Study: Ky. non-profit hospitals get more in tax exemptions than they give in community benefit; hospitals dispute methodology

By Melissa Patrick and Al Cross

Kentucky Health News

A first-of-its-kind report argues that all of the nonprofit hospital systems in Kentucky are spending less on community investments and charity care than they receive in tax exemptions. The hospitals disagree, saying they're not being given credit for all the services they provide. 

The Lown Institute Fair Share Spending report calculated "fair share spending" by comparing a hospital's charity care and community contributions with the value of its tax exemptions, using 2019 tax information to calculate their findings. (If data were not available from this year, IRS Form 990 from 2018 was used.) The report considers a fair share of charity care and meaningful community investment to be at least 5.9% of overall expenditures. The figure is based on peer-reviewed research published in 2018.

The institute, a nonprofit think tank based in Massachusetts, calculated this measure for more than 1,800 hospitals across 275 nonprofit hospital systems in the U.S. It found that 227 of the 275 systems spent less on charity care and community efforts than what they received in tax exemptions, resulting in an $18.4 billion "deficit" in community spending.

Kentucky's nonprofit hospital systems ranked 39th among states in fair share spending, with a deficit of $424 million. 

Pointing to the 10 hospital systems that account for $5.6 billion of the $18.4 billion total fair share deficit, Dr. Vikas Saini, president of the Lown Institute, asked in the news release whether that money would be better spent by directly funding community efforts, like addiction, food insecurity and homelessness.

Kentucky hospitals dispute methodology

Several Kentucky hospital systems and their associations criticized the report's methodology, saying it doesn't include things like uncompensated and unreimbursed costs, including Medicaid shortfalls, research and support for education in health professions. 

Kentucky Hospital Association spokeswoman Ginger Dreyer said in an e-mail, "The report cherry-picks only certain categories of community investment while ignoring others, including many programs and services which benefit the community but may not be included in a hospital’s community benefit report." 

Rick Pollack, president and CEO of the  American Hospital Association, said in a blog post that the report was "an obvious example of relying on preconceived notions and faulty methodology to draw inaccurate conclusions." He cited a 2019 Ernst and Young report that found for every dollar invested in nonprofit hospitals and health systems via the tax exemption, $11 in benefits were delivered to communities. 

Baptist Health, Kentucky's largest hospital chain, said in an e-mail that it echoes the AHA's comments,  and spokeswoman Kit Fullenlove Barry offered more detailed criticism.

Barry said there are strict standards governing what research can be reported as a community benefit, and contrary to the Lown Institute's understanding, hospitals are not reimbursed for the education of the majority of health professional trainees, who provide health care; and that shortfalls in Medicaid reimbursements are considered a form of uncompensated care, long regarded as a community benefit.

"When all IRS-defined community benefit activities are included, Baptist Health more than covers the $135,093,407 that the Lown Institute has calculated as the system’s 'tax value.' Baptist Health’s community report that covers data from roughly the same time period, shows community benefit spending of $177.6 million," Barry said.  

The Lown Institute's figures are much different. It reports that the hospitals in Baptist Health's Kentucky system got more than $135 million in tax exemptions, but spent just over $62 million on charity care and community investment, for a nearly $73 million shortfall. 

Guy Karrick, spokesman for Saint Elizabeth Healthcare, also criticized Lown's methodology. He said Medicaid losses, health-professions education and research "are indeed recognized by the IRS on our 990 form as counting toward community benefit. . . . “In 2019, our 7.41% of expenses was well above the 5.9% criteria they are using for the fair share amount. The losses on Medicaid are real and the reimbursement from Medicaid is well below the cost of care. The teaching component goes well beyond our residency programs and includes nurses and other healthcare professionals for which there is no reimbursement. All three of these clearly benefit the patients and community we serve."

Of the four Kentucky hospitals in the Saint Elizabeth system, the Lown Institute report shows they received nearly $69 million in tax exemptions and provided nearly $46 million in community benefit spending, for a "fair share spending deficit" of nearly $23 million. 

Norton Healthcare spokeswoman Maggie Roetker said in an e-mail, "As a not-for-profit system our mission is to support the health of the community. Our community benefit numbers are reported on our Form 990, which is based on industry-accepted methodology and within the IRS guidelines for tax exemption. For a complete picture of our community benefit, go to nortoncares.com."

The Lown Institute says Norton got more than $110.5 million in tax exemptions and provided less than $32 million in community benefit, for a $78.5 million fair share spending deficit. 

The Lown Institute's account of its methodology acknowledges all the excluded categories, saying they don't have a direct impact on the community. It says:

"Medicaid shortfall was not included because hospitals are already reimbursed for Medicaid patients by the state. Hospitals offer discounted rates for most insured patients, yet these are not considered community benefits; it is unclear why discounts for Medicaid patients should be an exception.

"Hospital spending on health-professions education and research were not included because these investments do not have a direct impact on the health of its community. The labor [that] hospital trainees provide helps hospitals provide patient care, but their work is not targeted toward particularly underserved patients or specialties. Additionally, hospitals are already reimbursed for trainees. Many hospitals do not report on Form 990 the indirect medical education payments they receive from Medicare for training residents, even though these payments are often greater than the cost of inpatient care. While research funding is a public good, it is unlikely that a hospital’s self-funded research has a direct impact on the health of the surrounding community."

Independent analyst says approach seems appropriate

 Julia F. Costich, Ph.D. 

Julia Costich, the Peter P. Bosomworth Professor of Health Services Research at the University of Kentucky College of Public Health, noted that the Lown clearly states it is only looking at programs that directly impact a community.

"Because the purpose of the report is to compare tax revenue foregone by the community with inputs specifically to the community where the hospital is located, the approach seems appropriate to me," she said.

As for research and education, Costich said, "These hospitals are typically not academic research institutions," and health-professions graduates "are scattered to the four winds," so the benefits to the community in these two areas are likely minimal. (UK's hospital system is not included in the report because it is classified as government-owned.)

"Hospitals for the most part have explicit charitable missions," Costich said, and this report puts "their feet to the fire" to make sure they are accomplishing all of the charity and community work they say they will do in order to get this tax exemption. 

Costich added that the release of the report is badly timed for the nonprofits, because in the last two years "Hospitals have really taken a hit because in the pandemic they have not been able to perform generously reimbursed procedures in the volumes they were used to, so hospital margins have definitely declined. That said, not-for-profit hospital systems often have substantial resources, and if you look at executive salaries in the not-for-profit world, particularly in the gigantic systems, they are intentionally competitive with some parts of the for-profit realm in order to arguably attract the level of expertise that is needed to run these hugely complex systems."

Some of those systems are in Kentucky. The report said the seventh largest "fair share deficit" in the nation, $515 million was incurred by Catholic Health Initiatives, which has 10 of its 76 hospitals in Kentucky; their share of the chain's total was nearly $81 million.

The 16th largest deficit, $249 million, was incurred by Cincinnati-based Mercy Health, another Catholic-affiliated chain that operates Lourdes Hospital in Paducah and Marcum and Wallace Hospital in Irvine. The prorated Kentucky deficit was more than $14 million.

Other Kentucky hospital systems in the report were:

• Appalachian Regional Healthcare with nine of its 11 hospitals in Kentucky and a $35.6 million deficit; the prorated Kentucky amount was nearly $30 million.
• Owensboro Health, with a deficit more than $25 million.
• Ephraim McDowell Health, based in Danville, with a deficit of more than $11 million.

Each of the hospital systems were offered the opportunity to respond to this report.