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37–275—PDF 2006

S. HRG. 109–967

TAKING THE PULSE OF CHARITABLE CARE AND

COMMUNITY BENEFITS AT NONPROFIT HOSPITALS

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

SEPTEMBER 13, 2006

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 3

WITNESSES

Kline, Hon. Phill, Attorney General, State of Kansas, Topeka, KS .................... 6

Keehan, Sr. Carol, president and CEO, Catholic Health Association of the

United States, Washington, DC .......................................................................... 7

Lofton, Kevin E., chairman-elect, American Hospital Association, Washington,

DC .......................................................................................................................... 9

Duke, Scott A., CEO, Glendive Medical Center, Glendive, MT ........................... 12

Kane, Dr. Nancy, professor of health management, Department of Health

Policy and Management, Harvard School of Public Health, Boston, MA ........ 14

Hartz, Ray, executive director, Legal Aid Society of Eastern Virginia, Inc.,

Norfolk, VA ........................................................................................................... 16

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 37

Duke, Scott A.:

Testimony .......................................................................................................... 12

Prepared statement with attachments ........................................................... 40

Responses to questions from committee members ......................................... 60

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Written testimony of Diane Insco ................................................................... 68

Hartz, Ray:

Testimony .......................................................................................................... 16

Prepared statement with attachments ........................................................... 70

Responses to questions from committee members ......................................... 82

Inouye, Hon. Daniel K.:

Prepared statement .......................................................................................... 86

Kane, Dr. Nancy:

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 89

Responses to questions from committee members ......................................... 95

Keehan, Sr. Carol:

Testimony .......................................................................................................... 7

Prepared statement with attachments ........................................................... 104

Responses to questions from committee members ......................................... 129

Kerry, Hon. John:

Prepared statement .......................................................................................... 141

Kline, Hon. Phill:

Testimony .......................................................................................................... 6

Prepared statement with attachments ........................................................... 142

Lofton, Kevin E.:

Testimony .......................................................................................................... 9

Prepared statement with attachments ........................................................... 211

Responses to questions from committee members, with attachments ......... 235

Page

IV

Schumer, Hon. Charles E.:

Prepared statement .......................................................................................... 252

Snowe, Hon. Olympia:

Prepared statement .......................................................................................... 254

Thomas, Hon. Craig:

Prepared statement .......................................................................................... 256

COMMUNICATIONS

Alliance for Advancing Nonprofit Health Care ..................................................... 257

Alliance National, Inc. ............................................................................................. 282

American Federation of State, County and Municipal Employees (AFSCME) .. 285

VHA Inc. ................................................................................................................... 290

(1)

TAKING THE PULSE OF CHARITABLE CARE

AND COMMUNITY BENEFITS AT NONPROFIT

HOSPITALS

WEDNESDAY, SEPTEMBER 13, 2006

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:05 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Present: Senators Snowe, Thomas, Santorum, Baucus, Rockefeller, and Schumer.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Thank you all for being patient. It seems like,

from the long line outside, we must have a hearing that people are

interested in.

We consider, today, the issue of nonprofit hospitals. Of course,

these hospitals are a very vital part of our Nation’s health care system. Federal, State, and local governments have provided nonprofit

hospitals tens of billions of dollars each year in tax breaks through

the tax code, because they are so essential.

It is our responsibility here in this committee of oversight, of how

tax dollars are used, to examine these billions of dollars of tax

breaks to understand what benefits they are providing to Americans. We recently did that, for instance, in regard to the R&D Tax

Credit.

This is important, because I think the President’s Panel on Tax

Reform had the right idea, and that idea is that, when you look at

a tax break, the question is, can it be justified by everyone else

having to pay more taxes?

However, I think it is important that we recognize that this policy discussion is not just words and not just numbers, more than

any other discussions that we have in this committee. This is about

real people and about real people’s lives.

I would like to recognize, in the audience, one of these people. I

am not going to ask her to stand or anything, but she is here, one

who is affected by today’s hearing: Mrs. Diane Insco. She is seated

in the audience here. I will be entering her statement into the

record.

[The prepared statement of Mrs. Insco appears in the appendix.]

2

The CHAIRMAN. But it is a story we hear all too often in looking at these issues. In short, Mrs. Insco was making $14,000 a year

when she was hospitalized due to problems related to her Type II

diabetes. She was charged by a nonprofit hospital over $4,639, far

more than if she had had insurance.

No one told her about financial assistance or charity care at this

hospital. The tax-exempt hospital went after her for debt and ultimately put a lien on her house. Mrs. Insco almost lost her home.

Her story, fortunately, has a happy ending, when, after many

lawyers and many phone calls, the hospital did the right thing and

tore up the bill.

But I believe this committee needs to think about whether we

are comfortable with a system that works only if you have every

lawyer in the Yellow Pages getting into the act. I think we can do

better, and, I believe, so do the vast majority of tax-exempt hospitals. So I thank Mrs. Insco for traveling to be with us here today

and allowing me to share her story.

While there are many issues that I think are important in the

area of nonprofit hospitals, I wanted, in my opening statement, to

just focus on two of these: measurement and reporting of community benefit, and also discounted charges, or free care, to lowincome, uninsured individuals.

I commend the Catholic Health Association and particularly Sr.

Carol Keehan, here with us today to testify, who have provided real

leadership in establishing best practices for measurements and

best practices for reporting for community benefits.

The great frustration in looking at this area is that there is little

common ground on how to measure and determine answers to very

basic questions. It makes it extremely difficult to make policy judgments.

In our review of nonprofit hospitals, it was very rare to get the

same answer or the same methodology to a question. That is not

to say that the hospitals that responded gave wrong answers. It is

just that this is very difficult to measure and compare. We found

that it was not even comparing apples to oranges, but more like

comparing apples to farm tractors.

I am pleased that the Catholic Health Association has given us

guidance in common terms here, and I think it is something that

we should be looking at across the board. Hundreds of hospitals

have already agreed to comply with the Catholic Health Association standard.

Should we get everyone else on board? Well, I will be listening

closely today to see to what extent Congressional action may be

necessary and to what extent the IRS and the nonprofit hospitals

can achieve much more meaningful uniform disclosure about hospital activities without additional legislation.

I would like to now look at charity care, particularly discounted

care and free care for low-income uninsured. There actually seems

to be some agreement that nonprofit hospitals should be providing

such discounts and free care. The Catholic Health Association’s and

the American Hospital Association’s testimony today will talk

about basic policies in that area.

As always, there are details. But I think it is important for members and the press to recognize that the nonprofit hospital organiVerDate 11-MAY-2000 16:27 Sep 17, 2007 Jkt 095484 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 37275.000 SFIN1 PsN: SFIN1
3

* For additional information on this subject, see also, ‘‘Present Law and Background Relating

to the Tax-Exempt Status of Charitable Hospitals,’’ Joint Committee on Taxation staff report,

September 12, 2006 (JCX–40–06).

zations agree that there is a need for real charity care to be provided.

I think the question then comes about, how can we make this

policy real for folks like Mrs. Insco, whom I have already referred

to? I think that Sr. Carol has it exactly right in her testimony, and

she will probably say this again, but let me quote: ‘‘It is one thing

to have policies in place, and quite another to implement them.’’

We need to think about how we can best make policies of discounted and free care to low-income uninsured a real benefit to

those in need.

Nonprofit hospitals receive billions of dollars in tax breaks at the

Federal, State, and local levels. The public has a right to expect

significant, measurable benefits in return. I hope this hearing will

help the Finance Committee decide how we can best ensure that

nonprofit hospitals provide appropriate levels of benefit to the communities they serve. As we consider these questions, I think it is

right to also bear in mind the particular issues facing critical access rural hospitals.

Let me end by saying that the Government Accountability Office

and IRS Commissioner Everson have both commented that there is

often little to no difference between for-profit hospitals and nonprofit hospitals when it comes to charity care and community benefits that are provided.

I am confident that many nonprofit hospitals are well-intended

and do outstanding work on behalf of their communities and the

poor. But I am concerned that the best practices of nonprofit hospitals are not common practices for all, and that needs to be

changed.*

Senator Baucus?

Senator SCHUMER. Mr. Chairman?

The CHAIRMAN. Yes?

Senator SCHUMER. Mr. Chairman, I cannot stay. I would just ask

unanimous consent that my statement be put in the record.

The CHAIRMAN. Sure.

Senator SCHUMER. It is a defense of nonprofit hospitals who do

an incredible job in New York, and do much better, I think, than

the for-profits in helping the poor. So, I thank you, Mr. Chairman.

The CHAIRMAN. I am glad to do that, Senator Schumer.

[The prepared statement of Senator Schumer appears in the appendix.]

The CHAIRMAN. Now, Senator Baucus?

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. Thank you, Senator,

very much, for all the good work you are doing.

The book of Ezekiel admonishes that, ‘‘We operate through the

hand of Providence when we bind up the injured and strengthen

the weak.’’ The Prophet makes this admonition to the community

as a shared responsibility.

4

Many tax-exempt hospitals nobly carry out Ezekiel’s instruction.

They work to improve neighborhoods, they provide scholarships for

students seeking health care careers, and, most importantly, they

serve the health care needs of their communities.

In Montana, most nonprofit hospitals are critical access hospitals, that is, hospitals with 25 or fewer beds. They serve rural,

often low-income, populations. Critical access hospitals play a key

role in rural America’s health care safety net.

I was proud to write the legislation that established that category in 1997. More than 4 out of 5 Montana hospitals are critical

access facilities, and I dare say that in many rural parts of our

country the primary hospital will be a critical access hospital.

Indeed, I think what often distinguishes nonprofit hospitals like

those in my State is that they operate where for-profit hospitals do

not. For one thing, they show up in small, rural areas. And they

do more than just show up. Nonprofit hospitals are more likely

than for-profit hospitals to offer services that are unprofitable.

For example, tax-exempt hospitals are more likely to offer psychiatric emergency services. Those services are typically moneylosers. Tax-exempt hospitals are five times more likely than forprofits to continue offering services when doing so becomes unprofitable.

Those statistics should not come as a surprise. That is not necessarily a criticism of for-profit hospitals. After all, for-profit hospitals have shareholders, nonprofit hospitals do not. Tax-exempt

hospitals can continue to offer unprofitable services on Main Street

without regard to what they think on Wall Street.

Thus, many tax-exempt hospitals do good work. They do so in my

State, clearly, and also in other parts of our country. But there are

also significant examples where nonprofit hospitals have not provided the benefit to the public commensurate with the tax benefits

that those hospitals receive.

Today we will hear about cases where nonprofit hospitals aggressively billed patients of limited means after they received vital care

they could not afford. We will hear of aggressive hospital bill collectors that act like credit card companies. We will hear of hospitals

taking legal action against patients with incomes near the poverty

line.

This kind of behavior by tax-exempt hospitals is not in keeping

with the spirit of our laws governing tax exemption. I say ‘‘spirit,’’

because admittedly the standards that govern tax-exempt status

are vague.

