Robert S. Berry, M.D.
1231 Tusculum Boulevard
Greeneville, TN 37745
November 16, 2007
Senator Chuck Grassley
Attn: The Committee on Finance
135 Hart Senate Office Building
Washington, DC 20510-1501
Dear Senator Grassley:
Thank you for your efforts on behalf of all taxpayers to keep non-profit hospitals accountable for their tax exemptions. After reading the July 20 Wall Street Journal article, “Lawmakers Question if Non-Profit Hospitals Help the Poor Enough” by Theo Francis, I felt it was my duty as a private citizen and a physician of the uninsured to bring to your attention a non-profit hospital in my community that would probably cause you and the rest of the Senate Finance Committee a lot of concern.
I say that I am a physician of the uninsured because I have roughly 5000 uninsured patients in my practice. Since opening nearly seven years ago, there have been about 20,000 visits from uninsured patients, saving them more than $5 million had they been treated in an ER of one of our local non-profit hospitals. Yet this practice does not presume upon other taxpayers through government grants or non-profit incorporation. It exists entirely on fees paid directly by patients – most with after tax income. Unlike non-profit hospitals, we pay our share of taxes on income, property, and purchases – just like any other business in our community.
I have waited to submit this, knowing that doing so might result in a backlash of hostility from some of the more powerful members of this community against me, my family, and my medical practice. But discretion in the face of injustice and corruption is cowardice. As Desmond Tutu once said, “If you see injustice and say nothing, you have taken the side of the oppressor.”
If I were not providing quality medical care at fair and honest prices then the uninsured and others would not exchange their money for my services. No such direct accountability exists in government bureaucracies or in tax-privileged hospital oligopolies – environments that invite abuse.
The purpose of the enclosed report is to show what can result when tax exemptions are given to a closely-knit hospital board over many years without public accountability. The information in this report comes primarily from the hospital’s 990 form, which is “open to public inspection,” and from my direct observations. I hope that it helps the Senate Finance Committee in its efforts to reform healthcare tax policies and regulations.
Robert S. Berry, M.D.
Is This What Congress Intended for Non-Profit Hospitals?
November 16, 2007
There are probably few non-profit hospitals in America that have more money in cash reserves while providing less charitable care per capita than Laughlin Memorial Hospital (LMH) in Greeneville, TN – a city of 16,000 in a rural county of 65,000. Using LMH’s most recent 990 form from www.guidestar.org (July 1, 2004 to June 30, 2005), it can be ascertained that it holds approximately $1,800 in cash reserves for each citizen within our county while spending roughly $6 to $13 in charity care per capita per year.
An analysis of LMH’s 990 form using IRS criteria
Being a “non-profit” provides LMH with tax exclusions on net income, purchases, and property. It also gives LMH the opportunity to play arbitrage with taxpayer money using tax-exempt bonds.
Below is an analysis of LMH’s 990 form using four performance measures within the IRS report mentioned in Theo Francis’s WSJ article, “Lawmakers Question if Non-Profit Hospitals Help the Poor Enough.” These are: net income, cash reserves, uncompensated care, and proportion of insiders.
1.Net income - LMH’s net income or “excess revenue over expenses” was $5.0 mil (line 18). This represents 8.1% of the gross receipts of $61.0 mil (compared with an average of 3.8% according to the WSJ article). 2.Cash reserves – LMH’s cash reserves were $115 mil (line 56). Since its total assets were $168 mil (line 59), nearly 70% are in financial assets. This represents $1800 per citizen of our county or $7200 for a family of four. Of this $115 mil, $46.1 mil comes from tax-exempt bonds (line 64). I believe it would be safe to say that LMH obtains a higher return reinvesting this money than it pays in interest on this loan. Even just a one percent differential between what it borrowed on a tax-exempt basis and what it earned in higher yielding investments in its cash reserves would yield nearly $ ½ million annually. A 5% arbitrage would net the hospital $2½ million available for exponential growth afforded by tax-exempt compounded interest. Given that LMH deploys 70% of its assets in financial instruments, one might be led to conclude that it is a tax exempt financial investment firm with a side operation in hospital services to justify its tax exemptions. 