BJC hospitals deserve their tax-exempt status
Posted By: Steven Lipstein 
Date Posted: November 1st, 2011 Category: Health Care
In the Oct. 23 edition, Post-Dispatch reporter Jim Doyle raises an important question in his article, “Tax breaks scrutinized at nonprofit hospitals”. As the CEO of not-for-profit BJC HealthCare, I can confirm that Mr. Doyle accurately describes our organization as having total revenue of $3.6 billion, operating earnings of $200 million, and with our foundations, investment portfolios totaling approximately $3 billion. Mr. Doyle further details BJC’s 2009 community benefit expenditures, $430 million in all, including amounts spent for medical care provided without payment, either as charity care or as uncollectable debt associated with patients eligible for such care; medical and nursing education; biomedical research; and health promotion and wellness services delivered in our communities.
Mr. Doyle asks whether not-for-profit hospitals such as those within BJC HealthCare should be exempt from income, property and sales taxes by reason of these community benefit expenditures. He correctly points out that for-profit hospitals such as Tenet-owned St. Louis University Hospital also provide community benefits and yet, their for-profit status requires them to pay taxes. Is the distinction between for profit and not-for profit hospitals sufficient to justify tax exemption? I think it is.
The distinction is not simply a matter of how much community benefit or charity care one hospital provides as compared with another. Rather, the distinctions between a for-profit corporation such as Tenet and a not-for-profit hospital organization such as BJC HealthCare involve key differences in legal structure, ownership, governance, access to capital markets and permissible distributions of earnings and cash flows.
Tenet Healthcare Corporation is an investor-owned company, whose stock is traded on the New York Stock Exchange (symbol THC). When the company reports quarterly results to its shareholders, the metrics are revenue and volume growth and earnings per share. Tenet has 10 compensated directors on its board who guide the overall philosophy and direction of the organization. Tenet’s directors are legally permitted to distribute Tenet earnings to shareholders and to grant options or warrants to purchase Tenet stock to individuals such as their employees. The decisions of the board with respect to where to deliver health care services or what health service lines to expand or constrict are justifiably and appropriately made with an eye toward protecting and enhancing shareholder value.
BJC is not owned by shareholders or investors. We have no stock. Our volunteer, non-compensated board is not permitted to distribute earnings for individual benefit. Rather, they are required to retain BJC’s earnings for community benefit — the kind of expenditures described earlier. Decisions of the board must be made with respect to serving the needs of our communities, and we measure our success in metrics of clinical quality, patient satisfaction, improving productivity, managing costs and improving patient outcomes by reducing non-value added variation in our processes.
BJC earnings are deployed to renew existing facilities such as St. Louis Children’s Hospital in St. Louis or Parkland Health Center in rural Missouri; to build new facilities in our local communities such as Progress West HealthCare in St. Charles County and Northwest HealthCare in North County. We invest in state-of-the-art technology for our local citizens such as intra-operative MRI and proton beam therapy at Barnes-Jewish Hospital, and we provide more medical care to the uninsured and to Medicaid recipients than any other health care organization in Missouri. We exist for the benefit of the community where our hospitals and services are located, not for the benefit of shareholders. We reinvest our cash flows in our community, where we and our families live, work and go to school.
BJC operates in a financially responsible way, which means we do make money. Our financial position allows us to take very good care of patients and their families and our prudent financial stewardship allows BJC to make long-term investments in our community that position us well for the future. These resources enable BJC to maintain and sustain our patient care, academic and social missions.
If BJC were to convert to a for-profit, publicly traded corporation, we indeed would pay taxes. But we no longer would be obligated to provide community benefit, and we would be permitted to distribute earnings for the benefit of individual shareholders.
According to the reporter, the money paid in new taxes appears to be substantial. But would local, state and federal government use those funds to fill the void in community benefit programs and services no longer provided by hospitals? Or would those new tax revenues be directed elsewhere? Would hospitals need to charge more to patients and insurance companies to cover the cost of new taxes? According to filed reports with the State of Missouri in 2010, for-profit St. Louis University Hospital had a cost per adjusted admission of $16,932, compared to $15,556 at not-for-profit Barnes-Jewish Hospital. Some, or perhaps even most of the cost difference between these two teaching hospitals situated in the same community may be attributable to the cost of sales and property taxes paid by St. Louis University Hospital. We as citizens need to consider the cost in forgone community benefit and the cost of higher health insurance premiums and out-of-pocket cost sharing associated with removing the tax exemption of not-for-profit hospitals.
Does BJC fulfill our community benefit obligations outlined in our not-for-profit mission? Yes, we do. When an organization relinquishes its right to distribute earnings for any purpose other than for community benefit, is it deserving of tax exempt status? Yes, it is.
Comment By: J Marshall
Date & Time: November 10, 2011 at 12:28 pm
While Mr. Lipstein’s (or the staff writer’s) comments are well thought out, please bear in mind that, while BJC cannot distribute earnings to shareholders, revenues can be distributed internally and externally to benefit stakeholders of the BJC “family.”
Internally, revenues can be used to increase the salaries of scores of highly compensated executives, provide generous benefits packages or build massive physical infrastructure – the possibilities are endless. Due to the salary potential for highly compensated executives, people who are adept at maneuvering the internal political milieu of a large bureaucracy, such as BJC, become successful and benefit personally, each taking a slice of the gravy train provided by government (Medicare), commercial insurance and private-party sources – like you and me.
Externally, revenues can be used – to run promotional programs, such as this website, tv, radio, billboards, newspaper, bus signs, etc. – all with the sole purpose of enhancing the public image of BJC. Media outlets are then beholden to BJC for significant portions for their revenues, making media criticism of BJC unlikely. (I applaud the Post-Dispatch for risking BJC ad revenue by running the story questioning BJC’s tax-exempt status!)
These internal and external expenditures serve to lower the net income of BJC so as to not appear to make too much. . .
All the while BJC uses its significant market power to extract higher payments from commercial insurance companies – getting paid as much as 20-30% for providing the exact same services as other providers in the community. Although some health plans are changing, due to set copays and deductibles, unsuspecting buyers of healthcare are oftentimes unaware of exactly how much is being paid to providers; and are led to believe that BJC physicians/hospitals are the best in the world. Really?
Additionally, most users of healthcare services are completely unaware of Government programs, such as Missouri’s FRA program, which compensate BJC, and other not-for-profits hospitals, for much of the indigent care delivered. The net result is that BJC is extracting hundreds of millions of dollars from the St. Louis community in the name of community benefit, community benefit which is self-reported (Hmmm. . .).
Eliminating the tax-exempt status of not-for-profit hospitals, while providing politicians with a significant windfall, would create a far more transparent distribution of funds for the under and un-insured, not to mention the everyday purchaser of healthcare, than the current obfuscated situation.