As a general matter, in order for a hospital to maintain its tax

exemption, the hospital must provide ‘‘a community benefit.’’ In the

past, if a hospital simply had an open emergency room, had a

board that was representative of the community, that accepted

Medicare and Medicaid, then it qualified as providing a community

benefit.

But recently the IRS and Federal courts have taken a more skeptical view toward the community benefit standard. The IRS now

looks for a plus factor in addition to a policy of open admittance.

For example, the tax-exempt hospital must also have charity

care, medical research, or a health education program. But the IRS

5

has not made clear just how much of this a hospital has to have;

it is vague, it is unclear.

To some extent, this flexible standard makes sense. After all, the

community needs in Manhattan, MT differ from those in Manhattan, NY. Unfortunately, some health providers take advantage of

these loose standards.

For example, some providers classify their community benefit

based only on their open admission policy, writing off bad debt as

charitable care. Not surprisingly, some of today’s witnesses will

argue that the provision of free care should be the paramount consideration in granting tax-exempt status.

I am very interested in hearing what this standard might mean

for rural providers like those in Montana, which often operate with

thin or negative margins. The provision of charity care by taxexempt hospitals is obviously important.

It has significant implications for both hospitals and the Federal

treasury. But it is also important because it raises one of the most

pressing problems facing our Nation, and that is the 46 million

Americans who have no health insurance. Arguably, if all Americans had health insurance, we would not be having this discussion.

One in five Montanans is uninsured. That is one of the highest

rates in the Nation. The uninsured are four times as likely not to

seek a physician’s care when they have a medical problem compared to those who do have insurance. Not surprisingly, the uninsured tend to get sicker and they tend to die earlier.

I realize that universal health care is not just around the corner.

This Congress will not even cover the victims of Hurricane Katrina,

one of this Nation’s worst natural disasters. But until providers

and insurers have an incentive to treat sick and uninsured patients, we are going to struggle with the problem of charity care.

I hope that this hearing will encourage more folks in Congress

and the administration to think about how we can work together

to solve the problem of the uninsured. It has been over a decade

since Congress took a comprehensive look at how to tackle this

problem, and we are long overdue.

Finally, on another note, Mr. Chairman, I am very proud to have

here today Scott Duke, who will be one of our witnesses. Scott is

the CEO of Glendive Medical Center in Glendive, MT. He is currently the chair of the Montana Hospital Association’s Board of

Trustees.

He was born in West Virginia, I am reminded. But he has wisely

chosen, at his own discretion, to live in Montana. [Laughter.] Scott

will be able to give us a perspective of rural hospitals from both

West Virginia and Montana.

Thank you, Mr. Chairman.

[The prepared statement of Senator Baucus appears in the appendix.]

The CHAIRMAN. I am surprised that Senator Baucus referred to

it as ‘‘rural hospitals,’’ because I talk about rural hospitals and he

talks about frontier hospitals. [Laughter.] Thank you.

I will introduce the rest of the group. It may be a very short introduction, but you are all leaders in your areas.

First of all, Phill Kline, Attorney General, State of Kansas. They

will be appearing the way they are seated here. Next, we have Sr.

6

Carol Keehan, president and CEO of Catholic Health Association;

Kevin Lofton, chairman of the American Hospital Association. Mr.

Duke has been introduced. Then Dr. Nancy Kane, Harvard School

of Public Health; and Ray Hartz, director of the Legal Aid Society

of Eastern Virginia.

So would you proceed, Attorney General Kline?

STATEMENT OF HON. PHILL KLINE, ATTORNEY GENERAL,

STATE OF KANSAS, TOPEKA, KS

Mr. KLINE. Thank you, Mr. Chairman, Senator Baucus, and

members of the committee. I appreciate the honor to appear before

you today to discuss the billing practices and procedures in treatment of the indigent by nonprofit health care delivery systems in

Kansas.

My first day in office, I was greeted with a lawsuit initiated by

an integrated, nonprofit health care system called Health Midwest

that had been purchased by HCA. In that lawsuit there was the

claim that my office did not have the authority to oversee that conversion from nonprofit hospital to for-profit status. We ended up winning that lawsuit and, as a result, a $110 million foundation was established in Kansas to benefit the indigent

in the area in which that hospital provided services.

Before I move on, I know this committee has had some interest

in conversions, because the law is similar to the law as it relates

to the Internal Revenue Code; however, it is very vague as it relates to the cy pres authority or how those conversions will be handled. I would like to touch on one issue that was raised within the

litigation that had not been resolved.

One of our claims was that there was excessive payment in that

conversion to the chief financial officer, who had negotiated a

$7 million golden parachute as that nonprofit integrated system

was converted to for-profit.

Unfortunately, the Kansas court that handled that litigation

found that it did not have jurisdiction for review of that issue, and

that is a sticking point as it relates to the eventual victory for the

State of Kansas.

As the committee is aware, recent studies have revealed health

care costs to be a major cause of personal bankruptcies and family

indebtedness across the country.

As our population ages, the health care delivery system will play

an even greater role in our economy. Kansas law affords the Attorney General cy pres authority and responsibility to ensure that

charitable assets are utilized for their intended purposes.

For the aforementioned reasons, I established a task force dedicated to inquiring into the billing of charity care and collection

practices of nonprofit hospitals in Kansas. The action was also

taken due to various complaints received in my office regarding

such practices.

I launched this task force with the goal of initiating a cooperative

review of current practices and procedures, and as an effort to

avoid media sensation or litigation threats.

I have found that, in almost all instances, those engaged in charitable health care have a strong dedication to the needs of those

they serve and operate in a professional and appropriate manner.

7

There are exceptions. As in all human endeavors, institutions

sometimes develop practices and procedures that do not reflect

their initial mission or the heart of those involved.

That is especially true when responsibility for enacting a portion

of that mission through collection practices is further removed from

those who are directly engaged in the provision of care through

contracts with outside collection agencies.

It was my hope that, in my approach, I would avoid tarnishing

an industry, while identifying the obstacles and procedures to the

fulfillment of the mission of nonprofit health care systems. This is

what we are now very close to achieving.

Our discussions were initiated at one point in the process. It was

necessary to selectively audit the largest nonprofit hospitals in the

State. Eventually subpoenas were issued, and in response to those

subpoenas discussions held, and a cooperative provision of documents was obtained. Those documents were analyzed and reviewed, and further discussion was held with CFOs of three of the

nonprofits within our State.

As a result of those discussions and working with the Kansas

Hospital Association, we are developing a best practices model that

incorporates provisions relating to outside collection agency contracts, disclosure provisions, financial assistance to be provided to

the indigent and under-insured, as well as everything involving

hospital visitation rights and authority to initiate litigation.

We have had numerous subsequent individual meetings, and I

appreciate the cooperation of the hospitals in Kansas. This eventual cooperative approach by the Kansas health care industry was

not unforeseen. My office has generally received few complaints regarding nonprofit hospitals, when considering the nature of the

services provided and the scope of this industry.

I suspected that this was true because such hospitals in Kansas

operate with a high degree of integrity and dedication to their core

mission. This is the case.

We have, together, however, identified some practices, policies,

and procedures that should be utilized by all nonprofit health care

delivery systems in Kansas, and those changes will be formulated

and incorporated into the best practices model.

I am hopeful that this type of cooperative approach might be utilized by others without the necessity of litigation or sensational

press, in order to grab the core mission and the heart of those serving the indigent and under-served in our Nation and provide a

practice and procedure that is consistent with that core mission for

which we have given them the nonprofit status to begin with.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Mr. Kline.

[The prepared statement of Mr. Kline appears in the appendix.]

The CHAIRMAN. Now, Sr. Keehan?

STATEMENT OF SR. CAROL KEEHAN, PRESIDENT AND CEO,

CATHOLIC HEALTH ASSOCIATION OF THE UNITED STATES,

WASHINGTON, DC

Sr. KEEHAN. Good morning, Chairman Grassley, Senator Baucus,

and members of the committee. I am Sr. Carol Keehan, president

and chief executive officer of the Catholic Health Association.

8

CHA has been actively involved in the issue of community benefit since the 1980s. For the past year, community benefit has been

a major priority for our association, and I am pleased to be here

today to discuss this issue with you.

By community benefit, I mean the programs and activities nonprofit hospitals provide to demonstrate they deserve the privilege

of tax exemption. It includes free and discounted care to lowincome, uninsured individuals, improving access to health care

services for all, and making communities healthier places in which

to live.

It is important for the committee to know, however, that we do

not provide these community benefits in order to prove we deserve

tax exemption. We do so because of who we are, organizations established to serve our communities and continuing to do just that.

Our board took seriously the issues raised by you about the need

for nonprofit governing bodies to hold managers accountable and

the need for sufficient public information about hospitals’ charitable activities.

We concluded that to be more accountable we must, first, make

sure leaders of our hospitals understand the legal basis for the

community benefit standard, commit our organizations to reporting

community benefit in a standardized way, using state-of-the-art accounting practices, and, finally, ensure that all Catholic hospitals

publicly post the availability of their charity care and discounting

policies.

Our first step was to publish, in May of this year, a revised Community Benefit Guidelines booklet reporting community benefit. It

includes a detailed definition of the community benefit that is

based on the IRS hospital revenue ruling and audit instructions

and comprehensive guidelines for accounting for community benefit

developed in consultation with national financial groups.

In the past, we have given this guide to our members as an aide.

This year, we asked them to follow the guidelines consistently. We

have also developed a packet of information to clearly explain the

current IRS requirements about community benefit and tax exemption.

As of today, the informational video included in that packet has

been viewed by more than 4,000 board members, senior managers,

and sponsors of our Catholic health care.

In addition, CHA asked each governing board to pass a resolution committing their institution to using the guidelines consistently and to publicly post the availability of charity care and other

financial assistance policies. The packet also included a pledge

committing management to carry out the board resolution.

I am pleased to report that, as of today, that board resolution

and management pledge have been received from 95 percent of

CHA member health systems, and 90 percent of our member hospitals. Additional commitments come into my office every day as

various governing boards meet.

Turning to the issue of charitable care, I want to assure you that

all of our organizations have financial assistance policies. We have

previously provided to Chairman Grassley a fairly comprehensive

list of charity care and discount policies of many of our systems for

9

low-income, uninsured persons and those who experience catastrophic medical expenses.

These vary, as is appropriate, to meet the needs of populations

in areas that have different costs of living and different median incomes.

Some of these generous financial policies include providing free

care for patients earning up to 200 percent of the Federal poverty

level, providing discounted care that does not exceed a certain percent of a patient’s income, and offering sliding scale discounts to

patients earning anywhere from 300 to 500 percent of poverty.

While our members have committed to publicly posting financial

assistance policies, often patients do not tell us they are unable to

afford their bills. For example, when patients come to us in emergency situations they may be in no condition to discuss it.

Other patients are reluctant to tell us they cannot afford to pay,

or simply refuse or are unable, for a host of reasons, to fill out paperwork or to cooperate in doing it.

Our members have taken steps to address this problem and identify those eligible for charity care and discounting by appointing

patient advocates to work with patients, informing patients about

financial assistance by taking out newspaper ads, putting the information on all their patient bills, and writing to patients who have

outstanding bills, and, lastly, instructing collection agencies to let

hospitals know if they discover a patient is unable to pay their bill.

