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Opinion

Nonprofit hospitals make lots of profit in D-FW — and don’t pay much in taxes

Are the community benefits worth the giant tax breaks?

In Dallas-Fort Worth, most of the profits in the hospital business go to nonprofit companies.

Baylor Scott & White and Texas Health Resources together generated almost half the pretax income in this market in 2017. Their combined total topped $1.1 billion, including investment gains, philanthropy and government grants.

Throw in some other health care leaders — UT Southwestern, Methodist, Children's in Dallas and Cook Children's in Fort Worth — and nonprofit hospitals accounted for roughly 70 percent of the region's pretax income, according to data from analyst Allan Baumgarten.

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Ownership structure may not matter to patients, because most don’t see much difference between for-profit and nonprofit hospitals, especially on prices. But it should matter to local cities and school districts.

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That’s because nonprofit hospitals don’t have to pay most taxes. Their exemptions typically include property, sales and federal income taxes. They can also offer tax-free bonds and a tax deduction for charitable donations.

How much is that worth? One study estimated that nonprofit hospitals nationwide saved almost $25 billion from the tax exemption in 2011.

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But they also gave back a lot — in charity care for the indigent and uninsured; by absorbing medical costs that Medicaid and other programs didn’t cover in full; and by sponsoring medical residencies for young doctors and investing in research.

The total value of these so-called community benefits? Over $62 billion in 2011, according to a government report.

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That sounds like a deal for the general public, except that the costs and benefits aren't the same everywhere. In some cities, such as Pittsburgh, that led to a lawsuit to strip the exemption of its largest health care provider.

It’s important to note that for-profit hospitals also provide community benefits, including uncompensated care and medical residencies — and they still pay taxes.

There are almost 3,000 nonprofit hospitals, well over half the total in the U.S. In D-FW, nonprofits accounted for roughly 80 percent of net patient revenue in 2017.

"There is considerable variation across nonprofit hospitals in both the amount of community benefits provided and the value of their tax exemption," wrote researchers at Johns Hopkins University in a 2018 study. And there's "little correlation between the two."

Almost 4 in 10 nonprofit hospitals in the U.S. are getting more from their tax exemptions than they’re giving back, the researchers found. Apply a tougher standard on what qualifies as a community benefit, and it's even worse.

“If one considers only the incremental charity care, then only 20 percent of the nonprofits exceed the value of their tax exemption,” they wrote.

Their conclusion: "The tax exemption is a rather blunt instrument, with many nonprofits benefiting greatly from it while providing relatively few community benefits."

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Hospitals are required to report on their contributions, and the numbers can be impressive. Both Baylor Scott & White and Texas Health Resources said their community benefits topped $850 million each in 2017.

At Texas Health, unreimbursed Medicare was a big chunk, accounting for over half the total. Almost $32 million in benefits came from a community program, in-kind donations and employee volunteers, the company said.

"We're blessed to have this blend of hospitals," said Stephen Love, CEO of the Dallas-Fort Worth Hospital Council.

He cited the for-profits, led by HCA’s Medical City Healthcare; the nonprofits, led by Baylor and Texas Health; UT Southwestern’s teaching hospital; and the public hospitals, Parkland Memorial and John Peter Smith.

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“They all work together collaboratively, and we have some of the best health care in the nation,” Love said.

He doesn’t describe hospitals as “nonprofits” because tax-paying and tax-exempt are better descriptions. Good hospitals — regardless of taxes — must have healthy profit margins to invest in upgrades and new technology.

Early in his career, Love heard a line at a Catholic hospital that he’s often repeated: “The good sister said, ‘No margin, no mission,’” he said.

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For-profit hospitals talk about their missions, too, because they’re on the front lines with patients.

“Everything we do is driven by our mission to care for and improve human life,” a spokeswoman for Medical City Healthcare wrote in an email.

The publicly traded company has some of the most profitable hospitals in the region, led by Medical City Dallas' 36.6 percent profit margin. It benefits from the scale of the nation's largest hospital company and is renowned for operating efficiently.

In 2017, Medical City provided over $319 million in uncompensated care in North Texas, the spokeswoman said. Beyond that community benefit, it paid more than $89 million in property and sales taxes, and nearly $92 million in federal income tax, she said.

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Debates over tax exemptions and community benefits began decades ago, before Medicare and Medicaid took effect. Several new requirements were added in the Affordable Care Act, related to financial assistance, billing practices and public health initiatives.

"There are gaps in how hospitals are complying, and it's clear that more could be done," said Jessica Curtis, a specialist in the subject for Community Catalyst, a Boston-based health care advocate for consumers.

She believes that nonprofit hospitals should face closer scrutiny, especially from state regulators. And they should be encouraged to think more broadly about what will benefit their community. With their resources, they can make real progress beyond the usual health care settings — in areas like affordable housing and food supply.

“Stripping their tax exemption is not the answer,” Curtis said. “It’s really a question of: Are they doing enough? And are they doing the right things?”

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