Are non-profit hospitals holding up their end?

The Democrats' big win on November 7th is expected to bring new focus on the issue of how much community benefit non-profit hospitals actually provide, in the person of new House Ways and Means Committee chairman Charles Rangel (D-N.Y.). Committee chairman Bill Thomas (R-Cal.) has been raising the same questions as Illinois' Democratic Attorney General (and likely future governor) Lisa Madigan; Rangel as ranking member has defended non-profits in general but has also expressed concerns about how much charity care the hospitals are providing.

Hospitals, in order to qualify as tax-exempt non-profits, are required by every state to provide some free care for the indigent. However Illinois is one of many states where no specific amount of such care is required; in other states it's low, 5% or less of total patient revenues. Federal rules are soft, allowing non-profit hospitals to demonstrate "community benefit" in other ways such as public-service announcements, medical research, and health fairs. Madigan in 2003 commissioned a study which reported that Illinois hospitals were providing actual free care worth as little as 1% of patient revenues; the NY Times in June reported that the IRS is now examining the same question nationally. Madigan's tough bill in the Illinois General Assembly was deferred this past spring to be taken up in 2007.

The American Hospital Association has proposed instituting a standard definition of community-benefit costs which every non-profit hospital would have to report on as part of its annual tax return. They want that definition to continue to go way beyond free care, and specifically they want it to include bad debt: patients who never pay their bills. That last item gets a big raspberry from watchdog groups such as Charity Navigator, whose president has become Madigan's biggest cheerleader: he asks why patients who were billed because they are not indigent should suddenly count as charity work just because they fail to pay up?

The real issue might be a broader one which this blogger eventually touches on, namely: should hospitals have to meet a different public-benefit standard than other non-profits? The basic non-profit social contract is: exemption from taxes in exchange for a publicly-beneficial operation which spends any profits only on that operation. Non-profit symphonies and museums are not legally required to give away 10% of their tickets for free. Less-blunt incentives encourage them to do a lot of things like that, but the law does not impose an arbitrary minimum amount of it. If hospitals are to be held to a different contract with society in order to be tax-exempt, then what other types of organization should the same logic apply to?