Mr. Chairman, we are pleased with the progress we have made.

Our long-term commitment to the people in our communities is

being demonstrated every day, and we believe that the community

benefit tradition in Catholic and other nonprofit health care organizations has been reinforced by efforts to achieve greater consistency

and standardization in reporting.

Over a decade ago, a former Chairman of this committee, Senator Daniel Moynihan, said, ‘‘A distinguishing feature of American

society is the singular degree to which we maintain an independent

sector, private institutions in the public service. This is no longer

true in most of the democratic world; it was never so in the rest.

It is a treasure, a distinguishing feature of American democracy.’’

It is important to us in Catholic health care that we continue

that tradition of service and live up to the expectation that we are

community benefit organizations. That is our mission and our commitment to you, as well as our commitment to the communities we

serve.

Thank you. I will be happy to answer any questions.

The CHAIRMAN. Thank you for your statement. I have already expressed my appreciation for your leadership in this area.

Sr. KEEHAN. Thank you, Mr. Chairman.

[The prepared statement of Sr. Keehan appears in the appendix.]

The CHAIRMAN. Mr. Lofton?

STATEMENT OF KEVIN E. LOFTON, CHAIRMAN-ELECT,

AMERICAN HOSPITAL ASSOCIATION, WASHINGTON, DC

Mr. LOFTON. Good morning, Mr. Chairman, Senator Baucus, and

members of the committee. I am Kevin Lofton, chairman-elect of

the American Hospital Association, and president and CEO of

10

Catholic Health Initiatives in Denver. We appreciate the opportunity to be here with you today.

All of us in the hospital family pride ourselves in how we take

care of people. That is our job, our mission, and thousands of times

a day, we meet this mission with skill and with compassion.

So when there are problems with a patient’s hospital experience,

we do not sit still. We take a hard look at how we do what we do.

We fix problems that arise, and we work hard to make sure the

problems do not happen again.

At the same time, Mr. Chairman, there is a lot of good news. For

example, the 66,000 women and men of my health care system provided nearly $800 million worth of benefits to the communities in

the 19 States that we serve through charity care, financial assistance, and many other programs.

One example occurred at Mercy Medical Center in Des Moines.

The gentleman was a 64-year-old retired Maytag employee who

had a heart attack just 2 months before becoming eligible for Medicare. His medical bills exceed $50,000, but his income was $9,000.

Mercy Medical Center covered all of his expenses. He wrote to the

staff, ‘‘Thank you to all who saved my life. It is great to be alive.

I promise to sing and dance at your wedding.’’

There are thousands of examples like Ron, people who left the

hospital feeling better about their health and feeling good about

their experience, happy that their hospital is in their community,

ready and able to take care of their needs.

The tip of the iceberg of these stories is represented by this brochure, Care in Action, which I would, if I may, submit for the

record, which highlights many of the good things that hospitals do

in their communities to fulfill their tax-exempt obligations.

That is why we are here to discuss tax-exempt status for the Nation’s not-for-profit hospitals, specifically how the community benefit standard allows not-for-profit hospitals to do the things that

make their communities healthier, whether it is walking the

streets to treat the homeless, establishing a clinic for vulnerable

children, or countless other services hospitals provide every day.

In 2004 alone, hospitals delivered more than $27 billion of uncompensated care to patients, and uncounted billions more in value

to their communities through services, programs, and other activities designed to promote and protect health and well-being.

We do this in a way that benefits not just the poor and marginalized, but the community as a whole, with services, programs, and

activities tailored to the specific needs of the community.

At the same time, hospitals are available 24 hours a day, 7 days

a week, 365 days a year, ready to assist their communities no matter what the emergency. Whether it is a man-made or a natural

disaster, hospitals are there.

Diversity of hospital benefits is a direct result of the current community benefit standard. That standard is broad, which allows hospitals flexibility to tailor programs and services to meet the constantly changing needs of their unique communities, from Des

Moines to Dallas, from Portland to Richmond.

In other words, Mr. Chairman, it works. That is why we fully

support maintaining the community benefit standard as it exists.

11

Not-for-profit hospitals are part of, and responsive to, their communities.

Those communities should decide what programs and services

are needed and hold hospitals accountable for meeting those needs.

The community benefit standard helps this to happen.

I would add that, back in May, the AHA Board of Trustees voted

unanimously to call on all hospitals to demonstrate their accountability to their communities. This includes making sure that there

is charity care for the poor and uninsured, financial assistance for

others in need, more careful collection procedures, and comprehensive reporting to the community on community benefits that notfor-profit hospitals provide.

Specifically, the board called for standardized public reporting of

community benefit using the model developed by the Catholic

Health Association, in cooperation with VHA.

The board determined that community benefit should be fully reported, thus including the direct and indirect costs of subsidized

health care services, charity care, bad debt, and the unpaid costs

of government-sponsored health care, including Medicaid, Medicare, and public and/or other indigent care programs.

In closing, Mr. Chairman, I would like to thank you for your recent remarks acknowledging the field’s work on this issue and stating that you are not advocating legislation in this area. We agree

with you that there are intellectually honest differences within the

field regarding reporting that includes or excludes Medicare, underpayment, or bad debt.

But those differences should not, and are not, preventing not-forprofit hospitals from reporting the value of their community benefit. We look forward to continuing our work with you and the committee to ensure that such reporting is useful and complete. Thank

you.

The CHAIRMAN. Thank you, Mr. Lofton. You asked for an insertion, and we will do that. I did not announce this, but if you have

longer statements, they will be included in the record as well.

Maybe I did not make something quite clear, based on your

statement about not having legislation. It is true that I do not anticipate legislation, but that is the purpose of this hearing.

Out of this hearing, or out of other staff work, or out of communication among members of this committee, there may be some legislation required. So I am not saying no to any legislation, I am

just saying at this point I have not anticipated any legislation.

[The prepared statement of Mr. Lofton appears in the appendix.]

[The brochure, Care in Action, appears in the appendix on p.

231.]

The CHAIRMAN. Mr. Duke?

Senator BAUCUS. If I might, Mr. Chairman.

The CHAIRMAN. Go ahead.

Senator BAUCUS. Just one word about Mr. Duke. Mr. Duke is the

administrator for a critical access facility in Dawson County, MT.

Now, his hospital staff—let me put it this way. The people he

serves are a number of people much, much lower than the total

number of staff in Congress by a huge magnitude. I might also say

that the area of Dawson County is larger than the State of Delaware.

12

Now, I have not calculated the per capita number of people in

Dawson County, but it is very rural. In fact, I remember when Hillary Clinton, during her health care era, came to Montana. She got

off the plane and looked around and said, ‘‘This is not rural, this

is mega-rural, hyper-rural.’’ [Laughter.] It is very rural.

The CHAIRMAN. Yes. And really what you meant to say, it is very

frontier, is what you meant to say.

Senator BAUCUS. Yes.

The CHAIRMAN. Mr. Duke?

STATEMENT OF SCOTT A. DUKE, CEO,

GLENDIVE MEDICAL CENTER, GLENDIVE, MT

Mr. DUKE. Chairman Grassley, Senator Baucus, and members of

the committee, good morning.

My name is Scott Duke. I am the chief executive officer at the

Glendive Medical Center located in Glendive, MT. That is eastern

Montana, and about 10,000 people, a little over 9,800 or so, live in

Dawson County. I am also the current chair of the Montana Hospital Association’s Board of Trustees.

I appreciate the opportunity to testify today to bring you the

unique perspective of the frontier in rural hospitals in America.

GMC is a not-for-profit community-based health care organization that provides a full spectrum of medical services. Among these

services is a 25-bed critical access hospital, two skilled nursing facilities with a total of 155 beds, a 13-unit assisted living facility,

a rural health clinic, a home care hospice agency, and we employ

more than 450 people.

Since the late 1800s, our organization has provided medical services to the citizens of eastern Montana and western North Dakota.

Today we are the only hospital for an area with approximately

15,000 people.

GMC’s mission is very straightforward: we are committed to caring, health, and a healthier community. We attempt to fulfill this

mission in a variety of ways. One way we do this is to provide medical treatment to anyone in need, regardless of their ability to pay.

Our facility has a clearly defined policy for providing financial

assistance. Persons whose income is at or below 100 percent of the

Federal poverty level are eligible to receive care at no charge.

Persons whose income is between 100 and 200 percent of the

Federal poverty level are eligible to receive it based upon their income and assets. We also provide assistance for catastrophic

events, and loans without interest if a patient fails to qualify for

assistance using the other criteria.

We take a number of steps to make sure that patients know

about, and understand, our policy. The Patient Notice of Financial

Assistance is a patient-friendly notice that describes our program

and is given to all patients upon admission. It is also posted in several areas throughout the facility.

Financial assistance for those who cannot afford care is just one

way we serve our community. GMC has a long and proud history

of making other investments in our community’s health. They

range from health screenings, telemedicine mental health consultations, scholarships, transportation, subsidized health services, outreach services, and economic development, to name just a few.

13

In 2005, GMC provided a total of $3,286,057 in community benefits. This included charity care, community services for which we

were not paid, bad debt, and the shortfall in Medicare and Medicaid payments. The amount was calculated using actual costs, not

charges.

Represented another way, GMC’s community benefit is equal to

15 percent of its operating expense, and nearly four times the tax

obligation we would pay if we were a taxable entity. Since 1999,

GMC has voluntarily reported its community benefits following the

model established by the VHA.

Nearly a third of Montana’s hospitals use the VHA-CHA tool to

compile all their community benefits. GMC is typical of the general

acute care community-based not-for-profit hospital in Montana.

These hospitals are the cornerstone of the Montana health care

system.

No matter how big or how small, they are run by boards made

up of community members. They tailor their services to meet the

unique needs of the communities they serve.

Montana’s hospitals have taken an additional step toward publicly demonstrating that they are fulfilling their charitable responsibilities. The MHA’s Board of Trustees recently adopted policies

regarding charity care, financial assistance, and community benefits reporting. The standards set by these policies mirror those

adopted by GMC.

MHA’s policies clearly outline expectations that members need to

work closely with patients to ensure that they understand the cost

of their care, the billing procedures and payment options, and collection practices. In addition, MHA members are expected to develop a community benefit plan and compile the report of community benefits at least annually using the definitions described in

the CHA-VHA model.

The MHA policy differs slightly with the CHA-VHA model in

that it asks members to report the unpaid costs of Medicare and

bad debt. We believe these costs are legitimate benefits provided to

the communities we serve. MHA policy also attempts to recognize

that frontier and rural hospitals face obstacles not faced by hospitals in urban areas. Given the many struggles, the mere fact that

these facilities exist could be argued as justifying their community

benefits.

Mr. Chairman, Montana’s hospitals believe a voluntary system

such as the one I have outlined is far superior to a one-size-fitsall Federal mandate. The current IRS standards provide the flexibility to adapt our services to the specific needs of our rural communities.

I urge the committee not to take any action that would alter that

standard. A standard designed for a larger urban hospital would be

irrelevant in the community of Glendive, MT.

