December 14, 2019

Are New Mexico’s hospitals shortchanging community health?

CEO Sylvia Barela./Santa Fe Recovery Center

A group therapy session in process at Santa Fe Recovery Center.

In Albuquerque’s poorest neighborhoods where few grocers offer healthy produce, a cornucopia of subsidized fruits and vegetables for hundreds of families.

In San Juan County, where more than one in 10 residents is diabetic, personalized classes to help participants reduce their risk of developing the disease by incorporating physical activity and healthy eating into their daily lives.

And in Santa Fe County, where dozens of people die each year of drug overdoses, a facility where anyone with a substance abuse disorder can walk in to get sober, and then hopefully move on to treatment and recovery.

What connects these otherwise disparate public health initiatives, and others around the state, is that they are supported, in part, by millions of dollars from the state’s nonprofit hospitals.

It’s not simple generosity that motivates the largesse. To maintain their tax-exempt status, nonprofit hospitals are required to invest in initiatives that respond to the needs of the population they serve — so-called “community benefit.”

Tackling poor nutrition, chronic illness and addiction are just a few examples of how hospitals can do this.

But there is no requirement for how much hospitals must spend to maintain their nonprofit status. And in New Mexico, where community leaders seeking scarce public health funding are understandably grateful for what hospitals currently spend, tax records indicate that some major nonprofit hospitals spend substantially less than similar institutions nationwide — and much less than the tax-exemptions they receive.

Hospitals fall into three categories: government-run hospitals like those operated by the University of New Mexico and the Indian Health Service, for-profit hospitals like Lovelace Medical Center, and nonprofit hospitals like those run by Presbyterian Healthcare Services and Christus St. Vincent. The state’s nonprofit hospitals, together, rival the size of the private hospital sector.

Tax exemptions for hospitals date back to the 19th century, when many were affiliated with churches and primarily offered charity care to the poorest patients. But times have changed and the business of medicine with it. With the advent of Medicare and Medicaid in the 1960s, the federal government took a growing role in health care, reimbursing hospitals for care they might once have provided patients at a loss. In more recent years, passage of the Affordable Care Act and the expansion of Medicaid drove down even further the number of patients receiving charity care.

Over those same years, nonprofit hospitals have grown into some of the country’s biggest businesses, with billions of dollars of assets.

 “They don’t look anything like they did when they were awarded tax exemption,” said John Colombo, a professor of law emeritus at the University of Illinois at Urbana who has testified about hospitals before Congress. But lawmakers have allowed them to retain their tax-exempt status by expanding the types of expenditures that meet the community benefit requirement.

In addition to charity care, hospitals can write off services they charge Medicaid beneficiaries for which they aren’t completely reimbursed, training for hospital staff and direct spending to improve public health. Medicaid is a federal program that pays for healthcare of very low-income people. 

Colombo criticized the practice: “Hospitals want to throw in all sorts of stuff I find crazy.” They may also sponsor health fairs and outreach programs out of self-interest, he said, as they are relatively inexpensive and make for good public relations. “You do that kind of stuff because it expands your patient base.” 

While New Mexico doesn’t have requirements about how much nonprofit hospitals must spend on community benefit to receive state and local tax breaks, officials in other states have wrestled with their local hospitals over the matter.

A handful of states require nonprofit hospitals to meet a minimum amount of spending to benefit the community. In Utah and Illinois, hospital spending must meet or exceed the tax liability they avoid through their nonprofit status. Since 1993, Texas has required hospitals to provide a minimum of 4% of net patient revenue as community benefit — though research suggests that even as the law spurred less generous hospitals to increase their spending, those that were spending over the threshold reduced their contributions, leaving total community benefit unchanged. In light of this, Oregon lawmakers who passed legislation this year will allow the Oregon Health Authority to tailor a minimum threshold for each hospital.

Massachusetts has taken a more collaborative approach. Rather than requiring hospitals spend a specific amount of community benefit, the Attorney General’s office worked with hospitals and health plans across the state to update a set of voluntary guidelines. In a departure from the IRS definition of community benefits, their guidelines encourage hospitals to invest in approaches targeting root causes of illness, like housing instability, unemployment and violence, and to be transparent about the spending. 

