by T Joe Willey

This is the third article in a series on the financial aspects of Adventist health care institutions.

"The public believes that hospitals – and especially nonprofit hospitals – have obligations to their communities to provide a critical safety net for care. … When the public is surveyed, eighty-two percent said that these hospitals have an obligation to work with patients who don’t have enough money to pay for care up front and to help them with a financing plan. Ninety percent said that nonprofit hospitals should be required to provide information to the public on the free and low-cost programs and services they offer to the community." (Community Catalyst. Best Kept Secrets:  Are Nonprofit Hospitals Informing Patients About Charity Care Programs.  May 2010.)
I spent a few days in the Loma Linda University Medical Center, not to gain information for this report, but to receive an implant of a newly-improved pacemaker.  This pacemaker has its own defibrillator which when activated can slam the heart with six-hundred volts.  I was instructed to avoid situations that might set it off, or at least sit down quickly and put my arms around a tree. 
In the bed next to mine, separated by a curtain, was a forty-year old male patient who apparently could not speak English. I will call him Raza Shadaba (not his real name).  Each time the resident came in or a nurse he spoke Arabic feigning he did not understand.  Based on their side of the conversation I could tell they wanted to get him to sign off on further treatment and return home.  He kept saying, “no comprehendo.” And they kept asking, “Do you have a wife? Can you call her or a friend to come and get you?” At one point the resident even used his own cell phone to call Raza’s wife which turned out to be a nonexistent number. It was clear Raza did not want to go home. Then I noticed something peculiar. 
During the day he had visitors. When they came around his bed he spoke reasonably good English. But after they left his perceptive powers to understand English disappeared. Later in the day someone from patient finance came by and tried to get him to sign forms for charity care. Again, he did not understand and refused to sign. It became entertaining to observe the frustrated hospital staff going back and forth trying to figure out what to do. On one occasion six young doctors appeared around his bed listening intently as to how the senior resident would proceed with his powers of persuasion.  Nothing worked and another night glided by.
Eventually the hospital found someone who spoke Arabic.  This individual in turn got the name of Raza’s Muslim cleric who appeared within a few hours.  In what I took to be forceful demands, it appeared he told Raza to gather up his things and return home.  When the resident came into the room I overheard the cleric tell the resident that Raza had just arrived in the country, was jobless, there was no food in his house, not even a loaf of bread, his wife with four children did not have a telephone or a car and worst of all his wife had “thrown Raza out of the house” for being belligerent. Raza figured the best place to go was the LLUMC emergency room. There somehow he claimed he suffered loss of memory from a concussion. After several days of testing and observation on the ward, with the help of his cleric, the hospital was finally able to discharge Raza. Representatives from the hospital helped him fill out the financial assistance forms to cover his costs under charity. On the way out Raza came by the foot of my bed and gave me thumbs up saying; “I had them on the run … didn’t you think?”
When it came my time to leave, a representative from Medicare appeared and asked me to read over the discharge instructions and sign a form that basically indicated I was satisfied with the treatment I had received.  While he was there I asked him a few questions. 
He told me how difficult it can be for the hospital to discharge Medicare or Medi-Cal patients who over stay in the hospital.  I mentioned about Raza and how he feigned lack of English when all along he knew what the hospital staff was saying to him.  The representative told me about two instances at LLUMC where elderly patients were homeless and continued to overstay the hospital for more than a year.  He explained, “The hospital cannot force you to leave.” If you think your Medicare-covered services are ending too soon you can appeal.  The discharge instructions are also required to avoid returning to the emergency room after leaving the hospital.  Hospitals are financially punished if they readmit patients again within thirty days.
All of these rules and regulations surrounding Medicare and Medi-Cal give the appearance of a quasi-governmental institution at LLUMC, a nonprofit faith-based hospital which derives greater than half its revenues from these two federal programs.  Some economists say that the nonprofit charitable tax-exempt model gives the government too much influence over competitive health care markets, which in turn provides camouflage for the real profit seeking motives of hospitals. [1]