Montana’s hospitals have built a legacy of providing charity care

and other community benefits. Virtually all of them have a charity

care policy, and most of these policies fit within the guidelines established by the MHA Board of Trustees.

In addition, each year Montana hospitals provide millions of dollars’ worth of community services at no charge. We believe this is

14

evidence of and demonstrates our commitment to our communities,

and fulfills the obligation we have as tax-exempt organizations.

Again, I thank you for the opportunity to testify.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Duke appears in the appendix.]

The CHAIRMAN. Now, Dr. Kane?

STATEMENT OF DR. NANCY KANE, PROFESSOR OF HEALTH

MANAGEMENT, DEPARTMENT OF HEALTH POLICY AND MANAGEMENT, HARVARD SCHOOL OF PUBLIC HEALTH, BOSTON,

MA

Dr. KANE. Thank you, Mr. Chairman and members of the committee, for inviting me to talk about my views on the current state

of hospital charitable activity, and to argue that there is a need for

a higher standard for hospital tax exemption.

I feel a little bit like the Grinch who stole Christmas, but I train

my students and work with community groups to try to help them

understand hospital financial performance and charitable activity

so that they can better argue for certain hospitals, in particular, to

meet their community needs.

So, I have actually been exposed not necessarily to the hospitals

represented at this panel, but to some of the ones that have made

the competitive environment for those who are behaving according

to the standard a little harder to deal with.

Over 10 years ago, I testified before a House committee on this

subject, back when the Attorney General of Texas instituted proceedings against the board of a major hospital for failure to maintain its charitable status.

The particular case was so egregious that it actually inspired the

Texas legislature to pass a higher standard for hospital tax exemption. Unfortunately, there is still no higher standard at the Federal

level, and most States do follow the Federal standard for hospital

tax exemption.

Meanwhile, the Federal standard has not kept up with either the

pressing economic incentives facing hospitals today or the growing

unfunded health needs of communities. The hospital sector is now

around a $600 billion industry, with fewer, bigger, and more commercialized organizations than even 10 years ago.

Many communities have lost their local control over their hospitals, as their governing boards have merged into systems whose

headquarters are often many miles out of the local community and

are concerned about the health of hundreds of thousands of people

in their areas.

As these systems become larger, they are also capable of taking

on quite a bit more debt, which, by the way, does make them vulnerable to Wall Street pressures, even though they are not equity

pressures.

It also gets them more involved with commercial enterprise, partly as a way to keep paying back that debt. Therefore, they have

less incentive to serve financially disadvantaged needs in their populations.

At the same time, the charitable tax exemption has come to be

worth billions of dollars per year, especially when you put together

all sources of tax exemption at the Federal, State, and local level.

15

When you couple that with the billions of dollars in disproportionate share payments that have been authorized to go towards,

basically, uncompensated care, we have created not an unfunded

mandate, but a funded non-mandate, for charity care.

Many hospitals enjoy the funds without obeying the non-mandate

by taking the money and not providing much charity care, or responding to the needs of their local communities, the most vulnerable communities.

Worse yet, it is impossible to identify the hospitals that are doing

the good work and providing the right amount of charity care from

those who are doing nothing because there is no national data set.

Neither the IRS Form 990, nor the Medicare cost report, requires

that hospitals publicly report charity care in a consistent, standardized way. CMS tried to do this in 2004, but the instructions were

a little ambiguous.

Two years later, the instructions have not been revised and we

still do not know who is providing uncompensated care across the

Nation. Therefore, I have a little consulting business to help States

figure out how to measure uncompensated care in ways that they

can meaningfully act on. But that is ridiculous. There should be a

national data set for reporting uncompensated care in a standard

way.

The other problem with the Federal standard is there is almost

no oversight of charitable organizations. It has been under-staffed

and under-funded at both the Federal and State levels.

I will say that the IRS, State Attorneys General, and legislators

are stepping up their efforts recently in the wake of revelations,

that largely emerged from the private sector, of harmful hospital

pricing, billing, and collection practices, along with very high executive compensation packages and minimal charity care.

But even with more attention and resources, both the State and

Federal authorities are finding that the existing standard does not

clearly prohibit behavior that society is finding, nonetheless, pretty

unacceptable.

So I believe we should have a higher standard and that the Federal standard should be legislated to have a higher expectation for

tax exemption. I do not support the notion that tax exemption

should be simply revoked. Many hospitals are indeed behaving

charitably in their communities that benefit enormously from

them.

It would be far better to level the playing field for those that

truly earn their tax exemption in ways that communities most

value, by requiring that all hospitals seeking to maintain their taxexempt status play by the same rules.

The key components of those rules, I think, should include tying

patient eligibility for discounts to the patient’s income, to the affordability for the patient. That, unfortunately, is going to start including insured patients because, frankly, a lot of them have

deductibles that they can no longer afford to meet.

Also, requiring transparency in reporting to the IRS, and in communicating to the community about hospital charity care policy.

Requiring the IRS to regularly certify the basic reasonableness of

hospital charity care levels and relate it, if necessary, to the value

of their tax exemptions. Requiring that hospitals partner with comVerDate 11-MAY-2000 16:27 Sep 17, 2007 Jkt 095484 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 37275.000 SFIN1 PsN: SFIN1
16

munity groups to improve population health, especially for vulnerable populations, with that kind of activity contributing towards

their reasonableness test with the IRS. Requiring that community

benefit planning, implementation, and reporting are consistent

with the Catholic Health Care Association guidelines, which I read

through and am very supportive of, and think that they are exactly

what we could use for a standard for our higher standard of tax

exemption.

I also would like to see the community benefit report in a standardized fashion attached to the IRS Form 990 so that we do have

a national data set.

Finally, I would expect or require hospital boards to have a permanent tax-exempt compliance committee that is responsible for

planning, review, monitoring, and reporting on charity care policies

and other community benefits.

Thank you for your attention. I will be happy to answer any

questions.

The CHAIRMAN. Thank you, Dr. Kane.

[The prepared statement of Dr. Kane appears in the appendix.]

The CHAIRMAN. Now, Mr. Hartz?

STATEMENT OF RAY HARTZ, EXECUTIVE DIRECTOR, LEGAL

AID SOCIETY OF EASTERN VIRGINIA, INC., NORFOLK, VA

Mr. HARTZ. Thank you, Mr. Chairman and members of the committee. I appreciate the opportunity to talk here on this vitally important issue.

My name is Ray Hartz. I am the executive director of the Legal

Aid Society of Eastern Virginia, which provides free legal assistance in civil matters to the poverty population of the greater

Hampton Roads area. We have five offices, comprising both very

rural and very urban areas, in Williamburg, Hampton, Norfolk,

Virginia Beach, and on the Eastern Shore of Virginia.

We serve over 200,000 people who live below 125 percent of the

poverty level, which is approximately one-quarter of all such poor

persons in Virginia. I have worked for legal aid organizations virtually my entire career in Virginia, but also in Florida, and also in

Arizona.

From my experience of working with the low-income communities in Hampton Roads and elsewhere, I can positively attest to

this committee that the people of low income, especially the working poor, are experiencing a health care crisis.

I am not referring to the quality of the health care, I am talking

today about the crisis of trying to survive under the mountain of

medical debt to a hospital and a hospital that has an aggressive

and effective collections department.

Everywhere I have practiced, hospitals have been very efficient

in getting judgments against those who owe them money, and then

in collecting on those judgments through wage and bank account

garnishments.

For example, last Thursday—I just looked up on the Internet last

night—in the city of Norfolk, just the city of Norfolk, which is the

third-largest city in my area, there were over 100 actions to collect

hospital debts brought by one of the nonprofit hospitals. Last

17

Thursday was not an unusual day. This level of suits brought happens on a weekly basis.

Every private hospital in Hampton Roads is nonprofit. Each has

a charity care program, either free of charge care and/or discounted

care, for the un- or under-insured patient. Unfortunately, the reality is that very few low-income uninsured patients are ever told

about the existence of these programs.

Attached to my written testimony are statements to this committee from several clients from eastern Virginia detailing the

problems that they have had in accessing charity care. One statement, if I can just briefly refer to it, is from a Ms. Bragg who lives

on the Eastern Shore of Virginia, which is a very rural area.

She is 47 years old. She is employed, but she cannot get health

insurance through work. Two years ago, she had some medical

treatment done at a nonprofit hospital and the bill was just under

$3,000. She makes slightly more than $1,000 a month. When she

could not pay, the bill collectors starting calling.

She was told by the bill collectors that the interest on her past

due account was 24.12 percent. Ms. Bragg realized that, at her income, even with a payment plan, she could never even be able to

pay off the accumulating interest, let alone the underlying hospital

bill.

Ms. Bragg wrote in her statement about the great distress this

bill and the hospital’s collection efforts—repeated collection efforts—caused her. She rarely has money left after paying rent,

food, and her medicines as it is.

But it occurred to me that maybe she should consider herself

lucky, because at least as of now, the hospital has not garnished.

Even at just $1,000 a month, she is subject to having money garnished from her paycheck. Right now, luckily, that has not happened yet.

The first time that Ms. Bragg was ever informed about the hospital’s charity care plan was when we called her last week to ask

if it had been offered to her. That is the norm, not the exception.

Over the past week or so, our staff has spoken with more than

20 clients burdened by unpaid hospital debt. Not one of them reported being informed of a charity care program at any time during

their hospital stay. Only one of those clients was ever told about

the program, and this was during the collection process. A bill collector informed her about it.

Several of these clients did learn about the program, the charity

care programs, through other service providers or through friends.

But when they approached the hospital to find out more, they only

met with difficulty and inconsistent responses. One client was told

by the hospital’s billing department point-blank that her poverty

did not matter, she had to pay the full amount owed.

Another statement I will refer to just briefly is from Joyce Butler, a 52-year-old woman in Virginia Beach. She was homeless for

2 years. She has accumulated more than $10,000 in debts. She receives repeated harassing telephone calls, sometimes two or three

a week, demanding immediate payment.

If I could refer the committee to the last line of her statement,

she said, ‘‘I wish I had known there was such a thing as charity

care. It would have eased my mind so much over the years. UnforVerDate 11-MAY-2000 16:27 Sep 17, 2007 Jkt 095484 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 37275.000 SFIN1 PsN: SFIN1
18

tunately, I was not made aware of this program. I wish I had

known.’’ She only learned about it when she called us for a bankruptcy and we asked her about it.

I will be brief, because I see I am out of time. But one important

thing. The denial of access to charity care has a devastating effect

on the lives of low-income clients, especially working poor and their

families. As I noted before, hospitals are extremely efficient in collecting.

They have lawyers on staff, they file the bills, they garnish. It

is a local situation. Once a judgment has been entered, a hospital

can—and does, usually—garnish the client’s wages up to 25 percent. The bank account can be completely wiped out. We are talking about garnishing the wages of people who are already hovering

on the edge of financial oblivion.

