Hospitals provide nearly five times the value of their tax exemptions
NAPERVILLE, Ill. and CHICAGO, April 10 /PRNewswire-USNewswire/ -- The Illinois Hospital Association (IHA) and Metropolitan Chicago Healthcare Council (MCHC) today challenged the flawed assumptions and data in a report that purports to estimate the tax-exemption values of 27 hospitals and health systems in Cook County and compare them with the charity care provided by those hospitals. The associations, which represent some 200 hospitals and health systems in the Chicago area and across the state, questioned the methodology used by the Center for Tax and Budget Accountability (CTBA).
"In essence, the report overstates the hospitals' potential tax liability while understating the benefits they provide," said Illinois Hospital Association President Ken Robbins. For example, it uses 2007 data instead of readily-available data from the 2008 hospital Community Benefit Reports, thereby understating the actual increase in hospital charity care by 35%. It overestimates sales tax liability by applying the regular sales tax rate to all supplies, even though a 1% rate applies to prescription drugs, food and consumable medical supplies, and there is no sales tax for supplies for Medicare and Medicaid patient supplies (which are over half of the average hospital's patients). And it estimates property taxes for these hospitals as about 2.2% of their expenses. Yet, for Cook County hospitals that are on the tax rolls, their property taxes are about 1% of their expenses.
"In short," Robbins said, "if the important parts of a formula are wrong, the end result can never be right."
The report ignores the fact that nonprofit hospitals earn their rightful place in society by treating patients at all times, regardless of their ability to pay. The report acknowledges that at least half of a hospital's bad debt is likely to be for care provided to patients who qualify for charity care. But it criticizes hospitals, saying they should do "a better job of identifying patients eligible for charity care on the front end of the process." This is basically an accounting dispute, because, as the report notes, however you account for it, the care was still given, and the patient did not pay for it. Unlike businesses, hospitals do not ascertain whether a patient can pay before providing their services. They go to great lengths to inform patients of the availability of charity care by telling them verbally, through posted notices, brochures, and through mailed information.
The report acknowledges that hospitals provide benefits to the communities they serve that far exceed the value of their tax exemptions. It acknowledges that the hospitals studied provided community benefits of $2.14 billion, or nearly five times the value of CTBA's inflated estimated tax exemption value. The combination of the hospitals' charity care, Medicaid shortfall, and half of bad debt at cost is $600 million, whereas the report estimates the hospitals' tax-exemption value at only $445 million. "Any credible study would take into account the reality of the exemplary work that hospitals do to serve their patients and communities and to merit their tax-exempt status," said Metropolitan Chicago Healthcare Council President Kevin Scanlan.
The method used in the report for estimating property taxes is not the method actually used for hospitals currently on the tax rolls. Furthermore, the report fails to take into account the hospitals' Medicaid shortfall - the substantial difference between what the government pays hospitals and their actual costs for treating low-income and disabled patients. Even the IRS agrees that shortfalls in Medicaid payments should be recognized as a community benefit.
The basic premise of the report - comparing the value of tax exemptions and charity care and concluding that the hospitals studied do not merit tax-exempt status - is incorrect. No Illinois court opinion has ever stated that charity care is the only measure for qualifying for tax exemption.
Editor's note: Below is a response to the CTBA Charity Care Report with charts demonstrating that the hospitals studied are entitled to their tax-exempt status.
The Illinois Hospital Association, with offices in Naperville and Springfield, represents 200 hospitals and health systems and the patients and communities they serve. The Metropolitan Chicago Healthcare Council is a membership and services organization comprising more than 140 hospitals and health systems working together to improve the delivery of health care throughout the metropolitan Chicago region. For more information, see IHA's web site, www.ihatoday.org, and MCHC's web site, www.mchc.org.
Response of the Illinois Hospital Association and the Metropolitan Chicago Healthcare Council to CTBA Charity Care Report(1)
"Everyone is entitled to their own opinion, but not their own facts."
Senator Daniel Moynihan
The Illinois Hospital Association (IHA) and Metropolitan Chicago Healthcare Council (MCHC) challenge the flawed assumptions and data in a report that purports to estimate the tax exemption values and charity care provided by 27 hospitals and health systems in Cook County.
- The CTBA Report contains so many flaws that it is completely unreliable. In short, the Report overstates the hospitals' potential tax liability and understates the benefits hospitals provide. A few examples of the fatal deficiencies and discrepancies in this report:
- It uses old hospital Community Benefit Reports, thereby understating the value of such benefits. For some reason, CTBA chose to use 2007 Community Benefit Reports for this study when 2008 Reports were readily available. By using the older data, they conclude that charity care costs for the comparable study hospitals increased by only $40 million. But if they used the most recent data they would have had to report that charity care increased by $54 million - in other words, CTBA understated the increase in charity care by 35%.
