The IRS grants non-profit status to hospitals that serve low-income patients, promise to provide charity care and free community programs. At Johns Hopkins University, accounting professor Ge Bai says that’s worth millions in tax breaks.
“They pay no property tax, no income tax, no sales tax," she explains.
Non-profit hospitals can also take part in a drug discount program called 340B. At the Pioneer Life Sciences Initiative – a think tank in Boston -- Dr. William Smith tells how that works.
“In the beginning the program functioned quite well. These were needy hospitals in rural and urban areas that treated a lot of patients for free, but hospitals soon discovered that they could buy drugs at a very low price and then if they can get an insured patient to come in the door, they can bill that insured patient for market price, and they can keep the difference.”
Richmond Community Hospital, for example, was making $100 million through the 340B program when it sold to Bon Secours in 1995. Bon Secours then began building satellite facilities in wealthier parts of central Virginia – attracting more insured patients who could pay full price.
“So on oncology drugs, if you can buy it for $25,000 and then you can bill the patient’s insurance company for $125,000 you’re making a substantial profit,” Smith says.
Over the years, Bon Secours also began paring back on the services it provided to low-income patients – closing its intensive care unit, for example, in 2017.
At Johns Hopkins accounting professor Ge Bai was not surprised.
“Some very financially healthy hospitals are actually not doing their fair share," she concludes.
She found, for example, that less than one percent of spending went for charity care at Carilion's Roanoke, New River Valley and Giles facilities along with Bath County Community and Warren Memorial.
The same study shows many spending less than two percent on low-income patients – among them Dickenson Community, Shenandoah Memorial, Martha Jefferson, Mary Washington, Southside Regional in Petersburg and Carilion Tazewell.
Not fair says Julian Walker, spokesman for the Virginia Hospital and Healthcare Association. He disputes Bai’s calculations.
“There are many hospitals on here that they list as having profitable margins when, in fact, these are hospitals that have negative operating margins.”
He adds that fewer people need charity care, since Virginia expanded Medicaid to include them, and he reminds the public that hospitals agreed to pay up to 10% of the cost to expand Medicaid. In 2021, the bill was sizable.
“The amount was $415 million. In 2022 that amount exceeded $500 million. Because hospitals are funding Medicaid expansion, you are moving those individuals from someone who was eligible for charity care into a patient revenue category, because now some of their care is being compensated.”
Bai and Smith say there are still plenty of poor people who don’t qualify for Medicaid, and too few of them get free care. The expansion of Medicaid has helped medical centers financially, and they’re allowed to count some questionable expenses as charity.
“If they buy a van for example to transport patients around, and there happen to be some low-income patients on that van, is that charity care?” Smith wonders.
He argues changes are needed, but lawmakers are reluctant.
“Non-profit hospitals tend to be the largest employers in their district, and they’re very influential.”
So what kinds of reforms would lawmakers consider? Smith thinks they could at least tighten the IRS definition of charity care and require non-profit hospitals to publicly disclose how much of it they provide.
