Tax exemptions for non-profit hospitals: The end may be near

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Is the tax-exemption for non-profit hospitals--a codified tradition that has been on the books for generations--on its heels?

It may still be too soon to tell, but what is going on in two different states at the moment could wind up spreading elsewhere.

In New Jersey, lawmakers are on the threshold of passing a law that requires non-profit hospitals to pony up a "community service contribution." In its current iteration, the payment would be the equivalent of $2.50 per bed per day, or about $365,000 a year for a 400-bed hospital.

The Garden State's hospitals are pretty much acquiescing to this fee because the Atlantic Health system lost a years-long legal battle with Morristown, New Jersey regarding a property tax exemption for the hospital it operated there. The state's hospital sector is afraid of getting fleeced over more lost exemptions. The money collected through the contributions would go to providing services in the communities where the hospitals operate.

Certainly, the New Jersey contribution levy is not in the same league as a property tax--the Garden State has about the highest property tax rates in the entire nation and no doubt some hospital operators would have to pay tens of millions of dollars a year if their property was levied at the same rate as private homeowners. As a matter of fact, Atlantic is paying $25 million just to settle the tax dispute over the Morristown property. Nevertheless, it represents revenue going from not-for-profit hospitals to government entities merely because they occupy space.

The same could soon happen in Illinois, which has also been the site of a years-long battle over property tax exemptions for non-profit hospitals. State regulators yanked some exemptions for Provena Health and some other providers several years ago. The hospital lobby there responded with an utterly troubling law that not only made non-profits tax-exempt until the end of time, but contained loopholes that even allowed for-profit providers to claim some exemptions. However, a state appeals court recently struck that law down as unconstitutional, setting up a potential showdown in the Illinois Supreme Court over the issue.

It remains to be seen if the Illinois hospitals are spooked by that development and may be willing to negotiate a compromise like their counterparts in New Jersey. But I won't be surprised if that is the case.

Why has this happened? Primarily because not-for-profit hospitals can no longer avoid scrutiny for many practices that have drawn ire from not only from patients, but politicians from both parties. They include strong-arming patients for upfront payments without informing them of financial aid options, often grudging expenditures for charity care, huge salaries paid to their top executives, and gaming programs such as 340B that were originally intended to ensure that poor patients and the hospitals that treat them get access to moderately-priced drugs.

That's leaving hospitals with some tough choices: Provide more extensive and more effective charity care and community benefits, fight regulators every step of the way, or cut some sort of deal. Choices one and three are the easiest. While some hospitals have made strides in beefing up their community benefits programs, many still seem to balk at providing the type of transparency and communication required to make it easier for patients struggling to pay their bills to get more financial relief.

It has taken many years for not-for-profit hospitals to admit that they could pay taxes in some instances. Expect it to take many more years, if not decades, for a large majority of them in this country to actually do so. Some may soften their business tactics and practices in the meantime, but expect more of them to enter into negotiations with lawmakers about what they will have to pay to get them off their backs. – Ron (@FierceHealth)

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