- It overestimates sales tax liability by applying the regular sales tax rate(2) to all supplies, even though a 1% rate would apply to all prescription drugs, food and consumable medical supplies and no sales tax at all is applied to supplies used for Medicare and Medicaid patients (which account for over half of the average hospital's patients). In other words, the correct value of the sales tax exemption to the studied hospitals was most likely less than half of the amount CTBA reports.
- It estimates that property taxes for these hospitals would be about 2.2 percent of their expenses. Yet, for those hospitals in Cook County that are actually on the tax rolls, property taxes are about 1 percent of expenses - less than half of CTBA's estimate. CTBA may prefer a methodology for calculating property values for hospitals that differs from the one presently used, but wishing it so doesn't make it so.
- It fails to include the $315 million "Medicaid shortfall" as part of the benefit that hospitals confer - that's the unreimbursed cost of care that those hospitals provide to Medicaid recipients. Even the IRS considers the Medicaid shortfall as part of the rationale for hospital tax exemption.
- To suggest that hospitals are not doing enough to serve their patients and communities or to deserve their tax-exempt status is misleading and does nothing to help policy makers and society work toward solutions to the critical, underlying problem - lack of coverage and access for the uninsured, including 1.7 million Illinoisans. Hospitals are committed to being part of the solution, but cannot shoulder this societal burden alone.
- The basic underlying rationale for this study - comparing tax-exempt value to charity care and concluding that hospitals are not meeting their obligations to merit tax-exempt status - is simply wrong. The very title of the report reveals a fatal flaw in CTBA's analysis that infects their entire report. The title sets up the false premise that charity care (i.e. free or discounted care) is the only measure of tax-exemption. While charity care is relevant, no Illinois court has ever held that charity care is the ONLY measure for qualifying for property tax exemption. In an unbroken string of cases dating back to 1893, the Illinois Supreme Court has expressly rejected such an approach, explaining as recently as 2004 that, "A charity is not defined by percentages ..." Quad Cities Open, Inc. v. City of Silvis, 208 Ill.2d 498 (2004).
- The correct test for tax exemption is a combination of unreimbursed hospital services and activities that contribute to the well-being of the community. In fact, the report includes Chart 4 showing that the 27 hospitals and health systems studied provided community benefits of $2.14 Billion or nearly FIVE TIMES the value of CTBA's inflated estimated tax exemption value.
- Try as they might to manipulate the data to support their pre-ordained results, they simply cannot hide the truth that hospitals are there 24/7 to provide essential life saving care, regardless of a patient's ability to pay.
- Illinois hospitals are committed to serving the health care needs of the people in their communities, regardless of their ability to pay, and are truly the health care safety net for the uninsured and our most vulnerable populations - the poor, the disabled, the young, the elderly and a growing number of middle class residents. Unlike other businesses, a hospital treats every patient who comes to the emergency room and then discusses how they can pay for that care.
- Contrary to CTBA's conclusion, the report actually demonstrates that hospitals are entitled to their tax exempt status. If you include Medicaid shortfall for the hospitals studied in this report (IHA estimate: $315 million), along with charity care ($175 million) and 50 percent of bad debt at cost ($109 million), that total amount of $600 million greatly exceeds the tax-exempt value of the hospitals as estimated in this report ($445 million). If a more realistic estimate of the potential tax liability is used ($228 million), the case in support of hospitals' tax exempt status is even stronger as shown in the graph below.
Comparison A: The CTBA report states that half of the bad debt cost they identify is really charity care and Comparison A reflects that position.
Comparison B reflects CTBA's inflated tax estimate of $445.7 million, but takes into account the Medicaid shortfall of $314.8 million, which even the IRS considers an appropriate component of unreimbursed care to the poor and needy, for a total value of charity, half of bad debt cost and Medicaid shortfalls of $600 million.
Comparison C is the correct comparison that shows IHA's revised estimate of taxes of only $227.9 million and utilizes more recent measures of charity, half of bad debt cost and Medicaid shortfall for a total of $629.7 million provided.
[Note to Chart: The IHA estimated property tax utilizes CTBA estimate reduced by 50% to reflect an average property tax liability of 1%. The sales tax estimate uses the CTBA estimate reduced by 50% to reflect that sales tax is not imposed on supplies used for Medicare and Medicaid patients. Community Benefit reports filed in 2008 were utilized for benefit components.]
