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Think Tank

Should Calif. Set Charity Minimum for Not-for-Profit Hospitals?

The California Legislature is considering a proposal to establish a minimum amount of charity care that private hospitals must provide to earn not-for-profit status and the tax benefits that go with it.

AB 975 — by Assembly members Rob Bonta (D-Oakland) and Bob Wieckowski (D-Fremont) — would more tightly define charitable care and stipulate that private not-for-profit hospitals may not have operating revenue exceeding 10% of operating expenses, which includes charity care, community benefits and all other normal business expenses.

State law currently requires not-for-profit hospitals to provide charity care, but because definitions of charity care are not specifically spelled out, minimum requirements are not clearly defined. This bill hopes to remedy that.

Not-for-profit hospitals have come under increasing federal and state scrutiny in recent years. The Internal Revenue Service, the California Franchise Tax Board, the California Board of Equalization and the state Legislature all mounted investigations to take a closer look at whether tax breaks are warranted and not-for-profit hospitals fulfill their responsibilities.

The back story on this issue includes an attempt last year by a labor group to put the issue of hospital charity care before voters in a statewide ballot initiative. In May last year, the Service Employees International Union and the California Hospital Association reached an agreement that enlisted CHA’s help in the union’s organizing efforts in exchange for SEIU dropping proposed ballot initiatives that sought to limit hospital billing and boost charity care.

The proposed Charity Care Act of 2012 would have required some not-for-profit hospitals to spend at least 5% of patient revenue on health care for low-income patients.

AB 975 would establish a standard definition of charity care under the Affordable Care Act beginning in 2014. The bill deals only with private hospitals, not public or University of California hospitals.

We asked legislators, stakeholders and consumer advocates why AB 975 is or isn’t a good idea.

We received responses from:

Time for Hospitals To Act as Good Corporate Citizens

Has therapeutic healing and recovery become a vanishing mission among California hospitals? Are California hospitals operating as big corporations more devoted to piling up cash than to assuring the delivery of care?

A look at how California’s private, not-for-profit hospitals are meeting their responsibilities for providing charity care and community benefit programs suggests many have lost their way.

In 2010 alone, not-for-profit hospitals pocketed $1.8 billion dollars in government subsidies through their tax breaks and other benefits above what they returned to patients in charity care, as documented in a California Nurses Association report based on public data.

Nearly half that total was recorded by just two of California’s biggest hospital chains, Kaiser Permanente and Sutter Health, which also happened to account for almost half of the 100 not-for-profit hospital executives who received pay packages of more than $1 million a year.

While many hospitals are no doubt good corporate citizens, these numbers undermine credibility for the hospital industry as a whole, especially when some apparently count marketing, cost-cutting and other dubious practices as their community benefit program.

Instead of opposing a common sense bill like AB 975, just as they have fought nearly every reform aimed at strengthening patient protections in California, hospital lobbyists should welcome this legislation as a way to restore public confidence that they are being genuinely transparent, accountable and acting in good faith in the delivery of charity care and community benefit.

California’s nurses salute Assembly members Bob Wieckowski and Rob Bonta for introducing AB 975. The bill is supported by California Nurses Association and an array of other labor and consumer groups, as well as elected leaders who believe we need common standards and a level playing field with equal expectations for all not-for-profit hospitals that reap the rewards of their tax exempt status.

Regrettably, implementation of the Affordable Care Act will not end the health care crisis. We continue to see patients skipping needed medical treatment, cutting prescription pills in half, unable to pay exorbitant hospital bills and facing huge out-of-pocket costs for insurance they can barely use.

Until we can achieve more far-reaching health reform, it is more important than ever for hospitals to compete in providing appropriate and equitable levels of charity care and community benefit, and not in who can most resemble Lehman Brothers or Goldman Sachs.

