Do UVM Medical Center or its Parent UVM Health Network Continue to Deserve their tax-exempt Status?

Courtesy of UVM Medical Center

During my long life, I’ve chaired 13 statewide nonprofit organizations, including the former Fletcher Allen Hospital, and served as a trustee on nine others. The first was the Vermont Arts Council when I was 25 years old. I know and understand nonprofits and feel strongly about their governance and oversight responsibilities. I’ve expressed my ideas and concerns about Vermont’s 6000-odd nonprofits often.

Nonprofit (for-mission) organizations generally include hospitals, universities, public charities, and foundations. To qualify as a nonprofit, an organization must serve “the public good.” Nonprofits do not distribute or spend “retained earnings” (profits) other than to advance the declared mission of the organization. Staff can be appropriately remunerated but board trustees must serve unpaid and are chosen for their commitment to, and skills at, advancing mission.

In this context, a July 20th article in the New England Journal of Medicine, entitled, “Do Nonprofit Hospitals Deserve Their Tax Exemption?”, written by Ge Bai, PhD, a professor of accounting at Johns Hopkins’ Carey Business School and professor of health policy and management at Johns Hopkins’ Bloomberg School of Public Health, and her colleagues raises tough but relevant questions. Do nonprofit hospitals fulfill their charitable mission and their obligation to address community needs as required by their nonprofit designation?

Needless to say, the response from hospital lobbyists has been fast and furious.

Healthcare is the third largest industry in the U.S. and, taken together, nonprofit and for-profit hospitals account for $1.4 trillion in annual revenues. Of the more than 5000 community hospitals, nearly 60% are nonprofits.

Nonprofit hospitals have some ill-defined policy and reporting obligations such as “community benefits” and “charity care.” Defining these terms is left largely up to the hospitals themselves. And, as a consequence, many nonprofit hospitals receive far more in tax-relief benefits such as state and local property taxes, federal and state income taxes, and state and local sales taxes, as well as access to lower-interest bond-financing than they deliver in these two “public benefit” categories. According to the Kaiser Family Foundation, nonprofits received some $28B in tax benefits but spent only $16B on free or reduced-price charity care.

One service hospitals claim as a “community benefit” is the difference that they say it costs to provide a medical service as opposed to what Medicare pays them (“the Medicare shortfall”). Green Mountain Care Board (GMCB)’s board member Thom Walsh challenged that claim recently in a column in The Washington Monthly.

As to the Walsh piece challenging the myth of Medicare shortfall, neither does the Lown Institute count compensating for Medicaid shortfall (research, training medical professionals) as part of a hospital’s “fair share.”

A June study published in Health Affairs showed that 86% of nonprofit hospitals provided less charity care than their exemptions were worth and that most nonprofits expand their cash reserves with retained earnings rather than funding their public service mission.

In a similar analysis in April of this year, the Lown Institute said that more than 1350 nonprofit hospitals have a “fair share deficit,” i.e., the value of their community investments is less than the value of their tax breaks.

Furthermore, a 2018 study by the National Bureau of Economic Research found that for every $100 of expenses incurred, nonprofit hospitals in aggregate spent $2.30 on charity care, as compared with $3.80 spent by for-profit hospitals.

It comes as no surprise then that a Kaiser Family Foundation’s (KFF) report last year showed that 100M Americans are carrying healthcare debt. So regulators must also pay close attention to ensure safeguards against abusive medical debt collection, including the sale of nonprofit medical debts to third party collection agencies, whose methods are less regulated and may include property seizures.

The Internal Revenue Service (IRS) and the Centers for Medicare and Medicaid Innovation (CMMI), as well as local healthcare regulators should adopt and amend policies that ensure that nonprofit hospitals’ “community benefits” and “charitable care” at least equal the value of their tax forgiveness and bond-finance savings.

Also worth considering is that foregone tax revenue from nonprofit hospitals reduces money available to fund the social determinants of health such as housing, food security, early childhood development and employment and job security. In 2018, Tower Health took over the 219-bed Pottstown, PA, hospital, which then became a nonprofit and no longer had to pay the $900,000 in annual municipal taxes, that had largely been used to fund the local school system. The result included serious cutbacks in curriculum and teaching staff to accommodate the loss of tax support. These issues apply here in Vermont as well.

From a regulatory standpoint, it’s also important to differentiate between UVM Medical Center (UVMMC) in Burlington and the UVM Health Network (UVMHN), a network of six hospitals in Vermont and New York. As a recent article In the New York Times points out, “The Federal Trade Commission (FTC) has an even harder time evaluating the vertical merger, which is far more common: when a big hospital system buys up a much smaller hospital or some doctors’ practices and independent surgeries or radiology centers – or when it merges with a local insurer.”

Nonprofit hospitals need to be held to strict account in order to preserve their nonprofit status. The “Community Benefit Standard” adopted by the IRS specifically says that they “operate to promote the health of a class of persons that is broad enough to benefit the community.” Unfortunately, the standard defines no quantifiable requirement and applies only to federal tax exemptions. Qualifying for state and local tax exemption is within the purview of state law.