3.Uncompensated care – The IRS admitted that “the definitions used by respondents to answer these questions were not uniform.” LMH’s 990 form reports “Charity Care” at $0.9 mil, “Unreimbursed TennCare” at $3.3 mil and “Total Community Benefit” at $4.6 mil. I would assume that the first is for true uncompensated care and represents 1.5% of annual revenue. But it is uncertain whether the $0.9 mil is for charges or cost. If it is for charges, then the actual cost to the hospital would be much less. In fact, according to the website www.hospitalvictims.com the charge to cost ratio of Laughlin Memorial Hospital is 2.4, and thus the cost to the hospital of its uncompensated care was probably only $360,000 or 0.6% of revenue – about 1/10th of the threshold you proposed to qualify for tax-exemptions. While LMH has $1800 in cash reserves for each citizen of Greene County, if the true cost of its charity is $360,000, then it spends only $6 annually per citizen in charity care. 4.Proportion of insiders - The IRS never defines the term “insiders.” According to LMH’s 990 form there are 8 persons on its board of directors. From information gathered from people who are more knowledgeable about LMH than I, it appears that four of these have sat on the board for at least 10 consecutive years. The previous hospital president, Jack Wilson, and banker C. Herbert Whitfield have been on the board for over two decades. Accountant Ray Adams has been on the board for over 15 years, and the current president and CEO, Charles H. Whitfield, Jr. – the son of the banker and the recently installed chairman of the Tennessee Hospital Association board of directors – has been a member since 1997. Two more members are physicians on staff at the hospital. The other two, I believe, are business persons at large in the community. Given the lack of turnover among half the board and the potential nepotism, I believe any reasonable person would conclude that LMH’s board has a high proportion of “insiders.”
Who benefits from LMH’s tax exemptions?
An analysis of its 990 form reveals that, on the surface at least, the money accumulating in its cash reserves does not seem to be benefiting anyone personally, including the persons responsible for its enormous financial success. The only one member of the board who earns anything from his service – Charles Whitfield – does so because he is president and CEO of the hospital. His total compensation of $233,000 exceeds by 50% the average income earned by primary care physicians in this country but is much less than that of some other hospital CEO’s in this area.
Such a large cash reserve enables the board to purchase a lot of good will among influential members of our community. For example, recently it has been able to share its financial resources through a $20 mil expansion of dubious community benefit – an outpatient medical building only 40% occupied and a covered parking lot that rarely if ever is used.
At the time of its opening, the new five story outpatient center had only two floors utilized, one of which is a CATH lab. According to recent medical studies, small CATH labs have poorer outcomes than do larger ones. The conclusion from these studies is that patients are better served in hospitals that have cardiac surgery backup. There are three such hospitals with cardiac surgery services less than an hour’s drive of LMH. It appears, therefore, that the board’s decision to have a CATH lab here in Greeneville might actually do more harm than good to community members. Yet without the CATH lab, the new building would be only 20% occupied – hardly an adequate justification for its construction.
LMH’s 990 form showed that its “tax-exempt bond liabilities” (line 64) increased from $25.3 mil on July 1, 2004 to $46.1 mil on June 30, 2005. Yet the completion of its building project was announced in January 2004, and there was no major building project ongoing during the rest of that fiscal year. In addition, it already had $60 million in cash reserves independent of the tax exempt loans. Such a cash hoard amassed partly from government favors enables it to dominate local real estate and labor markets.
LMH’s large cash reserves drive up the cost of local property. When I inquired about purchasing a small portion of the property next to my practice, I was informed by one of the owners that LMH was interested in purchasing it and that “it has lots of money.” I inferred from this statement made by someone who is currently on the board of the Laughlin Health Care Foundation (and perhaps has in the past been on the hospital board itself) that there was no way I would be able to outbid the hospital.
LMH has assisted other medical practices in recruiting and relocating physicians, then providing them with income guarantees once they have started practice. However, it has refused to provide similar assistance to my practice. Another physician would enable the practice to double the hours it is open, thus making affordable care more accessible to the uninsured. Yet even if it did assist me, how could I compete for physician labor when it has $115 million in cash reserves?
LMH’s large cash reserves also enable it to be a major advertiser in The Greeneville Sun…
An interesting disparity
There is probably no other community in America today where the disparity in caring for the uninsured between a taxpaying, for-profit medical practice and a non-taxpaying, non-profit hospital is more striking than in Greene County, Tennessee. Since opening in January 2001, my practice has had roughly 20,000 visits from 5000 uninsured patients saving them more than $5 million over local ER’s. One would think that with all of the tax benefits the community gives LMH, its board would be delighted to collaborate with a private practice that cares primarily for the uninsured. In fact, it has refused on multiple occasions my requests for a price list of its routine outpatient services. How can a local physician help uninsured patients make strategic use of the hospital’s resources without knowing in advance how much it is going to cost them?