“We’ve been really successful here in Massachusetts without legislative intervention,” said Sandra Wolitzky, an assistant attorney general. “It just requires getting the right people at the table and coming up with reporting principles and an accountability framework.”

In other places, discord over the role nonprofit hospitals play has broken into all-out warfare. In New Jersey, the town of Morristown sought to revoke the property tax exemption of a local hospital on the grounds it failed to operate as a nonprofit, and in 2015 a tax judge ultimately decided in the town’s favor, spurring other cities in that state to seek property taxes from their own healthcare entities.

Colombo agrees with the viewpoint that some hospitals may not actually operate as nonprofits. “My general view is that these modern hospitals are businesses, not charities, and we need to treat them as businesses.”

Nonprofit hospitals in New Mexico have plenty of options for providing the community benefit their tax status requires.

The state’s health ranks among the poorest in the country by a number of indicators. “Injury, substance use and mental illness are what sets New Mexico’s health status apart from that of the U.S,” according to the latest state health department report, which also highlighted the challenges created by the state’s high poverty rate. USDA data in 2015 show that more than a quarter of New Mexican census tracts are food deserts. And one in four New Mexico children don’t have consistent access to sufficient food.

Hospitals’ current community benefit spending reflects some of those priorities.

In partnership with Bernalillo County public health authorities and community-based organizations, Presbyterian Health Services helps fund the “Healthy Here” initiative, which includes a mobile farmer’s market that brings organic fruits and vegetables to Albuquerque’s International District and South Valley neighborhoods during the summer months, walking trails to promote physical activity and a Wellness Referral Center to connect patients with free exercise classes.

Public health leaders praise the program. State Rep. Micaela Cadena, D-Mesilla, who is research director for the nonprofit Young Women United, said she appreciates how Presbyterian has created opportunities to exercise and eat healthy food rather than simply shaming unhealthy behaviors. “I think they are a fantastic example about how that can be done well.”

In the northwest corner of the state, San Juan Regional Medical Center reported spending $166,000 on diabetes prevention in 2017, more than a third of the hospital’s direct spending on community benefit. In addition to participating in local health fairs, the hospital offers community members classes about diabetes that encourage them to incorporate healthy eating and exercise into their daily lives. A hospital spokesperson estimated the program had served more than 1,200 people in the past year. In May 2019, a nurse from the hospital also recorded a five-minute public service announcement in Navajo that ran all month on a local radio station. (One in three county residents is Navajo, a population with an elevated rate of the chronic illness). 

In Santa Fe, Christus St. Vincent’s has prioritized substance abuse. Between 2017 and 2019, it gave nearly $1.4 million to the Santa Fe Recovery Center, the only residential treatment provider in the county that takes clients who can’t afford to pay.

Sylvia Barela, the Recovery Center’s CEO since 2015, said the hospital provides about one third of the funding for the detox center, and its support for wraparound services like food assistance, transportation and housing is also crucial.

“Without the grant funding we wouldn’t be able to provide those services,” Barela said.

She nevertheless acknowledged that demand for the services vastly outstrips supply. The Recovery Center’s wait times run up to six weeks long. “We are able to take maybe one to two clients from the emergency department on a daily basis, as opposed to maybe the 10 or 15 or 20 that are coming in.”

How Much Is Enough?

While hospitals’ investments in community health are widely heralded, it’s also clear they are insufficient to meet the state’s needs. But whether they should be doing more to maintain their tax-exempt status is hard to answer.

They are required to document community benefit expenditures in their tax forms, but the information is often so convoluted that even the hospitals themselves don’t know how much they are spending.

“The state and the hospitals need to find a way to make that information more available to folks,” said Russel Toal, who spoke to NMID while deputy secretary of the Human Services Department. “To make sure that hospitals are holding their own, and also that they’re not making excessive profits.” 