The result of this is the client may lose their car and the ability

to get to work. Their children may go hungry. The family may become homeless. But it does not need to be this way. Many of these

people—if not most of these people—would have been eligible for

the charity care program that the local hospital, the local nonprofit

hospital where they received their care, runs, but were never informed about it.

Mr. Chairman, very briefly, I would just say I have spoken recently with members of legal aids around the country, and also

from my past experience. This is not a Virginia problem of people

not being told, this is a problem in the other two States I have

been in, and virtually every State. I talk to directors of legal aids

or legal aid-type programs, and the charity care programs exist but

the clients never find out about them.

Mr. Chairman, I appreciate the opportunity to talk about this

important situation, and I would be happy to answer any questions

the committee may have.

[The prepared statement of Mr. Hartz appears in the appendix.]

The CHAIRMAN. Yes. Well, we have had good testimony. Now we

will take a 5-minute round of questioning for those people who are

still here. If others come back, this may be changed. But right now

it is: Grassley, Baucus, and Thomas, in that order.

I am going to start with Dr. Kane, but anyone else could supplement or add to her answer, or disagree with it if you want to.

I appreciate the comments that we received about the best practices from different hospitals. But as we have heard, there is often

a gap between what are policies, meaning what is on paper, regarding charity care and community benefit, and what actually happens.

Also, we have the Government Accountability Office noting in a

report last year that a great deal of charity care and community

benefit provided by nonprofit hospitals is actually concentrated in

the work of a small number of charity hospitals.

There is an old saying that we often repeat around here that

would be applicable to this situation. Senator Phil Gramm used to

say, ‘‘Some are pulling the wagon and some are sitting in the

wagon.’’

So my question is, why should we not take the good standards

that the Catholic Health Association has put forward and already

19

adopted by hundreds of hospitals and make them the baseline for

all nonprofit hospitals as a requirement for tax-exempt status?

Before you answer, let me say this, additionally. We can certainly build in some flexibility to modify requirements for different

situations, like rural areas. But right now we have no real measurable requirement in the law in exchange for providing these billions of dollars of tax breaks at Federal, State, and local levels. So,

rhetorically, does this make sense? Should every nonprofit hospital

not be required to help pull the wagon?

Dr. Kane?

Dr. KANE. Well, you have made it easy for me. I can say yes. But

I will elaborate a little bit. Perhaps you have all become aware that

we are down about 20 percent in terms of the number of hospitals

in the last quarter-century.

Most of the hospitals that are no longer with us, a far larger

number of hospitals that are gone, were public hospitals. In other

words, the hospitals that were really the primary safety net and

have lost out in the competitive battle, were those that were pulling the wagon.

I think, therefore, it is imperative to level that playing field, to

adopt the Catholic Health Association community benefit reporting

guidelines. I have to say, frankly, as an aside, that as a member

of MEDPAC, although I cannot speak for MEDPAC, we believe

that Medicare payments should be adequate for efficient hospitals

and would hate to see the costs above payment be considered charity, when others might consider it being inefficient. So, I just want

to put my little 2 cents’ worth in on that.

But, yes. I do think that the standard that the Catholic Health

Association is presenting is very much a workable standard that

should be applied so that people get out of the wagon and all start

pulling together. Thank you.

The CHAIRMAN. Before I go to my second question, does anybody

want to say anything one way or the other? [No response.]

Then for Mr. Hartz, and followed by anyone who might want to

add views, you work directly with low-income uninsured who have

tried to navigate the often extremely confusing mazes. You have

talked about those in your testimony, revealing how difficult this

can be for, not only your clients, but also for attorneys working on

their behalf.

In your opinion, what could hospitals do to make their charity

care policies more accessible to those who need it more? And more

importantly, what steps do you think Congress should take to ensure that the gaps you spoke of will no longer exist?

Mr. HARTZ. Mr. Chairman, what occurred me, and I am certainly

no expert in hospital administration, just from the perspective of

the clients, I think four very simple things could be done which

would benefit the clients immensely.

One would be for each hospital to apply their existing charity

care programs uniformly and fairly. Two, to provide notice of the

existence of the charity care program to all patients at registration

and at discharge. Three, to have some notice of the existence of the

charity care program in every communication made by the hospital,

or a bill collector on their behalf, to the patient which is an effort

to collect a hospital debt. I think it could be as simple as, ‘‘We have

20

a hospital charity care program. For more information, call this

number.’’ And, four, to provide patients who are denied charity care

an opportunity to present additional information with the representation of counsel or some assistance to have that decision reviewed.

How that would work, I am not sure. But the problem I found, as

I emphasized in my testimony, is people just do not know. I think

if everybody got it when they came in and got it when they left,

that would settle it.

One other thing from talking to people, the first question they

are asked when they check in is, ‘‘What insurance do you have?’’

Everyone I have talked to, that is the first question the hospital

asks them. If they do not have insurance, it seems obvious they

should be examined.

Now, obviously, not all people would be eligible for charity care,

but that is the group of people, at the very least, you ought to focus

in on, and maybe the hospitals provide some greater detail of information regarding the charity care program to them.

The CHAIRMAN. Sr. Keehan?

Sr. KEEHAN. Thank you, Mr. Chairman. Mr. Hartz makes some

very, very good points. But as someone who ran a hospital here in

DC for 15 years, it is not as simple. That is not an excuse. It means

we have to keep learning from each other, from his experience and

our experience. First of all, we make a huge effort when people are

coming in, particularly for emergency care, to focus on what the

emergency is, what the problem is.

We have really pushed very hard for staff not to make the first

and foremost question when people come in, particularly for emergencies, what kind of insurance do you have, and if you do not have

the right insurance, let us sit down and talk about it before we

treat you. We have made great progress in that and we do not

want to go backwards.

Second, we do, as part of our guidelines and as part of our board

resolution, ask hospitals to post the availability in the admitting office, in the emergency room, on the website. Many, many of our facilities put it on every bill they send out.

Quite frankly, there are many, many reasons that it is difficult

to get the applications. Sometimes people are too proud to say they

are poor, and we understand that. That is a lifelong problem. People really mind having to say they cannot afford to pay.

Other times, people have great difficulty in getting the paperwork that they need to document it. Other times people have an

immigration status. We have some people—many people—particularly in our urban areas, who are mentally ill. They are frightened

by the questions that we have to ask.

I would not want to face this committee saying we have given

charity care, which drives up health care costs, to people who could

afford to pay but did not because we were sloppy in our charity

care policies.

It is a horrible challenge. We listen to those same stories. We

deal with those people over and over again when they come in, and

our hearts ache for them. That is part of the reason we spend so

much time talking about getting good quality coverage.

We need to learn from each other every way we can learn, working together with organizations in the community, whether it is the

21

Health Department, Legal Aid, Catholic Charities, any one of the

organizations that tries to reach out to find better and better ways.

But I can tell you, people work very, very hard to do this, but

there are many challenges. It is not as simple as putting the availability of charity care on the bill or posting it at the admitting office, but those are all good suggestions.

The CHAIRMAN. Mr. Kline, did you want to jump in on this?

Mr. KLINE. Yes. Thank you, Mr. Chairman. An observation.

Building on both the comments, I am sure that you have met with

frustration at times when you have negotiated language to legislation, and then later viewed its implementation by an agency far removed from the discussions that occurred within this room——

The CHAIRMAN. Every day.

Mr. KLINE. Every day. [Laughter.] Much of what we deal with

and what we have discovered in our discussions with the nonprofits

in Kansas is that, as the responsibility for collection is further removed from the hospital itself, it is further removed from the mission.

Oftentimes outside contracts provide collection agencies with

means and methods that the hospitals themselves would not agree

with. Sometimes those collection contractors prohibit further contact between the patient and the hospital.

Sometimes those collection agencies do not in any way engage or

encourage a retroactive review of the charitable services available

because, as many of them are on a contingency basis, it reduces the

possibility of further collections and fees that they may generate.

Sometimes those collection contracts, in fact, have temporal

deadlines where they are incentivized to collect certain outstanding

fees by a set deadline and thereby, by the luck of the draw—or unfortunate luck of the draw—somebody who can ill afford care is

meeting up against that deadline.

If the agency collects from them a relatively minor fee, which has

a significant impact on that patient’s life, they receive a bonus and,

therefore, the collection agency’s efforts are heightened. So there

are some procedural steps that can be taken in best practices that

will prevent some of what I believe is just an institutional

evolvement.

As you move away from the core mission of a nonprofit hospital

and you get into the financial realm and you move further down

the stream, their goal is to collect money, not to engage in the overall mission of a nonprofit hospital.

We have provided the committee with a draft of our best practices that we have negotiated with the Kansas Hospital Association

that has some procedural steps that will help integrate that mission into all of the collection efforts of a nonprofit, such as requiring the CFO to give approval before they initiate litigation, prohibiting temporal guidelines in outside collection agency contracts, and

as well, disclosure and retroactive review of potential financial assistance to pay a bill.

Those things are legitimate. They strike at the very heart of the

mission that the good people before you have, and there are procedures that can be implemented that are consistent with the operation of a hospital, as well as the nonprofit and charitable mission

that they are concerned with.

22

The CHAIRMAN. Before you speak, Mr. Lofton, let me assure Senator Baucus that I am going to go to him next. I am not going to

ask another question.

Go ahead.

Mr. LOFTON. Mr. Chairman, the examples that Mr. Hartz gave

are unfortunate. A lot of what we are talking about is how we can

better communicate the policies, not that they do not exist, not that

hospitals are not willing to provide the care.

I am sure that we could go to some of those same hospitals and

we would be able to get examples of hundreds of people who were

provided the information, received the information, and also provided the information we need to be able to certify them.

When you spoke earlier about whether or not there should be

legislation supporting the CHA-VHA guidelines, the AHA board

passed a resolution in May and we fully believe that uniform reporting is the order of the day.

The AHA resolution supports the CHA-VHA guidelines in all aspects. I think the most important aspect is in the relationship to

cost, that we are actually recording cost of care, not charges.

The one area of exception relates to whether or not the underfunding of Medicare or bad debt should be included in community

benefit or whether it should be reported separately.

When you look at our organization, which is a member of the

Catholic Health Association, we report the community benefit excluding Medicare under-payments, but we still report that in annual reports and the like.

At the end of the day, we fully support everything that the CHAVHA guidelines entail, but it is a simple matter of an intellectual

difference about what is included in community benefit.

At the end of the day, someone is going to pay the bill, someone

is going to pick up the tab. So the AHA position is that uniform

reporting is where we need to go, and at the same time there needs

to be full reporting that also includes the under-funding of Medicare.

Dr. Kane talked about the Texas legislation. One of the reasons

that the AHA passed the resolution the way it did is because many

States have passed similar laws. Texas, in the example she gave,

is one of the States that includes the under-funding of Medicare

and bad debt. So we are following guidelines that at least a dozen

States have approved, and each of those States requires that the

under-funding of Medicare be included in what they call community benefit.

The CHAIRMAN. Mr. Duke?

Mr. DUKE. Mr. Chairman, from the rural perspective in Montana, I would echo Sr. Keehan’s comments. We actually have found,

in trying very, very hard to get the information out, the word

‘‘charity,’’ puts a bit of a stigma out there, not just in our fine

State, but probably in many areas of the country. So we have sort

of changed the name to ‘‘uncompensated care.’’