Perhaps it is because LMH’s charges are several times those of my practice or what my practice can obtain for the same outpatient services. For example, my practice charges $45 for two lab tests for which one of my patients recently paid LMH $163 (and that was its “discounted price” for payment at the time of service). We have found a for-profit, tax-paying facility in nearby Johnson City that will do a CT scan of the abdomen and pelvis for $650 while LMH charges $2,200. How can Americans find ways to reduce the cost of healthcare when government subsidizes inefficient non-profit hospitals that charge patients many times more than do facilities that pay the taxes from which these subsidies are derived?
Many uninsured patients admitted to LMH do not have a regular physician but need follow-up care after being discharged from the hospital. Recently, one of LMH’s employees called us asking if we would take care of these uninsured patients. We, of course, agreed but only to the extent that we are able. While family physicians on average have about 2,500 patients in their practices, ours has nearly 8,000. Some days we are so busy that we can’t accept any new patients. The uninsured patients recently discharged from LMH would be turned away on those days. It would seem that if LMH wanted these uninsured patients to obtain timely, quality follow-up care then it would want to assist my practice in recruiting another physician – which it has refused.
To add insult to injury, LMH even requires insured patients with orders from my practice to pay for services up front. With orders from other practices, it bills the insurer on the patients’ behalf. This not only is inconsistent with the charitable spirit of non-profit incorporation, it probably constitutes illegal discrimination. Yet such is the unaccountable power LMH wields in this community.
My practice has demonstrated that direct payment for routine medical care saves $200,000 a year per physician in overhead. If all routine medical care were settled at the time of service, Americans would save over $60 billion per year and free up over one million administrative employees to be available for direct patient care. How can practices like mine gain a foothold in the local economies when government subsidizes their domination by non-profit hospitals? It would seem that Congress would want fresh approaches like mine to have the freedom to flourish, especially since a majority of Americans consider healthcare to be our most important domestic issue.
The Laughlin Health Care Foundation
So if the hospital itself is not being charitable, perhaps the Laughlin Health Care Foundation (LHCF) is. According to its 2005 990 form, $189,450 (provided entirely by the hospital itself) was spent on a “variety of programs designated to assist the community including 911 emergency training for kindergarten students, yes mam (sic) cancer care program, free visual & dental clinic, scholarship program, etc.” The amounts spent on behalf of each program are not provided.
It did, however, spend $58,066 on its annual “Long Drive Golf / Pro-Am Tourn” which garnered $30,020 in “contributions.” Perhaps the participants and spectators appreciated the hospital’s $28,046 subsidy and enjoyed its annual celebration of golfing prowess. I suspect that the uninsured patients who have told me that LMH has liens against their properties were not so amused.
The Foundation’s director was not paid by the Foundation itself. The hospital paid her $119K in total compensation. I’m not sure what the hospital received for her work since a description of her duties was not provided on the 990 form.
Of course, her income and the golf contest’s net loss are just a small fraction of the hospital’s annual expenses. Nevertheless, these minor indulgences might reflect a culture of arrogant disregard for the stewardship with which other taxpayers have entrusted them. Scratching a little below the surface of non-taxpaying, unaccountable insider-dominated hospitals might reveal a culture of arrogant disregard for their core mission – the care of patients.
It is worth noting that if the director’s income has been this amount since I started my practice, then her total income has been greater than mine. I have chosen to forego the income afforded physicians who have earned board certifications in both Internal and Emergency Medicine to take care of the uninsured at no cost to other taxpayers. I think it can safely be said that her work has not benefited the uninsured and others of our community as much. Yet her income is subsidized by other taxpayers while mine is not.
So, from its own 990 form, it appears that LMH uses part of its cash hoard to promote itself and benefit a few members of the community at the expense of the rest. Is this what the non-profit law intended?
Given that our current federal tax code discourages the formation of clinics like mine and encourages non-profit abuse, maybe its time to level the playing field and reform the tax code.
The legal issue
At present the key legal issue appears to center around the IRS’s definition of “the community benefit standard” – how it interprets and enforces it. Revenue Ruling 69-545 describes 5 factors that the IRS takes into account in determining whether a hospital qualifies for tax exemption. LMH clearly adheres to factors (b) – (d). However, one might wonder if it complies with factors (a) and (e).