Historical Overview of Hospitals & Charity

The first hospitals in America’s cities were almshouses for the very sick and generally the poor.  They were rooted in the tradition of charity and supported by donations.  The poor were housed in long wards and were not expected to pay (and for that manner not expected to live either).  Volunteers usually provided the care.  One of the earliest examples was Bellevue Hospital, originally called the “Poor House of New York City.”  Bellevue was established in 1786 to house the “poor, aged, insane, and disreputable.” [2]
The wealthy on the other hand, stayed at home and physicians treated the patients there.  Most Americans gave birth and even endured surgery at home.  Over time medical care improved and evolved.  From modest origins hospitals began to grow. They were often founded and funded by religious orders or charitable business leaders.  Anesthesia was introduced in surgical procedures and scientific discoveries shifted the role and importance of hospitals.  At the turn of the twentieth century physicians for the first time began to charge for their services in the hospitals.  The larger ward layout shifted to private rooms to accommodate paying patients.  By 1922 sixty-five percent of revenues in hospitals were generated by private payments.  Around this same time health insurance was sold by a Texas hospital to the city’s school teachers. [3] Soon other hospitals joined together to offer insurance which became Blue Cross and the poor began to be pushed away from medical care they could not afford. By the 1960s, billions of dollars were flowing into hospital from insurance companies.

Government Influences have Shaped the Hospital Industry

Without getting into too much detail, as hospitals evolved and relied on patient payments their revenues were impacted by tax laws.  By 1913 the federal income tax exempted “any corporation or association organized and operated exclusively for religious, charitable, scientific or educational purposes.” Hospitals recognized they could be tax exempt under the law if they organized exclusively for charitable purposes and as long as no earnings were skimmed off to private shareholders or individuals. Tax agencies did not spell out what was meant by amorphous charitable features in exchange for forgone taxes, probably because of this long legacy of charity activities to begin with.
Then the American Hospital Association convinced the federal government to offer loans and programs in the construction of additional facilities.  From 1946 and up until 1997 the Hill-Burton Hospital Construction Act became a major influence to modernize or expand hospitals. This legislation also came with a promise to provide free or reduced-cost care to the indigent. [4]
In 1966 the hospital industry received another boost from the federal government.  The Social Security Act created Medicare.  Medicare provided significant medical benefits to Americans over age sixty-five.  This group was most likely to need hospitalization and hospitals were assured that they would be reimbursed on the “basis of reasonable costs.”  The companion program, Medicaid (known as Medi-Cal in California) was established to support individuals classified as medically indigent (persons of low income).  Medicaid was a joint program between the federal and state governments.  These two government programs probably did more to fuel the rising costs of hospital care than any other factor.  The two programs also altered the long-standing charity mission of hospitals.
Providing hospital services to needy Medicaid patients (as a government subsidy) was often unprofitable, so it has become a type of charity benefit.  In a word, when Medicaid is unprofitable the offsetting shortfall becomes charity.  Medicare and private insurance also contributes indirectly to revenue shortfalls, including patient’s failure to co-pay or to pay deductibles.
It wasn’t long after Medicare was introduced before hospitals morphed into higher profits, maximizing more lucrative activities, becoming more technical and market oriented and aggressively enterprising.  Medicare programs favored entrepreneurial, short-term financial interests.  There were no regulatory caps on hospital profits even though they have the face of the “beloved local charities.” [5] For various reasons the nonprofit charitable tax-exempt hospitals are the most common type in this country.  Nearly seventy percent of the licensed beds in America are located in nonprofit hospitals.  But keep in mind, tax exemptions given to nonprofit hospitals can be viewed as another form of government subsidy for charity, along with the financial performance of Medicare and Medicaid, or lack thereof.
It seemed to make good social policy that a hospital could keep the revenues it would have otherwise paid in taxes and apply them for charitable purposes.  The Internal Revenue Service (IRS) does not specifically require that a hospital provide a certain level of charity care to qualify for tax-exempt status.  Of course, leaving this measure ambiguous (which the American Hospital Association lobbied for), as you can imagine, has created confusion as to what constitutes charity and unreimbursed provided care.  For example, does bad debt qualify as charity?  How are sliding discounts treated?  Does giving grants to Adventist colleges or conferences constitute hospital charity? 
According to the Congressional Budget Office the estimated tax benefits and value of the exemption from federal, state and local taxes that should be paid by hospitals is somewhere in the neighborhood of $12.6 billion annually (in 2002 dollars when last it was measured) [6] or about $16.38 billion today in loss tax revenues (including property and sales taxes).   Obviously, if hospitals with slim margins were required to pay taxes some would go out of business.
Two additional important points: Number one, the federal government allows nonprofit hospitals to issue tax-exempt debt and receive charitable contributions that are tax-deductions to donors.  As more “free” tax dollars enter hospital revenues the definition of charity was enlarged to cover more ambiguous community benefits, and some observers see some portions of community benefits as an aid to competitive marketing, rather than as charity.
Number two, to qualify for all of these tax advantages, the hospitals must provide community benefits as an expense, which the Internal Revenue Service (IRS) defines as promoting the health of any broad class of people, including such activities as charity care, health screening, and community education about health risks, emergency room services, and basic research.  Since 1969 these unreimbursed provisions have been broadened to include many other charitable obligations “as services and activities that benefit the community as a whole.” [7]

