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Excerpted from: Hayley Penan, California's Nonprofit Hospital Puzzle: Reworking the Jigsaw to Benefit Underserved Communities, 9 UC Irvine Law Review 1131 (July, 2019) (264 Footnotes) (Full Document)


HayleyPenanStandards for establishing and maintaining nonprofit hospital status have become the subject of increasing scrutiny over the last decade, at both the federal and state levels. There have been accusations that:

In the best case, the mission of a modern tax-exempt hospital is to keep their tax exemption and then provide the best health care at the lowest cost. In the worst case, a non-profit tax-exempt hospital's mission is to keep its tax exemption in order to maximize profits and use their non-profit structure as camouflage to hide both their profit maximizing activities on behalf of doctors and administrators and/or their elitist, secretive (perhaps fraudulent) cross-subsidization of certain types of healthcare and wealth redistribution.

This concern has only been amplified by research that has shown that the value of tax exemptions for nonprofit hospitals has doubled in the last decade and by the recent rise in mergers and acquisitions among nonprofit hospital systems around the country. While the Affordable Care Act (ACA) has made great strides in increasing accountability of nonprofit hospitals across the country, it has also created concerns about existing charity care requirements. The reduction in the rate of uninsured due to the ACA has opened the door to some nonprofit hospitals challenging the necessity of maintaining their current levels of charity care.

The federal requirements are only one component of nonprofit hospital taxation status. State tax exemptions, particularly those reducing property tax revenue in a state like California with nonprofit hospitals clustered in many of the highest rent districts, means substantial tax dollars are in effect going to support nonprofit hospitals. While this may benefit some communities, it may contribute to significant healthdisparities across geographic, socioeconomic, gender, racial, and ethnic lines throughout California and across the United States. A prime example is the health disparity between individuals in rural and urban areas. This persisting difference should lead us to scrutinize whether the current tax exemptions for nonprofit hospitals are the most efficient use of states' tax dollars.

In a time when we are debating women's access to the fields of science, technology, engineering, and math (STEM), universal basic income, and new life-saving technologies, what chance do we have to address these complex issues if we cannot find ways to get the fundamentals right? Access to basic health care services is critical to reducing health disparities and social inequity in our society, and we must make sure that our limited resources are used in the most effective ways to reduce health disparities and increase the overall public health. Access to health care is a matter of life and death impacting civil liberties and privacy concerns; it serves as a window into the fundamental values of our society. How we choose to allocate precious resources within our health care system speaks volumes about our values around human life, and most importantly, sheds light on who in our society benefits from existing legal and social structures and at whose expense this benefit is achieved.

This Article focuses on a case study of California. California matters significantly in discussions about health care access for a number of reasons. First, it is one of the most populous states in the country. Second, it is the largest recipient of Title X funds. Third, it is regarded as a thought leader in ensuring health care access and protecting the rights of its citizens; a clear example of which is California's protection of reproductive privacy through the state constitution. Finally, California is a vibrant place to examine nonprofit hospital status in the context of several recent attempts by the state's legislators to amend the current standards for nonprofit hospital status.

California's mandatory hospital data reporting through the state's Office of Statewide Health Planning and Development (OSHPD) facilitates a comparison between the charity care and community benefits provided by nonprofit hospitals and for-profit hospitals in the state. Researchers at the University of California, San Francisco (UCSF) conducted a survey in 2015 of nonprofit and for-profit hospitals' expenditures on charity care in California in a first-of-its-kind study based on the OSHPD data. The resulting report serves as a basis from which to examine whether the current nonprofit system provides enough of a public benefit to justify nonprofit hospitals receiving significant tax exemptions.

This Article looks at the UCSF study's findings and examines the current structure of the federal and California state nonprofit taxation status standards, as well as recent efforts to reform the California statutory nonprofit hospital requirements. Review and analysis of these findings and laws ultimately leads to a conclusion that there is a problem with the current system. There is a lack of uniformity and certainty that nonprofit hospitals' charity care and community benefits are directed towards the populations that are most in need of these services.

The current system is failing to help the most vulnerable populations in the state. This Article focuses on the persisting health disparities between individuals living in urban areas and rural areas, the latter of which are generally unserved or underserved by California's nonprofit hospitals. Part II begins by providing the history, rationale behind, and standards for granting nonprofit status to hospitals.

Part II also addresses in detail recent efforts by California legislators to reform the state standards for nonprofit hospital status.

Part III provides an overview of what a nonprofit hospital looks like in California. This section examines the locations, operations, and self-impressions of California nonprofit hospitals, and provides a framework for how nonprofit hospitals operate in conjunction with EMTALA and the ACA requirements.

Part IV looks at other state systems for determining whether to grant hospitals nonprofit status.

Part V lays out potential solutions to the problematic California statutory standards, assesses the costs and benefits of each, and puts forth a proposal to improve the current system.

Part VI concludes.

[. . .]

The ACA's increased reporting mandates and the requirement of community health needs assessments to gain information about the health needs of the communities served by each hospital are steps in the right direction, but they will not by themselves alleviate the significant health care services disparities in California or elsewhere in the country. Even with the new ACA requirements, there are still uniformity problems. Without any specific parameters for how the assessments are conducted, what is taken into consideration, what steps must be taken, or what results are achieved, there will always be some nonprofit hospitals fulfilling their obligation while others are not.

Most importantly, the current system does not require the communities served by nonprofits to be those that are in the greatest need of charity care or community benefit activities, and the current system does not require nonprofit hospitals to consider this at all. This often leaves the populations greatest in need of care, who will suffer the most without access to needed health care services, without access to life-saving medical treatment.

Letting hospitals determine which communities they serve has resulted in nonprofit hospitals primarily serving the communities in closest proximity to their locations. It also may be encouraging nonprofits to serve the communities with the highest reimbursement for services rendered. And, in some ways, this approach makes sense. It is easier and more efficient to serve the communities closest to your location than to try to serve those far away. However, because the vast majority of nonprofit hospitals are concentrated in urban centers, the nonprofit hospital system is failing those communities that are furthest away-- especially in rural areas--which are experiencing significant community-level health disparities. If taxpayers are to see a full realization of the public benefit from nonprofit taxation status, changes must be made in the system to help address these gaps. The best plan for addressing these gaps is to amend the law so that nonprofit hospitals are required to serve the communities most in need of health services and consider the needs of underserved and unserved communities first and foremost.

California has shown itself to be a thought leader in protecting the rights of its citizens. If California is unable to find a way to use its nonprofit hospital standards to improve access to care for the most vulnerable, what hope can there be for those who live in Texas or Mississippi or other places around the country with less funds and even greater access to care issues and health disparities? Though this article has dived into the case study of California, it demonstrates that it is critical that we think about new and creative strategies to most effectively use limited state and federal resources to increase access to care and save lives, both in California and around the country.

Hayley received her Juris Doctorate degree from the University of California, Irvine School of Law and a Masters in Public Health with a concentration in Health Policy from the Harvard T. H. Chan School of Public Health.

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