Tags: Healthcare Reform | hospitals | health | care | taxing

Taxing Hospitals Is Wrong Way to Fix Healthcare

Taxing Hospitals Is Wrong Way to Fix Healthcare
James Blinn/Dreamstime

Tuesday, 18 July 2017 07:47 AM

Before Obamacare passed, we were bombarded with statistics about the uncompensated care that hospitals provide.

The numbers were large -- in the tens of billions -- and the implication was that this was something of a national emergency. Certainly it was one very good reason to pass the Affordable Care Act, so that hospital budgets wouldn’t groan under unpaid bills, and the people getting care could be sure that they wouldn't get turned away at the hospital door.

Seven years later, Obamacare is entrenched, and uncompensated care seems to have become a smaller problem. Which is -- bad?

In “How hospitals got richer off Obamacare,” Dan Diamond writes:

“The result, POLITICO’s investigation shows, is that the nation’s top seven hospitals as ranked by U.S. News & World Report collected more than $33.9 billion in total operating revenue in 2015, the last year for which data was available, up from $29.4 billion in 2013, before the ACA took full effect, according to their own financial statements and state reports. But their spending on direct charity care — the free treatment for low-income patients — dwindled from $414 million in 2013 to $272 million in 2015.”

This result is not surprising; indeed, it was intended. Obamacare was supposed to increase utilization of the health-care system -- which means utilization of hospitals, and therefore, their profitability. It was supposed to reduce the number of people who had medical bills they couldn’t pay. If you supported Obamacare, this is good news for your position: It shows the law working roughly as it was supposed to. So what’s the issue?

Well, many hospitals have non-profit status, which means they don’t pay taxes on their revenue. To keep that nonprofit status, they are supposed to provide community benefits.

One of the major benefits they provided was healthcare for people without insurance.

Now that fewer people are without insurance, there is a question about just what constitutes a community benefit that would justify leaving these hospitals untaxed.  National Nurses United, a union that the article cites repeatedly, would like that community benefit to be defined as providing charity care. Hospitals would like it defined as “Anything we want to call community benefit.”

Anytime anyone in Washington opens their mouths in public, you can be pretty sure that they are doing what Wall Street types call “talking their book” --  in more common parlance, “trying to make themselves some money.” This is no exception. The labor union seems to be seeking to turn this provision of the tax code into a jobs program for nurses, by mandating that non-profit hospitals spend a certain amount of their revenue on charity care, an activity which will, of course, require the employment of many nurses. The hospitals, meanwhile, are trying to avoid paying a large tax bill, while avoiding any government interference in their operations. Both sides have wrapped themselves in the banner of the public good, as special interests are apt to do while they are sliding their hands into the taxpayer’s pocket.

Neither side is necessarily wrong: Sometimes lobbyists promote good ideas that just happen to make their clients some money. And I find it all too easy to believe that hospitals are benefitting from a nice tax subsidy while not really doing much worth subsidizing.

But if that’s the case, then the best solution is probably to stop subsidizing it, not to make the subsidy more complex. A lot of the current mess in the American health-care system can be traced back to the thicket of hidden subsidies and fiddling regulations we’ve enacted over the years, trying to fine-tune the system into some platonic ideal where nothing ever goes wrong and no one ever makes an unseemly amount of money. But fine tuning has not delivered us the platonic ideal of anything, except perhaps the word “dysfunction.” It might be time to step back and rethink our approach.

We might start by asking ourselves, “Why are hospitals tax exempt in the first place?” When the income tax was first levied, giving hospitals nonprofit status made sense, because these organizations did largely act as charities. Over the succeeding decades, however, the government decided that it didn’t want to rely on charities for charity care, and enacted a series of programs that financed such care with government dollars.

In an ideal world, perhaps hospitals would have gratefully accepted those dollars, and redirected the money they’d been spending on treating patients to cover gaps in the system, like dental care (woefully underprovided either by charity or government fiat). But we do not live in the ideal world. The difference between a charity hospital and its for-profit brethren has shrunk smaller and smaller, and by now, seems too small to justify treating them as charities.

Unfortunately, stripping hospitals of their tax-exempt status would entail a bruising lobbying battle. (Especially since teaching hospitals, major beneficiaries of the exemption, deliver a double punch, because they are part of both the hospital and the educational lobbies). The first best solution may not be possible, so as is often in politics, we may have to settle for second best.

But is second best really a massive public charity program, opaquely financed by taxpayer dollars, but invisible to the voting public? Special interest lobbies love such programs, because the general public will probably never know they exist, and is unlikely to sit still for an explanation of why this costs them billions of dollars every year. By redirecting the money this way, we also ensure that this dubious tax exemption becomes even more politically difficult to repeal; we will thus continue to spend this money, decade after decade, whether or not it is needed or wanted or less valuable than some other potential use for those government funds.

It’s galling, of course, to see hospitals getting away with something. But much of the new money we spent on Obamacare was always going to end up benefitting some third party, rather than the uninsured, because someone has to be paid to provide all the new services. And like all major new laws, it has delivered a windfall to some group that didn’t really do much to deserve it. When the dust clears, and we can see who’s holding the windfall, it’s tempting to say “That’s not what I wanted!” and frantically start trying to redistribute the windfall to some more deserving party by piling even more regulations atop the ones we already enacted.

But such instincts should be kept under strict control, because they lead to the piecemeal meddling that got us into this mess in the first place. The original sin of our health-care system, after all, is the tax deduction for employer-sponsored insurance, which began its life as an attempt to patch another major government program -- the World War II system of wage and price controls -- that turned out to have some unexpected side effects. Such little patches often turn into the exhibition tent for some amazing new boondoggle. And frankly, our health-care system can’t afford to add any new spectacles to its already remarkable collection.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”

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Before Obamacare passed, we were bombarded with statistics about the uncompensated care that hospitals provide.
hospitals, health, care, taxing
Tuesday, 18 July 2017 07:47 AM
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