Schedule H and the IRS

The IRS community benefit standard is the legal basis to determine whether or not a nonprofit charitable hospital is exempt from federal income tax.  But members in Congress and state regulators recognized that the tax agency’s oversight of charities had largely failed. There was strong bipartisan interest in Congress in supervising the tax benefits of nonprofit hospitals as well as making affordable health care accessible to everyone.  Nonprofit hospitals were already on the defensive over billing and collection practices against the uninsured and the public was asking hospital systems to justify executive perks.  By 2006 the IRS finally became concerned about how well community benefits were being accounted and administered.  Five hundred hospitals were sent questionnaires concerning their charity programs and another twenty nonprofits were examined regarding executive compensation practices. [8] The IRS study sought to review benefit reporting, bad debt and shortfalls, research, and income and health insurance coverage levels; a wide variety of issues. 
One of the take-away lessons from the study resulted in a priority to create Schedule H in the 990 Form that nonprofit hospitals use in reporting to the IRS.  This report was designed to make charity reporting more transparent.  A copy of this section for LLUMC is included below.  This table summarizes the charity care and community benefits for 2011- 2012 as reported on the 990 Form.
In the next article in this series (Part 4) we will discuss the most significant features of this table and compare these findings to our group of other teaching hospital examples.  Beyond this tax summary, Loma Linda University Health System (LLUHS) has a comprehensive and impressive community benefit report that is used to support tax-exemptions within the State of California.  We will say more about this in the next report.
Adventist Today readers will benefit knowing about the complexities of the hospital’s relationship to both the poor and indigent within the communities it serves and their advocates.  Something like forty percent of residents struggle to pay medical bills.  So charity is an important safety net.  But is there a way to prevent hospital care in the first place?   As you will see in the next section, LLUHS not only provides free medical care, picking up the costs for residency training, etc., but is also working on a two county-wide community plan to improve health, promote social change, and make health care available especially for the most vulnerable to fulfill its obligation to California’s Community Benefit Law and protect its exemption from taxation.
1. George A. Nations III.  Nonprofit Charitable Tax-Exempt Hospitals: Wolves in Sheep’s Clothing. p. 12.
2. Harry A. Sultz & Kristina M. Young.  Health Care USA: Understanding its Organization and Delivery.  7th Edition.  Jones & Bartlett Learning 2011. p. 70.
3. George A. Nations III.  p. 14.
4. From what I could determine none of the Adventist hospitals in California accepted Hill-Burton funding.
5. Steven Brill. "Why Medical Bills are Killing Us." Time, March 4, 2013. p. 26.
6. Congressional Budget Office. Nonprofit Hospitals and the Provision of Community Benefits.  December 2006. p. 5.
7. IRS Revenue Ruling 69-545.
8. IRS Nonprofit Hospital Project Final Report.