Congress seeks to have hospitals justify tax-exempt status

Proposals in the Maryland General Assembly to define which patients are eligible for financial assistance at hospitals are getting an unexpected push from Congress, which might soon consider legislation aimed at making nonprofit hospitals justify their tax-exempt status.

The push comes on the heels of a Feb. 12 Internal Revenue Service report showing that a small percentage of America's nonprofit hospitals provide nearly two-thirds of the nation's free or reduced-price care for the poor.

"I'm very disappointed," Sen. Charles E. Grassley of Iowa, who has for years pushed to examine the business practices of various nonprofits, said in an interview. "Charity care is practiced differently from hospital to hospital and community to community, and there ought to be a uniform definition. If the IRS doesn't do it, I will have to do it through legislation."

The initiatives come amid a worsening economy that is expected to swell the ranks of people seeking help to pay hospital bills, and a growing debate over how much charity care nonprofit hospitals should have to offer in exchange for their tax exemptions.

In response to an investigative series in The Baltimore Sun on hospital debt-collection practices, Gov. Martin O'Malley is urging lawmakers to replace voluntary guidelines crafted by the Maryland Hospital Association with a minimum standard of who is eligible for free care, commonly referred to as charity care.

"These reforms mean quality hospital care does not have to add a crushing hardship to uninsured patients or their families," said John M. Colmers, secretary of the state's Department of Health and Mental Hygiene.

The state agency that sets Maryland hospital rates has called for a review of the formula it uses to compensate hospitals for their costs of charity care and unpaid bills. A report by the Health Services Cost Review Commission recently said that the current formula might unwittingly create financial incentives for hospitals to classify some low-income patients as "bad debt" cases, which they can pursue through collections or court action, instead of providing them charity care. Executive director Robert B. Murray said financial incentives might be added to encourage more charity care.

Grassley told The Sun that the Centers for Medicare and Medicaid Services should also investigate if lower-income patients have been harmed. A CMS spokesperson declined to comment.

Four decades ago, after the Medicare and Medicaid programs were created, the federal government abolished requirements that hospitals provide free and reduced-price care to the poor to receive tax-exempt status.

Since then, the IRS has used a "community benefit" standard, requiring hospitals to report how much they spend on items such as medical research, emergency care, physician training and health fairs.

Grassley, the ranking Republican on the Senate Finance Committee, said the standard is vague.

If the IRS doesn't restore the requirement that nonprofit hospitals provide charity care, Grassley said, he and Sen. Jeff Bingaman, a New Mexico Democrat, plan to push legislation to do so. One proposal would require nonprofit hospitals to devote at least 5 percent of their annual revenue to charity care. States could set higher standards, Grassley added.

In 2007, the amount of charity care provided by Maryland hospitals was slightly above 2 percent of gross patient revenue, according to state data.

The IRS has acknowledged that it has struggled to administer the "community benefit" rules, calling them "imprecise legal standards" in its recent report. The report found that 14 percent of nonprofit hospitals surveyed provided 63 percent of the aggregate charity care and unpaid bills written off, though the agency didn't recommend any policy changes and didn't identify the 489 hospitals surveyed.

The American Hospital Association has countered that nonprofit hospitals do more to help the poor than any other part of the health-care industry, and it said the IRS undercounted the amount of charity care and other community benefits.

In Maryland, legislation introduced by Del. Peter A. Hammen and state Sen. George W. Della, both Baltimore Democrats, would require hospitals to provide care to all Maryland residents whose incomes are less than 1.5 times the federal poverty guideline, which would equal $33,075 for a family of four.

State regulators, backed by O'Malley, have recommended eligibility for a family of four with income up to $44,100.

A leader of a nationwide consumer group said the proposals would "go a long way toward creating a much more fair, clear and transparent system for consumers."

"It is long overdue, and the need is clear based on The Baltimore Sun's investigation," said Renee Markus Hodin, project director for Community Catalyst, a Boston-based nonprofit group.

The investigative series found that Maryland, unlike some other states, lacks uniform standards and practices to determine who is eligible for free or reduced-price care at hospitals. Because hospitals have varying policies, which consider household assets as well as income, some people end up facing court judgments or get liens placed on their homes even though they have little means to pay their bills. Hospitals are required to post notices about the availability of financial assistance, but not necessarily to inform each patient about that or provide charity care applications proactively.

Under Maryland's unique system in which the state sets hospitals rates, hospitals received nearly $1 billion last year - through a markup on bills that all patients pay - to cover their costs of charity care and unpaid bills. All but one of Maryland's 47 hospitals are nonprofit.

In 2005, a bill to require hospitals to devote at least half of the amount of their tax exemption to free and reduced-price care died in committee in the General Assembly.

The Maryland Hospital Association argues that its members justify their tax exemptions through annual filings to the IRS and touts Maryland's law requiring hospitals to also file annual reports with state regulators on how they benefit their communities.

"Charity care and financial assistance is critical, but the benefit that our hospitals provide to communities is much broader than that," the group's president, Carmela Coyle, said in a recent interview.

O'Malley ordered regulators last December to do an "immediate and thorough review" of hospital debt-collection practices. The report, released Feb. 13, noted the benefits of the state's rate-setting system but acknowledged that the voluntary guidelines for defining charity care might have led to overly aggressive debt-collection practices by hospitals.

The Sun reported that hospital debt-collection lawsuits spiked sharply between 2003 and 2006 before falling slightly in 2007. In all, hospitals filed more than 132,000 of these suits in the past five years, winning at least $100 million in judgments and placing liens on more than 8,000 homes.

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