Now, you hear that term used back and forth in different contexts, but there is a reason for that in the effort of trying to get

the word out and to try to be successful, because I would echo the

comments that we know we fall short on that. We do not have the

data to be able to be sure, but if I could speak to it in terms of

23

Mr. Lofton’s comments, what we are trying to do in putting out the

information in a complete way is to inform and educate the folks

who are coming to us about the costs of care, the high cost of care

and what goes into that. One might argue that, if you have a person who would qualify under charity care, but they do not apply

for that and end up being into bad debt, that is a community benefit.

So what we need to do, in learning from each other and in growing in this effort in terms of trying to get the word out and get everyone qualified, that applies in the rural area, it applies in the

urban area, and we really are in favor of that, speaking from a

rural State.

The CHAIRMAN. Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

I would like to start off by asking, first, I assume that nobody

here advocates repealing the tax-exempt status for nonprofits. Am

I accurate? All right.

Second, I assume that most of you believe that we would not be

sitting here if this country had universal health insurance. Do I see

all heads nodding? Does anybody disagree with that? [No response.] So everybody agrees. I see heads nodding by all six panelists. They all agree. All right.

Mr. KLINE. Mr. Chairman?

Senator BAUCUS. Yes. You do not agree?

Mr. KLINE. I am sorry, Senator Baucus. I am not here to address

that particular issue.

Senator BAUCUS. No, no. I am just asking generally.

Mr. KLINE. I just did not want to go on the record that I——

Senator BAUCUS. No, no. I understand. But just generally. Generally we probably would not be here if everyone had health insurance.

Mr. KLINE. You can call me back for another hearing, Senator,

as it relates to universal health care.

Senator BAUCUS. But you are a private citizen. You must have

a view. You are a public official, but you are also a person. You are,

after all, Phill Kline. You must think about these things.

Mr. KLINE. I think about a lot of things, Senator. [Laughter.]

Senator BAUCUS. Including this. So you probably agree. [Laughter.]

Mr. KLINE. I was not aware that it was the prerogative of the

Senate to make a statement like that.

Senator BAUCUS. I am just guessing.

Mr. KLINE. I am here at your invite. [Laughter.]

Senator BAUCUS. That is just my opinion. All right. That is for

another day. Hopefully an earlier day than some might think.

Why can we all not just adopt standards that are similar to the

Catholic Health Association’s standards? Maybe not exactly, but

why is that not a significant part of the solution here? I compliment you, Sister, very, very much on all you have done. We have

spoken in the past, Sister, and I am just very impressed with all

that you are doing for your community.

But I would like anybody to comment on that. I know there is

the question of, is Medicaid considered charity care or not. I am not

clear about bad debt, whether that should be included or not. I

24

know the Catholic Health Association says, no, you should not include Medicaid because that is a government program.

But I would like each of you to address the degree to which we

should adopt standards similar to those adopted by the Catholic

Health Association.

Mr. LOFTON. Senator Baucus, as I mentioned, the AHA board

adopted a resolution in May. If you go through all of the elements

of the AHA-VHA guidelines, we are in complete support of all of

the guidelines in terms of what charity care is included.

The difference comes on whether or not the under-funding of

Medicare as a specific component is included in the community

benefit or whether you include that as an under-funding of payment separate and apart from community benefit.

Senator BAUCUS. I understand that. But how do we skin that

cat? How do we reach agreement on that?

Mr. LOFTON. Again, part of the dilemma that we face is, if we

were to pass a resolution that would stipulate that that is included,

as I mentioned, there are about a dozen States where the current

law has hospitals report Medicare under-funding.

It is all a matter of a definition. It is a fine intellectual line between the two. But I think that we can get to uniform reporting,

we are very close. We are very supportive of the CHA position.

Again, using my own system, Catholic Health Initiatives, as an

example—we are a member of the Catholic Health Association—we

report community benefit under the exact guideline the way that

the CHA promulgates, but we also report, because everyone needs

to know, the amount of Medicare under-funding because that cost

is borne somewhere in the system.

So if Congress is looking at whether or not you will be able to

actually compare apples and apples, you would have all of the information in front of you.

Senator BAUCUS. Right. Sister, you have thought about this, the

degree to which your association’s guidelines can be virtually universally adopted.

Sr. KEEHAN. Senator Baucus, the really good news on this is that

it is possible now for the not-for-profit hospitals. You have VHA,

AHA, and CHA agreeing on what we should measure—with the exception of two things—and how we should measure it. Before, we

had charges, we had costs, we had charges without write-offs, we

had what services should be included.

We have now come down, with this booklet, on exactly what you

can measure, what you cannot measure, on what things you are

doing, health fairs for the community, what things you are doing

that are pure marketing that are all right to do, but do not call

them community benefit. We agree, virtually, on everything.

CHA agrees that the unpaid cost of Medicare is not all due to

inefficiency. We are a little different from MEDPAC. We agree

there is an unpaid cost of Medicare that gets passed on, because

anything that adds to the cost of health care gets passed on. We

agree that bad debt, just like department store shoplifting raises

your price, gets passed on.

We agree that communities deserve to know what those costs

are. They deserve to know other things as well. If you are in California, you deserve to know what the cost of the seismic retrofit is

25

for the earthquake stuff. But we do not believe you should report

those costs to your community in the category of community benefit.

Tell your community about that. Tell them about other things

like the malpractice costs, other kinds of costs that are particularly

true in a community. A community with a lot of black lung that

is uncompensated would want to do that.

So the good news is, even if you follow exactly the way AHA

wants you to report, it is very, very easy, because the lines are so

clear. You can extract out from the AHA reporting absolute comparable comparisons to the CHA reporting.

Where you cannot compare is in the for-profit hospitals who continue to report their charity care and those kinds of things at

charges. So in the not-for-profit world, this is a huge step forward.

Senator BAUCUS. Right. Let me ask Mr. Duke, your response.

Would the hospital in Dawson live with that?

Mr. DUKE. It can, and has, actually, as the Sister described, since

1999, and has brought that forward with that one intellectual difference. The reality is, the Montana Hospital Association, as I said

in my testimony, recently adopted that as an expectation.

In fact, as we are working on this, it is a work in progress, we

are receiving daily the commitments from all of the members,

which is virtually all the hospitals in the State, that they are

agreeing with that and they can meet those standards. Now, we do

not have 100 percent yet, but we are well over 90. So in our State,

that is happening and we can live with it.

Senator BAUCUS. Dr. Kane, why is this not just a large part of

the solution, just all the nonprofits adopting this?

Dr. KANE. You are talking about a reporting system, and I think

that is part of the solution. A standardized reporting system is part

of the solution. I guess the second part to that question is, what

are you going to use it for?

I think that is where people start disagreeing about what should

be in it as a community benefit and what should be there for anybody to know about. I mean, they are not going to post the profits

they make on their private insurer contracts, so let us get real

here.

We do not want to know all about the financing of the hospital.

We want to know, what are they doing that makes it worth giving

them a tax exemption?

I agree with Sr. Keehan, that, for a variety of reasons, the Medicare shortfall, when it does happen, is not necessarily a charitable

act, given freely by the hospital.

I do think what you need to think about in these reports is how

they are going to be used, and for what purpose.

Senator BAUCUS. Well, how should it?

Dr. KANE. That is the only reason it is controversial.

Senator BAUCUS. And so how should it?

Dr. KANE. I suggest in my testimony that the IRS should be reviewing these community benefit reports, have them attached to

the IRS Form 990, and review them in light of the value of hospital

tax exemption, to say, is it merited, and have hospitals have to

really justify their tax exemption on the basis of what they do for

26

truly charitable giving purposes and not things that are sort of

forced upon them by the government.

Senator BAUCUS. Sister, what is wrong with that?

Sr. KEEHAN. Senator Baucus, it is absolutely perfect.

Senator BAUCUS. Good. We can stop there. [Laughter.]

Sr. KEEHAN. As you know, the 990s, for the first time, are going

to be required to be filed electronically. CHA has worked carefully

with our members and with some other experts to develop a template which will allow our members to report community benefit

electronically with their 990. We are encouraging them to do that

because we believe there is an accountability responsibility.

We are trying to make it not only uniform, but we are trying to

make it as easy to move from the reports they develop using the

guide, to putting those reports on electronically, just the same way

they take their basic financial statements and move them to the

electronic.

Senator BAUCUS. All right.

Mr. Duke, can you live with Dr. Kane’s solution?

Mr. DUKE. Yes.

Senator BAUCUS. You can?

Mr. DUKE. Yes.

Senator BAUCUS. Good. Well, why can all nonprofits not live with

that? I know you cannot speak for all nonprofits. But maybe I

would ask Mr. Lofton.

Mr. LOFTON. I do not think that we are saying that we cannot

live with that. As she said, it is a simple matter of, what do you

want to use the information for. The AHA position is that the community, as well as the IRS, everyone needs to understand, these

are the costs to provide care, these are the aspects of pure charity

care. No one disagrees with those.

But there are other community benefit aspects that contribute to

the overall community that should go into consideration of why we

deserve the tax-exempt status.

The fine line describing bad debt was in several of the testimonies here. It is a simple matter sometimes, a patient could come

in today, and if they do not have all of the proper information, then

they are a bad debt today.

If they come in tomorrow with the information, they are then

provided charity care or sliding fee discounts. So, it is a very fine

line. We feel that the difference, in terms of the costs and what we

receive, should be included in the community benefit standard.

Senator BAUCUS. What about other criteria in determining the

tax-exempt status? What about executive salaries, for example?

Some of them are pretty high for a nonprofit, or at least what most

people think of as nonprofits. Does anybody have any reaction to

that? Dr. Kane?

Dr. KANE. That is actually already prohibited, if you take the

inurement part of the nonprofit standard down to the level of practice. So I think that is one of the few things that attorneys general

have been able to act on, if they can find a way to get them reported to them meaningfully.

I mean, one of the issues around executive compensation is that

because hospitals report on 990s, they can break up the CEO’s salVerDate 11-MAY-2000 16:27 Sep 17, 2007 Jkt 095484 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 37275.000 SFIN1 PsN: SFIN1
27

ary into 10 different entities or put it in a private, for-profit management company and you will never see it.

So that is another area where the reporting would be better done

standardized, but it is already part of the nonprofit standard that

an individual cannot inure benefit, and excess compensation would

be considered that.

Senator BAUCUS. Is it proper for the IRS then to take these

standards that we are developing here as the criteria that they use

in determining nonprofit status? Is that a proper function for them

to do? I mean, the statute is pretty broad. Should there be any

more guidance from the Congress as to the degree to which these

privately developed standards are utilized? Anybody?

Sr. KEEHAN. I think that we have worked closely in developing

these standards with the IRS. The IRS freely admits, health care

has moved, and moved, and moved. From the first time in the late

1980s when we did these standards to 2006, health care has grown

fairly significantly in technology, expense, et cetera. So I think this

is a good basis. We built this basis off the IRS information.