Factor (a) considers “whether the governing body of the hospital is composed of independent members of the community.” From the information provided in item 4 of page 2, the hospital does not appear to comply since six of the eight either were working there at the time or had worked there. In addition, four had been on the board for more than the last decade with two of those being father and son.
Factor (e) considers “whether the hospital’s excess funds are generally applied to expansion and replacement of existing facilities and equipment, amortization of indebtedness, improvement of patient care, etc.” Considering the proportion of assets that LMH holds in cash reserve and the recent expansions that provide little benefit to the community, one would have to question if it is complying with this.
The IRS report then states:
“Revenue Ruling 69-545 also provides that the IRS will weigh all facts and circumstances in each case and that the absence of these factors or the presence of other factors will not necessarily be determinative. Likewise, the courts have held in numerous cases that community benefit is a flexible standard based on the totality of the circumstances and that a hospital need not demonstrate every factor to be exempt” (emphasis mine).
In other words, even though LMH’s operations appear not to represent the charitable spirit of what a reasonable person would expect of a non-profit organization, it seems to be operating within the letter of the law as interpreted by the IRS and the courts. As law professor and non-profit expert John Colombo once told me in a phone conversation, “the ‘community benefit’ has holes big enough to drive an 18 wheeler through.” Mr. Colombo was involved in two Illinois cases where hospitals lost their tax exemptions.
The other issue is enforcement of any new rules. An accountant friend of mine familiar with this area recently told me that he was not aware of any non-profit hospital ever being audited by the IRS. He has told me that the data within 990 forms are generally self-reported and that accountants signing off on these forms actually do not examine the books. With enforcement rare, the definition of “community benefit” flexible, and accountants not examining self-reported financial information, it appears that non-profit hospitals remain essentially unaccountable to the communities they serve.
Therefore, unless your committee persuades Congress to change the current laws, LMH and other non-profit hospitals are not likely to change in the near future. They will continue to abuse the loopholes for the benefit of their boards and at the expense of the persons they are supposed to serve.
Some suggested solutions
Our community would benefit from a detailed audit of LMH’s financial records for the last several years. If has abused its non-profit status, then it should return to the appropriate taxing authorities the amount it has benefited from its exemptions. Both the hospital and the accounting firm preparing its 990 form should be held accountable.
LMH should have less insider influence. It should replace all members of the board who have served more than seven years with independent members of the community. These new members must not serve as proxies for the members they replace.
There are questions that naturally arise concerning LMH’s cash reserves for which the public deserves an answer.
1.Why did the hospital have $25.3 mil in tax-exempt loans at the beginning of the year when the building project had already been completed and when it already had $58 million in cash on its own? 2.Why did it acquire $20.8 mil in tax exempt loans without the presence of another major building project? 3.What government officials signed off on these loans? 4.What financial institutions have been involved in issuing these loans and to what extent did they benefit financially? 5.What personal connections, if any, are there among the people involved in these decisions from the government, hospital, and financial institutions? 6.Did any of these people benefit personally from the issuance of these loans and if so, how?
On June 30, 2005, LMH had $46.1 million in tax exempt loans and $114.9 million in cash total. If it still has these tax-funded liabilities, then it should pay them off and stop using taxpayer money for its own arbitrage.
If the hospital will not provide cash-payers with a list of prices for its routine outpatient services, then it should have its tax exemptions withheld until it does. It should not be allowed to discriminate against any medical practices in terms of recruiting additional physicians and patients presenting orders to them as it has done to mine.
Given that its cash hoard will enable it to continue dominating the local economy, perhaps it should return most of it first to cash-paying patients it has overcharged and then distribute the remainder evenly throughout the entire community. After all, we have all had to make up for the tax shortfall because of the exemptions afforded to LMH.
As you can see, there are many unintended consequences that can result from giving tax favors to some entities and not giving them to others. One solution on a national basis would be to increase the number of detailed audits of non-profit hospitals. However, given the additional cost to taxpayers of these audits and the tendency for the IRS to abuse its unchecked power, perhaps the best solution would be to eliminate the tax exemptions for hospitals entirely.
Who really has the wisdom to determine which groups should enjoy tax favors and which should not? Who has the integrity to wield such power without external accountability? Would it not be better to disseminate this power to millions of individual citizens who have proven time and again that voluntary exchange without government coercion or privileges has proved the fairest, most efficient, and wisest way to allocate scarce resources?
Robert S. Berry, M.D.