Marsha Willis is a senior policy analyst at The Hilltop Institute at the University of Maryland, Baltimore County, which monitors community benefit practices nationwide. She said that judging how much hospitals should be spending is difficult. “The requirements for reporting are so bad at the national level, hospitals can kind of do however they want.”

But a comparison between the community benefit spending New Mexico hospitals report on their tax returns and that of hospitals elsewhere suggests New Mexico may be getting shortchanged.

Nationwide, overall community benefit spending by nonprofit hospitals in 2014 averaged 8.1% of operating expenses, according to research published in the journal Health Affairs. Gary Young, director of the Northeastern University Center for Health Policy and Healthcare Research and the lead author of the study, said there was a lot of variation among hospitals but that figure could be used as a benchmark.

A review of the last four years of available tax returns of New Mexico’s largest nonprofit hospitals shows that some have reported substantially lower levels of community benefit spending than is typical of hospitals nationwide.

In response, the hospitals attributed the low figures to differences in accounting practices or changes in state and federal policy that are out of their hands.

Presbyterian reported barely half the national average for 2014-2016 (between 4.13% and 5.02%), which Young described as “on the lower end” of the national data. Sara Rosenbaum, chair of the health policy department at George Washington University and another expert on this topic, said the hospital’s community benefit spending was “unbelievably low.”

Clay Holderman, chief operating officer of Presbyterian Healthcare Services, attributed the hospital’s low levels of spending in 2014-2016 to New Mexico’s expansion of Medicaid under the Affordable Care Act, which reduced the uninsured population and with it, charity care for which the hospital wasn’t fully reimbursed. A large share of Presbyterian’s overall community benefit spending is attributable to write-offs for charges they don’t recover in full, which makes it sensitive to changes in the population’s insurance coverage. In 2017, when the state cut rates of reimbursement that doctors, hospitals, and dentists received for treating Medicaid patients, their community benefit spending rose to 8.24%.

Holderman said Presbyterian likes to keep its community benefit spending above 7% of operating revenue. ”There’s not a magic number, but we do try to stay in line with what the needs of our community are,” he said. “We think we’re doing a very good job.”

Christus St. Vincent gave even less community benefit as a share of operating expenses: It reported 3.94% in 2014, and a lower share in each year since. After reviewing the data, CEO Lilian Montoya concluded that the figures were influenced significantly by internal accounting decisions. For example, she said, her team had been “incredibly conservative” in what they claimed as subsidized health services, and would be reevaluating that approach in future years.

Writing off debt doesn’t buy good health

Changes in insurance coverage should not affect some subcategories of community benefit spending, such as direct expenditures on public health and grants to partner organizations like those supporting Healthy Here and the Santa Fe Recovery Center. And Willis of The Hilltop Institute said these types of spending are more important for public health than a hospital writing off debts for unreimbursed medical care.

“If you’re really trying to incentivize hospitals to do more to improve community health, just covering charity care and Medicaid shortfall doesn’t really get you there,” she said.

Nationwide, hospitals report spending 0.5% of operating expenses on direct spending and grants to outside organizations, according to Young’s research.

Although hospitals in poor areas tend to report giving larger amounts of charity care — likely because the populations they serve have less insurance coverage and worse health — they report fewer direct expenditures and grants aimed at population health. “It becomes a sort of a vicious cycle there because those are communities where more investment in community health improvement and disease reduction would be really beneficial,” Young said.

By the numbers, Taos Holy Cross Hospital appeared to be surpassing the state’s other hospitals by a large margin, reporting nearly 2% of its operational expenses in the years 2014-2017 as direct expenditures on community health. But upon inquiry, Chief Financial Officer Steve Rozenboom said that due to an accounting error, the hospital had failed to report outside grants it had received to offset the cost of the programs, and the hospital’s own direct expenditures were considerably lower. “We don’t know — when we refile those particular returns — what the result will be, but it will be substantially reduced.”

Presbyterian reported over $2.7 million in direct expenditures and grants aimed at community health in 2017, but as a share of the hospital’s $1.6 billion in operating expenses, this amounted to 0.17%, one-third the national rate of 0.5% for these subcategories. 