We built it in consultation with them, in consultation with the

CPA Association and health care financial management. So I think

right now we are all on as much of the same page as we can get.

Again, it goes back to, how do you want them to use it?

Senator BAUCUS. That is my question.

Sr. KEEHAN. Is there a bright line? You made the point better

than anybody. If you look at a hospital in downtown Manhattan

and a hospital in Manhattan, MT, you cannot look for the same

thing, but you can very easily look for community benefit.

I would venture, although I do not know the hospital well in

Manhattan, MT, that just being there, being available, keeping

about 40 to 60 people employed and being available for that wide

an area in that very rural area, is a huge benefit. Whereas, you

would look for different things in Manhattan, NY.

Senator BAUCUS. Well, I have a confession in this: there is no

hospital in Manhattan, MT. [Laughter.]

Sr. KEEHAN. It was your example. I was trying to help you.

[Laughter.]

Senator BAUCUS. I appreciate it very much.

So who is the enforcer here, IRS?

Mr. LOFTON. Ultimately it has to be the IRS. When we are talking about the issue of executive compensation, this is broader than

just health care. We have to look at universities, we have to look

at foundations. So the IRS inquiry that Sr. Carol referred to, we

are in full support that that is where guidance would come from.

The AHA board passed the resolution in May to do what Dr.

Kane mentioned; to make sure that CEOs are signing off on the

990s, to make sure that they are fully accountable for what is being

turned in to the IRS.

Senator BAUCUS. All right. My time has expired here. But, just

generally, does anybody disagree with having the IRS being the enforcer? Most people do not like the IRS.

Mr. LOFTON. I would be in favor of them enforcing the regulations, but I do not see the IRS’s role in terms of deciding what is

appropriate compensation. Those are two different things.

28

So if we are talking about reporting of information, making sure

that we are living up to all of the guidelines, then that is the role

of the IRS. The IRS’s role is not to get into determining what is

an appropriate level of compensation.

Senator BAUCUS. Are you talking about executive compensation?

Mr. LOFTON. For executive compensation. Right.

Senator BAUCUS. Even if it is $50 million, that is not an issue?

Mr. LOFTON. Well, I do not think that is the case anywhere in

not-for-profit health care, the numbers that you are giving.

Senator BAUCUS. I do not want to dwell on that, anyway.

Thank you, Mr. Chairman. My time has expired.

The CHAIRMAN. Thank you, Senator Baucus.

Professor Kane, you mentioned in your testimony an estimate of

$20 billion a year in tax breaks for these hospitals. I would like to

know if that $20 billion includes the estimate of the value of taxexempt bonds issued to finance the activities of nonprofit hospitals.

Dr. KANE. My written testimony is a very rough estimate. And,

no, it would not include the value of tax-exempt bonds. I have actually published an article about how to estimate the value of tax exemptions. In doing so, you cannot always quantify everything on

both sides, benefit and tax-exempt value.

But the reason I have trouble with tax-exempt debt and calculating a value for it is that, while individuals do not have to pay

taxes on the interest that they earn from tax-exempt debt and

therefore that is a tax expenditure by Congress, also for-profit companies get to borrow and deduct interest, so the exact calculation

is hard, quantitatively.

However, from a non-quantifiable perspective, the access to taxexempt debt is incredibly valuable to nonprofit hospitals. It is more

of a broader gestalt than it is a specific number.

I do not know if you have become aware that there have been

some studies done that suggest that at this point—and this is just

something that people need to think about in thinking about taxexempt debt and who gets it—it looks like these very large systems

with lots of cash are the ones who are able to raise the debt, and

the very small critical access hospitals in Montana or wherever are

less able to get access to that debt because they do not have the

cash and they are small.

So the tax-exempt debt is currently favoring large hospitals with

lots of cash, and not necessarily creating better access to capital for

some of our smaller hospitals.

So in a way, not necessarily in the sense of tax-exempt regulation, but more maybe in the sense of how tax-exempt debt gets

accessed and distributed, it is not providing access to hospitals that

have a lot of trouble getting their hands on cash. It is actually accelerating hospitals that already have cash getting their access to

capital.

The CHAIRMAN. On another question, Mr. Kline, the first thing

you mentioned in your testimony interests us, and also the Joint

Committee on Taxation has proposed policy changes in that area

about those conversions.

Also, I heard something unrelated to this hearing, that that same

thing happened at credit unions going to be banks. So, I have written to Commissioner Everson on that.

29

But give me your views in this area, whether or not this area of

hospital conversion continues to be an area of concern to you and

other AGs, and whether Congress ought to act.

Mr. KLINE. Thank you, Mr. Chairman. The HCA purchase of

Health Midwest was the largest nonprofit conversion in United

States history at that time. There was no guidance under statute

or law as it relates to how to ensure that the charitable assets to

be received through that purchase would be dedicated to the original mission. That was extraordinarily problematic.

I believe that the legislative body has a legitimate interest in

that function because it was the legislative body that granted the

tax-exempt status in the first place.

If you review conversions as they have occurred in various States

throughout the Nation, you will see that often Attorneys General,

relying on what is really common law authority emanating from

the 13th century, have exercised their authority and responsibility

to oversee those conversions in established charitable foundations,

which generally are operated under the control of the Attorneys

General subsequently after the conversion.

I believe that that was an inappropriate approach, as the grant

of authority initially was from the legislative body and these funds

and benefits were granted by the legislative and executive branch.

However, there is really no statutory authority, even to an Attorney General, as to how those boards would operate, whether they

would have to be entirely consistent with their original mission,

and much of this is handled through negotiation, quite frankly.

I have mentioned to the Hospital Association in Kansas, and I

believe that they are interested—we just have not had sufficient

time—that a model piece of legislation needs to be developed to understand what steps need to be taken before that is approved.

The uncertainty is hard for investors, it is hard for the purchaser, it is hard for the nonprofits, it is hard for the consumer,

and so I believe action is appropriate and needed in that area.

The CHAIRMAN. Maybe then my last question would be to you,

Mr. Kline, and to Mr. Lofton and to Sr. Carol. In our investigation

of several hospitals, we found that top hospital executives were receiving perks that are above what is allowable for private sector executives.

These were supported by the Government Accountability Office

report that was released last year. Some examples. We found executives staying in some of the nicest hotels in the world, dinners

at exclusive restaurants, theater tickets, and the list goes on and

on.

Lavish spending was not limited to out-of-town excursions. Some

hospitals surveyed by the GAO found leases being paid on expensive automobiles—Jaguars, BMWs, Mercedes—and there are hospitals paying annual country club dues.

So the question is, how is this serving the communities in which

these hospitals are located? Do you agree that those types of perks

seem to detract from the hospital’s overall mission of providing

community benefits and quality care? I would like to have the

three of you answer.

Mr. KLINE. Mr. Chairman, in our review of the conversion of

Health Midwest we found that there was a golden parachute negoVerDate 11-MAY-2000 16:27 Sep 17, 2007 Jkt 095484 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 37275.000 SFIN1 PsN: SFIN1
30

tiated by the chief executive officer of the nonprofit to the tune of

$7 million to benefit him personally at the moment of conversion.

I found that extraordinarily excessive and contrary to the inherent mission of that nonprofit. Unfortunately, the court in Kansas

did not have the jurisdictional reach, in its opinion, to be able to

address that issue.

I will say also that hospitals are engaged in a multi-billion dollar

industry. Even with their nonprofit status, they are negotiating

with for-profit companies that extend services and extend equipment, necessary materials, drugs, and so forth so that they can

perform their mission.

Business sometimes includes those things. It is very easy to be

sensational and to be able to identify something that might seem

excessive to the individual that is, in a comprehensive fashion, essential to their negotiation with other businesses and industry to

deliver their services. It is a tough issue.

The CHAIRMAN. I think you are saying that competition might

dictate considering those things, right?

Mr. KLINE. Well, I believe that in the operation of business sometimes things can be taken out of context and be made to look more

onerous than what they are. A holistic approach to the nonprofit

industry will demonstrate that they are full of people who are committed to a compassionate cause.

We do have exceptions. How do we identify the standards that

allow them to perform their crucial mission with the flexibility necessary to meet the local needs of the population, while at the same

time identifying those that are excessive? It is a terrible, terrible

chore that you have undertaken. It is a difficult one.

But I would say that it is very easy to pick apart any business

in industry and find extraordinary examples of a few people who

have been excessive in what they have done.

The CHAIRMAN. Sr. Keehan?

Sr. KEEHAN. Part of our effort with the education of boards and

the sponsors of health care has been to sensitize people to what can

often be perception. Certainly we are not advocating excessive

perks. We do recognize that we have executives whom we compete

for within a market, and that many of the skill sets for our executives are the same skill sets in a for-profit world.

On the other hand, I think the Attorney General is right, that

you can pick apart some things. I think that lavishly paying for excessive perks, in general, is not appropriate. However, at times

when folks say someone has a membership at a country club, it implies that this is their sort of leisure world funded by the hospital.

Sometimes people take a membership on the behalf of an association in a place where you can have board committee meetings, a

place that is more convenient than the facility, a place where you

can have board meetings, where you can have seminars, things like

that, a place where you can meet.

Would you rather pay for a membership at a club and have a

person meet there in a reasonably business-like setting or have different meetings at every restaurant in town? I think sometimes it

just does not sound good.

So we would encourage people to be sensitive to the way it

sounds, but also, though, encourage understanding that some of the

31

things are not as excessive as some people may make them out to

be. But in general, we certainly would agree with you. If you find

something egregious, the board needs to be taking responsibility for

it.

The CHAIRMAN. And Mr. Lofton?

Mr. LOFTON. Mr. Chairman, I would be happy to respond. Also,

when I finish that, if I could comment back on your question about

the taxes and financing.

The CHAIRMAN. Sure. Go ahead. Then Senator Baucus, if he has

got another question, and then that will be it.

Mr. LOFTON. All right. Again, the AHA board passed a resolution

to improve the board’s responsiveness in terms of looking at both

executive compensation and perks. Again, if there are examples

where those perks are being exceeded, then there would be no reason to try to defend that.

But as Sr. Carol indicated, a country club membership, in and

of itself, a name-brand hotel, in and of itself, there are summer

rates, there are times where the hospital, in smaller rural communities in particular, may be the largest employer in town.

It is part of the executive’s responsibility to interact with the

business community, to provide leadership in the community. So,

sometimes just conducting the affairs of the office will take you to

situations where those perks may be appropriate.

As it relates to tax-exempt financing, the comment was made

that it really is a zero-sum game, six of one, half dozen of the

other, in terms of whether you look at the tax-exempt side versus

the reductions that the for-profits are able to take off of the interest that they pay. So, that kind of balances itself out.

The point was also made about the disadvantages of rural hospitals. I would just add for the record that that situation is not the

case where you have hospitals that are part of affiliations or part

of other, larger systems. Catholic Health Initiatives is a very large

system in the aggregate, but in our system two-thirds of our markets are in rural communities. We have 18 critical access hospitals.

