Nonprofit Hospitals Face Increasing Pressure to Justify Tax Breaks

Nonprofit hospitals are under increasing pressure to justify the tax breaks they receive, The Wall Street Journal reports.

According to the American Hospital Directory, nonprofit hospitals make up the majority of hospitals in the United States.

While 77 percent of nonprofit hospitals have money left over from their annual operating expenses, only 61 percent of for-profit hospitals are operating in the black. The directory also reports that the combined net income of the 50 largest nonprofit hospitals increased nearly eightfold to $4.27-billion from 2001 to 2006.

Sen. Charles Grassley, the senior Republican on the Senate Finance Committee, believes that lawmakers should be asking questions about whether some wealthy nonprofit hospitals can justify their tax-exempt status. “Some nonprofit hospitals seem to forget that their operations are subsidized with generous tax breaks,” he says. “They allow their priorities to get out of whack.”

New standards adopted by the Internal Revenue Service, scheduled to take full effect in 2009, will require nonprofit hospitals to report to the public more details about what they do to serve their communities.

The newspaper examines Northwestern Memorial Hospital, in Chicago, for example, which reported spending $20.8-million on care for the needy in 2006, less than 2 percent of its revenue and far less than what the Center for Tax and Budget Accountability, a Chicago nonprofit organization, estimates the group receives in tax breaks.

The hospital has also been under fire for what many consider to be excessive executive compensation and renovation projects. The hospital’s former chief executive officer, Gary Mecklenburg, received a $16.4-million payout in 2006, and the hospital recently completed a $1-billion building project.

Northwestern Memorial says it deserves tax-exempt status because of benefits it provides to society, especially because it finances research that is helping hospitals nationwide improve care.

But not everyone is persuaded, the newspaper reports.

“Nonprofit is a misnomer — it’s nontaxable,” says Edward Novak, president of Sacred Heart Hospital, a small for-profit institution in Chicago, where he receives less than $220,000 in compensation per year. “When you’re making hundreds of millions of dollars a year, how can you call yourself a not-for-profit?”