“Our goal is to significantly increase that in 2019,” Holderman said.

Christus St. Vincent exceeded the national average, averaging 0.77%  of operating revenue over the past four years. Montoya pointed out that between 2014-17 the hospital doubled the grants it made to community organizations, from $840,000 to $1.7 million. But over that same time, the hospital’s direct expenditures on community health fell from $2.7 million to $846,000 — so overall, investments in population health that were attributable to the hospital declined.

What hospitals get in return

Another way to gauge hospitals’ level of community benefit spending is in comparison to the benefits they receive as nonprofit organizations. While a complete accounting of their tax-exemptions is not possible, public records show they are worth tens of millions of dollars. 

Between them, nonprofit hospitals hold tens of millions of dollars in real estate that are exempt from annual property taxes, and their partial exemption from state gross receipts tax and total exemption from the local portion are estimated to be worth over $100 million a year.

Nonprofit hospitals are exempt from both state and federal income tax. The term “nonprofit” is something of a misnomer as they can and do accumulate profit, which they may then plow back into employees’ salaries (their executives are some of the best paid people in the state) and new buildings and equipment. Presbyterian Healthcare Services, for example, reported net assets in 2016 of nearly $1.5 billion.

Their properties are also generally tax-exempt, which means each year counties forgo property taxes that other landholders would have paid. Presbyterian’s main hospital and its Kaseman Hospital, both in Albuquerque, and its Rust Medical Center in Rio Rancho had taxable values in 2018 of $30 million, $15 million, and $58 million respectively, and are all fully exempt, according to county assessors. In Santa Fe, Christus St. Vincent’s medical offices and parking lot alone are exempt from a taxable value of $6.3 million; the county hasn’t appraised the value of the hospital itself but said it could be around $100 million.

Last July, for the first time, New Mexico’s nonprofit hospitals began paying the state gross receipt tax at 40% the rate paid by for-profit businesses, which should raise around $55 million in new revenue this fiscal year — plus another $40 million from government and for-profit hospitals. 

“My general view is that these modern hospitals are businesses, not charities, and we need to treat them as businesses.”

Professor of Law Emeritus John Colombo, University of Illinois.

But the episode actually illustrates how hospitals wield their clout in New Mexico. In fact, the tax increase was the hospitals’ idea, because it was paired with a measure that infused the hospitals with additional resources.

The same week the measure passed, the Legislature also increased the rates that clinicians can bill Medicaid for their services. One of the Legislature’s leading tax experts, Rep. Jason Harper, R-Rio Rancho, said of the two measures, “they weren’t directly coupled, but it was understood that this would happen, and that’s why the Hospital Association supported it.”

Those clinical services, which are jointly paid for by the state and federal government, are worth $200 million to the hospitals this year. Richard Anklam, executive director of the New Mexico Tax Research Institute, explained, The idea is to increase the amount of money in the system available to the hospitals and its providers, not the other way around.

And even after this year’s changes in tax law, the hospitals still do not pay any gross receipts taxes to municipalities. State Sen. John Arthur Smith, D-Deming, who was involved in crafting the agreement in his role leading the Senate Finance Committee, said he was surprised Albuquerque and Santa Fe didn’t take the opportunity to advocate that hospitals pay them those taxes. “I really don’t know why they didn’t surface to say that.” 

Just as nonprofit hospitals’ influence in the Legislature is real, so too is their significance for the health of New Mexicans. A simplified universe, in which hospitals bear no special public obligations (and reap no benefits from that status), might be alluring — but it isn’t realistic. Those who want to improve community health must engage with them, said Gary Young. “Hospitals are central institutions in our healthcare system and if we’re really going to do better in terms of keeping people well — not just treating them when they get sick — they need to be a part of that shift in paradigm.”

Ted Alcorn is a writer whose work has appeared in The New York Times, The Atlantic and The Lancet.  He lives in New York City and was raised in New Mexico.

This article first appeared on New Mexico In Depth and is republished here under a Creative Commons license.