So, those small, critical access hospitals have the same access to

not-for-profit, tax-exempt financing as our larger facilities. That is

part of, again, the reason why we need to be able to generate bottom lines, is to be able to reinvest capital back into the communities that we serve, so it is another way that not-for-profit hospitals are giving back to the community. So, tax-exempt financing

is very important to us.

The CHAIRMAN. Thank you.

Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

As you know, there are some efforts around here that start, usually at the other end of Pennsylvania Avenue, to cut Medicaid reimbursement. I would like you to respond to the effects of cutting

Medicaid reimbursement, Sister.

Sr. KEEHAN. Senator Baucus, thank you. We already have a continually growing number of uninsured. We have huge numbers of

uninsured American children. We have made some dent in that

with the SCHIP program and with the Medicaid program, but we

also have an increasing number—and Mr. Hartz spoke to it—of

32

working poor who are being driven out of their insurance programs.

If we are saying that the economy is improving, why are we

going after the people, the Americans, who are least able to afford

health care? If the economy is improving, we should be putting that

economy to the service of Americans who, at this point, do not have

the opportunity to be part of that growing economy and are being

squeezed more and more every day.

Senator BAUCUS. Very good point.

Mr. Duke, the effects of Medicaid reimbursement?

Mr. DUKE. Yes. And if I could, Senator, can I go back to one of

the original questions you had? Just something for the record.

Senator BAUCUS. Sure.

Mr. DUKE. One of the things about the landscape in Montana,

with our rural hospitals, our frontier hospitals, the VHA-CHA

model is a complicated model, I should have recognized for you in

answering that. It is difficult for some of those very small—the

really small ones—to meet those compliance issues.

I am not saying they are bad or they are wrong, but I should

have pointed that out. Quite frankly, as we look at that we need

to think about it. I do not have all the answers, certainly, but I

should have added that in.

Senator BAUCUS. Sure. That is all right.

Mr. DUKE. That is a real issue for some of our really small ones.

Senator BAUCUS. That was the Sister’s very generous Manhattan

to Manhattan point.

Mr. DUKE. Yes. Thank you.

Sr. KEEHAN. Except there is no Manhattan.

Mr. DUKE. I would echo the Sister’s comments, and also add this.

We are fortunate in Glendive. As we track our numbers, we are

about 51 percent Medicare and right about 5 percent Medicaid, and

we know we are lower, generally speaking, than a rural area might

be.

But the real concern which you brought forward earlier is the

issue around the growing number of under-insured and uninsured,

and that certainly is something that we are tracking.

For us, with the nursing homes and the way that we look at that

side of the population, the only thing I can tell you is that it would

be devastating to us because we already have little or no margin

within the system, and when we talk about having cuts to the very

valuable Medicaid side of things, especially on our nursing home

side—I am quite concerned about the talk now about reducing the

bed tax issue down from 6 percent to 3 percent.

In Montana, that is about $20 a day, which is borne on the back

of the providers to help make up for that deficit. If we talk about

cutting it further, it would be extremely devastating.

Senator BAUCUS. Should Form 990 be expanded or modified? I

guess IRS is reviewing it right now. But I will just give you a

chance, all of you, to say to IRS, to us, what should Form 990 contain? Maybe executive compensation issues. It is there anyway.

People can make their own judgments whether it is good or not

good, but without taking direct action one way or another. But

what about the 990? Dr. Kane?

33

Dr. KANE. Actually, before I joined MEDPAC I did a fairly substantial report on the 990 and its shortcomings. That is in a June

2004 MEDPAC report, which I think is cited in my written testimony.

Senator BAUCUS. All right.

Dr. KANE. But it is very difficult to reform the 990 for any one

type of charity because it serves, I do not know, 60,000 types of

charities. Hospitals are the largest and most complex, so it is very

hard to get the 990 to be standardized across so many diverse

types. If you think a hospital among the two Manhattans is different, try the difference between a small charity and a teaching

hospital complex.

Senator BAUCUS. Yes. Different.

Dr. KANE. So I think you cannot expect too much from the 990

because of that range, but I think in the instance of hospitals, we

do need to ask for standardized supplemental reporting that meets

the needs, I think, of the community benefit issues.

Frankly, even the financial statements and the executive compensation kind of reporting in the 990 is not up to what you need

in a complex organization. So, I do not know that the IRS wants

to do this, but if they want to have 990–H, it might be good for

the hospitals only.

Senator BAUCUS. Right. What I am trying to get at is, who is the

enforcer here of these standards? For example, there are organizations that self-regulate, the American Bar Association, for example.

The National Association of Securities Dealers is another one. I see

eyeballs rolling here—I do not know quite what that means—by

one of the witnesses. But who helps make sure all this happens,

what we are striving for, to get proper community care and so

forth? Who does this?

Mr. LOFTON. It is very clear that, at the end of the day, we all

want full transparency and full accountability of the information.

Senator BAUCUS. What about these bad actors that we hear

about?

Mr. LOFTON. What bad actors?

Senator BAUCUS. Some bad actors that we have been hearing

about that have been cited here that are ripping poor people off.

There are always a few rotten apples.

Mr. LOFTON. Well, the 990s need to be structured to look at total

compensation. At the end of the day, we have to make sure that

the people that we are trying to attract to run our Nation’s health

care organizations are the best and the brightest.

Senator BAUCUS. I know. But is this just voluntary? Is it, all

right, we will adopt these standards if we want to, and if we do

not, we will not? We will modify what we want to. Should we leave

it that way?

Mr. LOFTON. No, no. I am not suggesting that it is voluntary.

Senator BAUCUS. So who is the enforcer here?

Mr. LOFTON. I think, again, the IRS has a responsibility for all

tax-exempt nonprofit organizations.

Senator BAUCUS. Is that sufficient?

Mr. LOFTON. Sufficient with what they have today?

Senator BAUCUS. Yes. Are the IRS actions sufficient?

34

Mr. LOFTON. I would not say that there would need to be a legislative solution. That is just a simple matter of making the requirements known, and then hospitals, in this case, responding and

making sure that all of the information is appropriately submitted.

Senator BAUCUS. Dr. Kane?

Dr. KANE. Well, I think you have to go with what you can do,

and I think the IRS is the right place to start. But I think, certainly, the States have Attorneys General who really try hard as

well, although they do not have the resources. Texas had a nice effort, but they really had no way to fund the enforcement of even

what they got reported to them.

So I think there is a funding issue and there is an oversight

issue and a lack of resources that needs to be considered, but really

the IRS is a great starting point. They have developed the standards and are trying to go out and develop a team to do the kind

of work that we are talking about. So that is a great place to start.

I think the States could use some help as well. I think, in fact,

hospitals are supposed to be local businesses. Ideally, you would

like to get the accountability function pushed down to more local

levels, but again, you have 50 States with 50 different statutes.

Senator BAUCUS. Right. I do not want to spend too much time

on this point. But we have the SEC, which regulates publicly held

companies. We also have the National Association of Securities

Dealers, which is self-regulating, self-policing.

I am wondering, should the American Hospital Association form

an NASD role and kind of be self-policing and boot people out who

are on their own and not meeting the standards?

My guess is that most of these hospitals are looking for a good

credit rating. They do not want to upset investors, and so forth. I

am just wondering if there was something else, so we do not have

to keep coming back to this hearing, short of passing universal

health insurance?

Sr. KEEHAN. I think it is very complex. The most important thing

you want to be sure that hospitals meet the standard on is quality,

so we have organizations that are independent of the member organizations, like the Joint Commission, that does that. We have CMS

that has a role because it is a huge payor and it has a role in looking at quality and looking at cost.

Senator BAUCUS. Right.

Sr. KEEHAN. And then you have IRS, because of the tax. I think

that the IRS has been very, very interested, in tune, and has been

a very willing partner to talk about and explain to us the complexity and where we can get to the main issues as we revise the

990. I do not know that the American public would allow one of the

trade associations to regulate things like its tax-exempt status.

Senator BAUCUS. Oh, no, no. Not that. Just to have a little more

self-policing with, say, the American Hospital Association, or

Catholic Health Association.

Sr. KEEHAN. The better we all do at this, the easier it will be for

the bad apples to stand out, Senator.

Senator BAUCUS. Yes. We need the IRS here. Mr. Chairman, did

we invite the IRS?

The CHAIRMAN. No.

35

Senator BAUCUS. Oh. We did not invite the IRS? Anyway, I am

sorry.

Mr. LOFTON. What the AHA has done is to endorse recommendations that would standardize the information to improve accountability. But to think that the AHA would be a monitor for 990s, I

do not think that that would be the proper role.

Clearly, we would endorse having volunteer monitoring, and we

really look for that to be, again, a local phenomenon based on the

local governing boards.

Senator BAUCUS. All right. I am finished, unless somebody wants

to say something that has not been said that should have been

said. Did anybody say something so outrageous that it deserves a

response or it needs to be said? [No response.]

The CHAIRMAN. All right. All I wanted to do is, Senator Baucus

and I have been working together on this. I have a suggestion I

wanted to throw out here. First of all, I owe all of you a thankyou for your time.

As background to what I am going to suggest, I just would say

that I think this has been a very useful hearing with a wide range

of views. Some issues are just common sense that we should seek

to deal with when possible, and some of those have been pointed

out.

But it seems to me that one judge of what ought to be allowed

in the area of perks is, the tax code does not allow publicly traded

corporations to deduct certain expenses, and it seems questionable

to me that tax-exempt organizations ought to be allowed to provide

the same perks.

But there are other matters that need to be given serious consideration. The question is, what can be accomplished through voluntary agreement by hospitals? We also have the roles of States

that have been spoken of several times here.

We have what Senator Baucus just brought up about the IRS,

and we have been in communication with them, but they have certain things that they can do. Whether they will do them or not, I

do not know, but those would not require statutory changes.

Also, we have to consider all this with a realistic eye of what can

be accomplished, whether it is by government agency, or whether

it is by the States, or whether it is voluntarily by the hospitals, because those are different forms with different pressures.

So for those reasons, not having answers to those questions, the

Finance Committee staff will develop a staff discussion paper that

will provide our committee members proposals to consider in addressing these issues that we have heard addressed today, and I

think particularly the proposals of the Catholic Health Association.

Proposals that have already been agreed to by hundreds of hospitals can serve as a starting point, as well as common-sense suggestions by you, Professor Kane. I want this draft developed in consultation with Senator Baucus. In addition, the committee will benefit from hearing from knowledgeable parties in considering a draft

proposal.

The approach is similar to a model that we used with charity reform, which I believe was successful ultimately in getting wide bipartisan consensus, both in our committee as well as in the charity

36

community, and may have proved beneficial in this process as well.

So, we will look at that as something to duplicate.

Of course, this document would be available for public comment,

and that is the purpose of it, to lay everything out on the table,

because I think it is important that we continue making progress,

as evidenced by some of the thinking that has been presented here

and some of the good-faith effort put forth, without Congress taking any action.

Do you have anything to add to that?

Senator BAUCUS. No.

The CHAIRMAN. All right. Thank you all very much.

The hearing is adjourned.

[Whereupon, at 12:01 p.m., the hearing was concluded.]

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A P P E N D I X

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