Don't Put Another Costly Mandate on California's Hospitals

California’s not-for-profit hospitals continue to demonstrate a strong commitment to providing quality health care programs to their communities, even in the face of widespread uncertainty and change with the implementation of the Affordable Care Act. So, why in the world would Sacramento now impose a “guilty until proven innocent” law that would not only undermine efforts to implement the ACA, but also jeopardize critical services tailored to serve community needs?

That would be the devastating effect of AB 975, a measure which purports to offer greater accountability but instead would result in instability and less access to quality care.

Who is complaining about the current system, which allows not-for-profit hospitals to invest in critical programs like burn units, cancer research, neonatal care, trauma centers and life-saving technology?  Certainly not community leaders or tax collectors. AB 975 is a solution in search of a problem. The special interests behind AB 975 are pushing arbitrary and unrealistic new laws that threaten the tax-exempt status of not-for-profit hospitals, and in turn their ability to invest in these kinds of substantial “community benefit” programs and health care services. That punishes all Californians, but especially communities with large numbers of uninsured, under-insured and low-income people.

The Office of Statewide Health Planning and Development’s own records show that hospitals already provide more than $13 billion annually in uncompensated health care services. An estimated four million Californians will be receiving health care coverage for the first time under the ACA, meaning a greater demand for health care services. At the same time, Medicare and Medi-Cal funding is on the chopping block.

AB 975 would create an unrealistic definition of charity care, dismantle an effective community benefit standard and places an annual “guilty until proven innocent” burden on hospitals that report an operating margin over 10%. That ignores the fact that hospitals engage in long-term planning for new technology and equipment, as well as building upgrades and replacements. The important point here is that not-for-profit hospitals don’t distribute earnings to shareholders. There are none. The money is plowed back into charitable activities and community benefit programs.

California’s not-for-profit hospitals have an important mission to serve their community. Revoking their tax-exempt status based on arbitrary rules will only put vital community services at risk.

California Deserves Same Oversight as Texas, Alabama

California taxpayers provide substantial support for our private, not-for-profit hospitals in the form of favorable tax treatment. They should at least be able to expect that these institutions will fulfill their commitment to California families by providing adequate charity care and community benefits.

That is why we have introduced AB 975.

The generous financial assistance our state, counties, and cities alone provide to California’s nearly 300 not-for-profit hospitals amounts to billions of dollars every year through exemption from state income taxes, sales taxes and tax-exempt bonds. Additional benefits accrue from federal exemptions.

Yet reports have shown some major hospital systems fall well below even the minimal former federal standards in what they return in charity care, and some even engage in questionable practices in what they count as community benefit.

Last August, the California state auditor, at the request of the Joint Legislative Audit Committee, issued a report that documented a wide variance among not-for-profit hospitals in policies and practices on how much uncompensated care they provide and the methodology they employ for calculating charity care.

Further, the auditor’s report noted that while most tax-exempt hospitals must prepare annual benefit plans, there is no statutory standard for defining these benefits.

The auditor recommended the Legislature consider establishing specific standards for community benefit plans with penalties for non-compliance. That is a key part of what AB 975 would do.

AB 975 would also provide more clarity on what constitutes charity care to guarantee that all California not-for-profit hospitals that receive public subsidies — no matter how wealthy or influential in Sacramento — are held to the same fair, common barometer in the level of uncompensated care they provide.

As was pointed out in a legislative hearing last year, states as different as Alabama, Indiana, Maryland and Texas do expect not-for-profit hospitals to meet minimum requirements with penalties ranging from fines to suspension of tax-exempt status.

Surely, California, which has been a national pioneer for so many far-sighted reforms, can at least have the same public oversight and protection as Texas and Alabama. While California’s fiscal climate is improving, many counties and cities continue to struggle. The loss of revenue from hospitals that may be evading their responsibility to provide adequate charity care and community benefit is an additional burden they should not endure.

Hospitals that meet their social contact will do well under AB 975. Those that don’t should be held to account.