Legislative Hearing Addresses Not-for-Profit Status of Hospitals

Legislators at a hearing on Wednesday questioned whether not-for-profit hospitals whose profit margins exceed certain levels should be allowed to maintain tax-exempt status, the Contra Costa Times reports.

Hospitals whose profit margins are below 10% automatically are considered not-for-profit and are not obligated to pay state and federal taxes, which can save them millions of dollars annually. Not-for-profit hospitals with profit margins of 10% or higher must prove that the excess funds are for specific purposes, such as facility investments, debt repayment or reserves.

Fifteen of California's 200 not-for-profit hospitals earned profit margins above 10%, according to a state survey.

According to the Times, "[m]uch of the ... focus" of the Assembly Revenue & Taxation Committee hearing was on Sutter Health, which operates 27 hospitals in Northern California, including nine with profit margins above 10%. For the first six months of 2005, the Sutter Health system reported an 8.5% profit margin, according to a Standard & Poor's report.

Fred Seavey, research director for Service Employees International Union United Healthcare Workers-West, said Sutter's not-for-profit status saves the hospital chain about $245 million in taxes annually. Seavey said that in the union's "view, Sutter is in no way operating as a nonprofit," citing the chain's billing practices for uninsured patients and executive compensation levels.

Gary Loveridge, senior vice president and general counsel for Sutter, said Sutter's profit margins are necessary to balance fiscally successful years with years the hospitals' earnings are lower. He added that Sutter is working to reform its collections practices and improve its commitment to charity care (Silber, Contra Costa Times, 12/8).