2023-02-14

Montana’s Tax-Exempt Hospitals Oppose Increased Oversight by State Officials

Nonprofit hospitals are fighting Montana’s attempt to boost oversight of the ways they claim they provide benefits to their communities in exchange for millions of dollars in tax breaks.

It’s the latest clash in a national struggle between policymakers and the industry over whether hospitals’ charitable giving is enough to justify their tax-exempt status.

Montana Department of Public Health and Human Services officials have asked state lawmakers to pass a bill authorizing the agency to create standards and reporting requirements for the community benefits nonprofit hospitals report, saying the information collected now is insufficient. Montana hospitals get state and federal tax breaks each year with little oversight of how that’s earned.

The Montana Hospital Association opposes the bill despite initially saying it would support the measure if it didn’t conflict with federal rules. Now, the association is seeking changes to the bill that state officials said would actually shrink the department’s oversight, gutting the bill of its original purpose.

The Montana debate illustrates a power struggle playing out nationally between state policymakers who want more of a watchdog role and tax-exempt hospitals resistant to added oversight, said Ge Bai, a professor of accounting and health policy at Johns Hopkins University who studies hospital giving.

“There is a question of whether they are nonprofits or for-profit in disguise,” Bai said. “The fundamental issue is the contract between taxpayers and nonprofit hospitals. We’re witnessing a national trend that this contract has been overlooked for a long time.”

More than half of acute care hospitals in the United States are nonprofit hospitals, which must record community benefits — such as covering a patient’s bill or offering mental health services at a loss — with the IRS for their tax exemptions. But federal rules around how hospitals tally charitable acts are broad, with oversight lacking. Pressure for more transparency has mounted as about 6 in 10 adults in the U.S. with household incomes below $40,000 have medical debt, and altogether Americans owe an estimated $195 billion or more.

Brenton Craggs, the Montana health department’s information and regulatory affairs coordinator, said in a Jan. 25 legislative committee hearing that some of the changes the hospital association proposed would limit information the state could collect from hospitals to reports they already submit to the federal government. Those documents have too few details for the agency to discern whether what nonprofit hospitals count as aid improves the health of their communities, he said.

“We want transparency and we want accountability,” Craggs said.

Twenty-five states have outlined some community benefit requirements through state laws, though those rules can be broad. For example, Montana requires all hospitals to have a charity care policy “consistent with industry standards.” Just five states — Illinois, Nevada, Pennsylvania, Texas, and Utah — have set minimum standards for hospitals to maintain their tax-exempt status.

Bai is among national researchers who have argued that federal standards for community benefits are too broad. She said tax-exempt organizations can count things that are part of normal business as community health improvement, such as renting billboards to outline treatment options, or holding a news conference to announce a hospital expansion — even though both double as advertising.

Despite their charitable status, nonprofit health systems often accumulate millions of dollars in assets and can become the biggest business in town. Additionally, a national 2021 study showed nonprofit hospitals actually spent less on services for patients unable to afford care than did for-profit hospitals.

Some of Montana’s wealthiest tax-exempt hospitals lag behind state and national averages in charitable giving, according to a KHN analysis of the hospitals’ IRS filings. A 2020 audit found that the way hospitals fill out community benefit reports varies, reducing transparency. The audit in part blamed the broad federal rules and called for increased state oversight.

The bill, sponsored by Republican state Sen. Bob Keenan, would require the health department to define what hospitals can count as a community benefit, detail how they must report their giving, and create penalties for hospitals that fall short.

When the state first proposed setting standards for the charitable contributions, Montana Hospital Association representatives said they would work with officials. In the Jan. 25 hearing before lawmakers, Duane Preshinger, an association vice president, said it opposes the bill because it couldn’t come to an agreement with the state.

Preshinger said that the bill would increase hospitals’ administrative burden and that hospitals are already highly regulated by the federal government. All the information the state needs is in the documents hospitals submit to the IRS, he said.

In the past, association leaders and hospital administrators have said those documents aren’t a fair measuring stick to compare hospitals’ community benefit because there has been so much variety in filling out the reports.

Bob Olsen, interim president and CEO of the association, said hospitals generally support the effort to clarify and standardize community benefit reporting practices. In recent years, the association worked with hospitals to create reporting standards that align with federal requirements.

That led to a handbook for members and a goal for hospitals in the state to uniformly report their benefits under self-imposed standards. The association didn’t expand or change the federal criteria but created new tools, examples, and answers to common questions about how to fill out the reports. Olsen said the association launched a training series in January for hospitals on how to use the guidebook.

Olsen said Montana’s 48 nonprofit hospitals provided $435 million in community benefits in 2019, according to a recent study commissioned by the American Hospital Association. “Still, hospitals agree there is room to improve reporting and have taken their own steps” to do so, he said.

Craggs, with the state health department, said that as the law stands the agency could have created standards without legislation, but it wanted to show it intends to work with hospitals to outline ways to collect more information without creating unnecessary burdens.

“We don’t want to scare away the hospital association. We’d rather bring them to the table and have these conversations,” Craggs said. “But there are issues.”

As of early February, at least one lawmaker has sided with the hospital association. Republican Rep. Ed Buttrey requested an amendment that largely mirrors the association’s requests. Buttrey is chair of the board of directors of Benefis Health System, one of the state’s largest nonprofit hospital systems.

KHN (Kaiser Health News) is a national newsroom that produces in-depth journalism about health issues. Together with Policy Analysis and Polling, KHN is one of the three major operating programs at KFF (Kaiser Family Foundation). KFF is an endowed nonprofit organization providing information on health issues to the nation.