institutions that are driven by altruistic motives, not profits.
For the sake of all Americans, this practice cannot be permitted to continue.
Drew Johnson is a senior scholar at the Taxpayers Protection Alliance.
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