- In determining whether a property is used for "charitable purposes," the Illinois Supreme Court has applied a six-factor analysis. The cornerstone of this analysis is whether the entity is lessening the burdens of government. Providing charity care is only one way in which hospitals relieve the burden of government. Hospitals are partners with government in serving as the foundation of our health care system. From rural communities to inner cities, communities recognize the critical benefits of having a hospital nearby. Without private hospitals, the state would have to step in to meet the public's need for hospital care.
- "Granting charity to all who need and apply" is one of the six factors that the Illinois Supreme Court has used in determining charitable property tax exemption. However, this factor makes clear that the charitable exemption is based on the availability of, not the quantity of, free care provided. In any event, while the CTBA may have an opinion on this issue, the simple reality is that the matter is currently before the Illinois Supreme Court, which will provide further guidance later this year.
- The report uses an inconsistent data methodology to develop an estimate of the value of these hospitals' tax-exempt status. As a result, the report's estimate of the hospitals' tax liability is inflated. For example:
- The study apparently applied the general sales tax rate (e.g., 10%) to all supplies, even though a 1% rate would apply to prescription drugs, food and consumable medical supplies, which are a major portion of hospital supply expenses.
- Moreover the sales tax does not apply to the purchase of supplies used for Medicare and Medicaid patients, which for many hospitals comprise over 50% of their business.
- Using only an income approach to estimate property tax liability does not take into account that local assessors use a more robust and accurate analysis that results in a lower market value of properties than the income only approach. The Report estimates property tax for the study hospitals at about 2.2 percent of expenses. However, for hospitals in Cook County that currently are paying property taxes, their property tax is about 1% of their expenses.
- The study disregards the Medicaid shortfall - the unreimbursed cost of providing Medicaid services - even though the report states: "To be sure, Non-profit hospitals provide many benefits to their communities. One such benefit is providing care to Medicaid beneficiaries." Moreover, the Internal Revenue Service has recently determined that Medicaid shortfall is a community benefit and should be so reported under the federal tax code. On average, Illinois hospitals are reimbursed less than the cost of treating Medicaid patients. For the study hospitals, this shortfall totals about $315 million.
- Illinois hospitals also relieve the burden on government by caring for Medicare patients at less than cost. On average, Illinois hospitals are reimbursed only about 90 percent of the cost of treating Medicare patients.
- The Report admits that at least 50% of hospital bad debt is provided to persons who likely would qualify for charity care. The reality is that most of a hospital's bad debt is provided to patients who are unable to pay. In most instances, if the patient would only cooperate with the hospital by providing necessary information, these accounts could be classified as charity care instead of bad debt. The bottom line is that bad debt represents care provided to members of the community for which the hospital is not paid.
- Hospitals are undertaking substantial efforts to provide patients with information on charity care and financial assistance - information is provided on every bill regarding how to apply for assistance, information is posted on hospital websites, brochures are available, and financial counselors assist patients in applying for assistance.
- Illinois hospitals continue to partner with government to address the legitimate concerns of their patients. In 2006, IHA worked with the Illinois Attorney General's Office and the General Assembly to develop the Fair Patient Billing Act which specifies the billing and collection processes that hospitals must follow. In 2008, IHA again worked with Illinois Attorney General and the General Assembly to enact the Hospital Uninsured Patient Discount Act, a ground-breaking new law that will cap hospital bills and offer substantial discounts to uninsured patients.
- Statewide, in 2007, 109 hospitals, which filed community benefit reports, provided $4.3 billion in community benefits.
- Hospitals across Illinois provide many benefits to their communities, beyond charity care and beyond subsidizing government-sponsored health care, including:
- money-losing services such as emergency care, trauma care, burn units, neo-natal intensive care units;
- community clinics, immunizations, screenings and health education programs;
- research to develop new drugs, treatments and prevention for a wide variety of illnesses;
- training and education of our state's physicians, nurses and other health care professionals.
Illinois hospitals remain committed to working to find meaningful solutions to the real problem - lack of coverage and access to health care for the uninsured. Unfortunately, the CTBA report does nothing to advance that effort.
Click here to view response with charts.
(1) Center for Tax and Budget Accountability, "An Update: An Analysis of the Tax Exemptions Granted to Non-Profit Hospitals in Chicago and the Metro Area and the Charity Care Provided in Return" April 2009.
(2) While CTBA does not disclose the sales tax percentage it uses, the current rate in Cook County is roughly 10% depending on the municipality.
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