21 Aug 2014
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Failing the Obscenity Testing in Health Care

Many metrics have been crafted in attempts to define the outer boundary of acceptability and the obscene. Ultimately such determinations are subjective and value laden.  An obscene income, for example, to me is any income that is $1 or more higher than mine. Not unlike the smell test, the obscenity test is none the less widely accepted. How does it apply to local health care?

For example, The Illinois Supreme Court seems to have relied upon the obscenity test when it ruled that a hospital in Urbana was ineligible for tax exempt status (Provena Covenant Medical Center vs. the Department of Revenue). The hospital had been devoting about 1 ½% of its gross revenues to charitable care. The court did not set out an exact threshold or definition of obscenity, but, like Justice Potter Stewart, they knew obscenity when they saw it.

As a consequence of this Supreme Court decision the Illinois Department of revenue suspended the renewal of tax exempt status for several hospitals in Illinois. One such hospital, Prentice Women’s, faced a $66 million back taxes bill. The hospital lobby quickly went to work in Springfield to nip this nascent and terrifying threat in the bud. The result was similar to the IRS’s “Financial Assistance and Certain Other Community Benefits at Cost.”

An examination of Cadence/Central DuPage Hospital’s 2010 Form 990 IRS tax return is illustrative. (CDH is used here as a surrogate for the Cadence Health System).  CDH reported “Financial Assistance at Cost” (essentially the old “charitable care” line item) at about 3%. However, now there are 7 other line items included in “Financial Assistance and Certain Other Community Benefits at Cost.”

In these 7 are such things as “community health improvement,” education, research, and contributions to other “charities”.  The resulting total is now 8%. This might suffice to avoid failing the obscenity test, if valid.

But what about the validity of these “community benefits” as justification for tax exempt status and what exactly is “at cost”? For-profit hospitals have most of these same expenses, not all of which are tax deductible.  And non-health care businesses face expenses like research and education also. Indeed, every business in a community that provides a service, makes a payroll, and pays its taxes provides “community benefits”.  One of the line items is donations to other not for profits. This might be more akin to the old “Prosperity Send-a-dime” chain letter than a community benefit.

And what is “at cost”? Hospitals have “charge masters” that set its prices. If you have no insurance with now insurance company to negotiate a discount for you (Read more: Bitter Pill: Why Medical Bills Are Killing Us - TIME http://content.time.com/time/magazine/article/0,9171,2136864,00.html#ixzz2lUX1AP8p), you likely will be charged $40 for a Tylenol tablet and $160 for a blood count that Medicare is charged at $4.  Only the State of California requires the publication of these lists.

So does CDH/Cadences's 3% pass the obscenity test? What if you knew that CDH’s gross profit margin in 2012 was $175 million on revenues of $745 million or 23% (see Crain’s) and that Apple’s last reported yearly profit margin was a bit lower at 21.7%.(see Yahoo). 

Another way to examine Cadence Health’s claim to tax free status is to compare its gross profit margin with the other 24 largest hospitals in the Chicago region.  The hospital that is closest in gross revenues is Advocate Christ Hospital. There the profit margin was 7%. In fact, the next highest profit margin after Cadence was at Advocate Lutheran General at about 15% (Children’s was slightly higher but is not a general hospital). What about total profit? Next behind Cadence’s $175 mil was U of Chicago’s $120 mil, but that was on revenues of $1,2 billion, almost double that of Cadence/CDH. Cadence’s top ten highest paid executives had an average income of over $1 million per year. Does this help them get past the obscenity test?

Much is wrong with our health care system and much of the problem is not in Washington but is nearby.


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