“In 2010, the Patient Protection and Affordable Care Act (ACA) supplemented these obligations by requiring nonprofit hospitals to report certain information regarding the provision of community benefits in their annual tax filings (Form 990, Schedule H), including the cost of providing charity care (care for which hospitals receive no or partial payment from low-income patients), the amount of their Medicaid “shortfalls” (the difference between the cost of providing care to patients covered by Medicaid and Medicaid’s payment for such care), and the cost of education, research, and other community activities. The ACA also requires hospitals to periodically conduct “community health needs assessments” and to develop a plan to address identified needs, including steps to prevent illness and address health disparities and social determinants of health.”

It’s evident that nonprofit status provides little if any assurance that hospitals will behave in accordance with their charitable mission or provide sufficient community benefits to justify their favored tax status. The National Academy for State Health Policy (NAHSP) has put forth some recommended guidelines for improved disclosure and transparency.

But the question must be asked: Should we in Vermont question whether UVM Medical Center (UVMMC) or its parent, UVM Health Network (UVMHN), continue to deserve their nonprofit status? This is a harrowing question with massive but important implications. And to answer it, we must turn to the data:

In UVMHN’s 2024 Budget Proposal, which covers its three Vermont hospitals (UVMMC, Porter, Central Vermont), there is a category entitled “Population Health Services Organization” which accounts for $23+ million in spending, including 138 staff, at an average salary of $84,700, and 16 managers at an average of $124,800. What is this? What does this really encompass, as another budget line cites “UVMHN administration” costs totaling $21,540,000 for 17 managers and 19 staff members. Salaries alone total just under $9 million. Management salaries average $437,700 per manager and average staff salary is just under $80,000.

In sum, UVMHN is budgeting in 2024 for $407,528,000 across total shared administration, of which $205,000,000 will be salaries for 358 managers and 2039 staff. The average administrative management salary will be $165,166 and average staff salary will be $84,651.

Compare this with an analysis by ProPublica of UVMMC’s FY2020 990 filing indicating there were 17 executives whose compensation was over $400K, with average annual compensation of over $600K… 20 times the median income of the ratepayers who will pay those salaries. I know of no other Vermont nonprofit executive directors who make this kind of salary, and note that the UVMHN salaries cited are “averages.”

Meanwhile the problems with UVMHN-controlled OneCareVT (OCV) are legion. The salaries for their executives set off a heated discussion about value and performance given their limited impact on managing the cost of healthcare in Vermont. Blue Cross Blue Shield (BCBS) found too little value there to remain a member, and OCV is wholly controlled now by Vermont’s healthcare monopoly UVMHN.

Raising a larger but equally relevant question, is a July 18th article in the New York Times that says:

“Keeping universal coverage basic will keep the cost to the taxpayer down as well. It’s true that as a share of its economy, the United States spends about twice as much on health care as other high-income countries. But in most other wealthy countries, this care is primarily financed by taxes, whereas only about half of U.S. health care spending is financed by taxes. For those of you following the math, half of twice as much is … well, the same amount of taxpayer-financed spending on health care as a share of the economy. In other words, U.S. taxes are already paying for the cost of universal basic coverage. Americans are just not getting it. They could be.”

In essence, is the mission of maximizing Vermont’s population health the primary driver of decision-making at our major hospital system or is the goal institutional and market-share growth and the consequent accumulation of retained earnings?

The case UVMHN makes for its expanding budgets is that high-quality healthcare, which many of us have acknowledged is available if you can access it, is very expensive. But does that statement survive a comparison of how much money is spent at UVMHN on the mission of patient care and how much is spent on administration and overhead?

As we will see in upcoming hospital budget approval hearings August 9^th– 25^th in front of the Green Mountain Care Board (GMCB), supplied data will raise questions about the performance of UVMMC when measured against some 107 of its peer hospitals around the country for quality of outcomes compared to relative costs. “Gold standard” comparison-evaluation data from 2022 was introduced at the June 28 GMCB meeting.

In advance of upcoming hearings, the GMCB set hospital-budget growth guidelines at 8.6% for a two-year window. Meanwhile, UVMHN is requesting a 28% increase for its Porter Hospital in Middlebury and 24% for UVMMC. As a result, insurers, who must pay hospital bills, are requesting their own rate increases ̶ MVP at 13% and BCBS at 15% on average. And so it goes.

GMCB regulatory considerations for the forthcoming budget hearings should include:

Setting clear standards for charity-care eligibility and obligations,
Tightening the definition of “community benefit,”
Limiting extraordinary debt-collection practices,
Setting a standard for reasonable administrative costs compared to clinical costs attributable to patient care,
Clarifying standards for efficiency and effectiveness of operations such as hospital and emergency room care that could be avoided,
Disclosing “Charity-Care to Tax Benefit” ratio by dividing reported charity-care provision by the estimated tax benefit.

The key regulatory principles involve specifying and defining accurate data submissions needed to regulate effectively, making that data public, as it must be with a nonprofit, and engaging stakeholders in a discussion about the future direction of Vermont healthcare.