Today the Board of Equalization acted, on a 3-2 vote, to require that non-profit hospitals report to it in July and September of this year about whether those hospitals are complying with the basic requirements of California law with respect to non-profit tax status as well as AB774, on hospital overcharging. The Board expect to put out a report in February of next year (2010).
The hospitals opposed this and attempted to delay the vote until another year, another decade, maybe another century.
However, Board Members Betty Yee, who proposed the motion, former Assemblymember Judy Chu, and Controller John Chiang prevailed. While the motion to conduct a stakeholder process passed a few months ago 5-0, this time Board Members Bill Leonard and Michelle Steel both voted no. Although the Board of Equalization is technically non-partisan, the vote was along party lines.
Under California law, including a decades-old court case named Rideout, after a hospital of that name, nonprofit hospitals are generally expected to have revenues in excess of expenditures of less than 10% (otherwise known as profits). However, non-profit hospitals may accrue greater “surplus” revenues if they use those “surplus” revenues for debt retirement, facility expansion or reserve for operating contingencies.
For those of you who are not tax geeks, here is an example: a few years ago Sutter Tracy had revenues in excess of expenditures of 24%. Pretty healthy return for a “non-profit”. It is this sort of thing that made the BOE think perhaps they should take a look and request information about what “non-profit” hospitals were spending their surplus revenues on.
The information request also requires hospitals to provide their charity care and discount payment policies as well as the number of liens and amount collected from liens. They are also looking at joint ventures and executive compensation and for personal inurement, since there is some lingering notion that those who are in charge of non-profits should not be among the wealthiest in our society.
The BOE also asked for corporate organization charts: we have seen a few of these over the years: we call them octopus charts because of how convoluted they are. All too often, remarkably enough, the land-use intensive, less profitable elements of the health system are held by the non-profit while the lucrative elements are held by for-profit affiliates or subsidiaries. Again, this is the sort of thing that has piqued the interest not only of the Board of Equalization but also of the U.S. Senate Finance Committee where under current chair Max Baucus (D-Montana) and former chair Chuck Grassley (R-Iowa) the committee has pressed the Internal Revenue Service to revise the reporting requirements for non-profit hospitals.
None of the data that the Board of Equalization required for its efforts is available from any other source: all of the financial reporting that is done to the Office of Statewide Health Planning and Development (OSHPD) is done on a facility basis while the BOE looks at taxable units. A hospital system can have 20 or 30 hospitals but it may have only two or three taxable units depending on its corporate structure (hence the need for the corporate organization chart).
In the relatively near future, we will have better information on whether “non-profit” hospitals are really non-profits—or whether they are behaving more like their for-profit counterparts.
If you want to look at the questionnaire, it is at http://www.boe.ca.gov/meetings/pdf/Item_P3b1_Nonprofit_Hospitals_041509.pdf