Sutter Health trial highlights not-for-profit status isn’t tied to charity care

California hospitals must provide generous charity care

California law has for more than a decade required hospitals of all types—not only not-for-profits—to provide free or discounted care to low-income patients. In fact, the law was just expanded to include patients with higher incomes.

“The state of California requires all hospitals to provide charity care, whether or not they’re nonprofit or for-profit or pink or blue or yellow,” Hearle said.

The state’s longstanding Hospital Fair Pricing Act says uninsured patients are eligible for charity care if their individual or family income is at or below 350% of the federal poverty guidelines. In October 2021, Governor Gavin Newsom signed into law Assembly Bill 1020, which raised that threshold to 400% of FPL starting January 1.

California’s charity care law is a condition of licensure, not tax status. Sutter spokesperson Amy Thoma Tan clarified in an email that Boudreau was speaking specifically to requirements for maintaining tax-exempt status. Since not-for-profit is a state corporate designation, she said, “this line of questioning was about California.”

That means Boudreau was technically correct. Hospitals must abide by California’s Hospital Fair Pricing Act, but violating the law has no effect on their tax-exempt status, said Ge Bai, a professor of accounting and healthy policy at Johns Hopkins University.

“It feels really like a loophole,” Bai said.

Mike Fine, a partner in Wyatt, Tarrant & Combs’ Health Care Service Team based in Louisville, Kentucky, was perplexed at the fact that Boudreau didn’t mention AB 1020 in her testimony. The law’s passage was a big deal for California providers, and there are civil penalties for hospitals that don’t comply.

“I’m sure there are people at Sutter Health who understand the law and its implications and they’re enforcing it,” he said. “It’s possible that at this time on the witness stand the executive didn’t remember. I’m not sure what was in her mind.”

Sutter may be trying to give the impression it voluntarily goes above and beyond what’s required for its communities. That would help counter accusations that it intentionally drove up healthcare costs for more than 3 million Californians.

It’s a common tactic of hospitals defending against antitrust lawsuits, said Gary Young, director of Northeastern University’s Center for Health Policy and Healthcare Research.

“That doesn’t directly address the issue of what you’re being accused of in terms of anticompetitive activity, but it is a way to assuage the situation and say, ‘Hey we’re good citizens,'” he said.

Sutter’s attorney called attention to the health system’s community benefit spending in his own line of questioning with Boudreau, listing the amount spent in each category in 2020 and directing her to define the categories. Charity care spending was $109 million that year.

“For those who don’t have insurance and can’t afford the care?” he asked Boudreau. “Sutter treats all of those people nevertheless?”

When it was Kovacs’ turn to question Boudreau, he noted Sutter’s charity care spending declined from 2.9% of its gross revenue in 2013 to 1.5% in 2019. Boudreau said that happened because California’s Medicaid expansion lowered demand for charity care by slashing the number of uninsured patients. Statewide, total charity care spending plummeted after the ACA took effect, from $6 billion in 2011 to $2.5 billion in 2016.

Even with California’s strict law, hospitals could still dole out very little charity care, Bai said. That could happen if they aren’t making patients aware of their generous policies. Or perhaps they operate in an area like Beverly Hills and their patients make too much money to qualify.

“Are you doing enough to deserve your tax-exempt status, which brings so much money to the hospital?” Bai said. “That’s the question hospital executives should ask.”

No federal mandate

Sutter said Boudreau’s comments only pertained to California’s requirements, but they nonetheless raised the question of whether federal law compels not-for-profit healthcare providers to give charity care.

The answer there is much more complicated. It’s a source of disagreement among some healthcare finance experts.

The Affordable Care Act beefed up hospitals’ community benefit requirements in several ways. The law says tax-exempt hospitals must have written policies that outline eligibility criteria for free or discounted care and give instructions for applying. The law requires hospitals to “widely publicize” these policies, including on their websites and give paper copies upon request.

Johns Hopkins’ Bai said the law stops short of actually requiring hospitals to give out financial assistance.

“To have the policy is a different thing than to actually provide charity care,” Bai said.

Young, of Northeastern University, agreed. He said there is nothing in Section 501(r) of the Internal Revenue Code—a product of the ACA—that requires hospitals to provide financial assistance. As a practical matter, the IRS could revoke a hospital’s tax-exempt status if it didn’t provide charity care and Young said he’s never encountered a hospital with no policy.

“Most hospitals do believe that they have to provide some charity care, but there’s no floor on that,” he said. “As a 501(c)(3) tax exempt hospital, I think it’s widely understood that you have to provide charity care.”

For its part, Sutter’s legal team said the health system is required to provide charity care to maintain its federal tax-exempt status. The health system’s spokesperson confirmed the position in her statement, although she didn’t specify where that’s required.

Hearle, of Verité Healthcare Consulting, contends the ACA requires not-for-profit hospitals to provide charity care. Not only does 501(r) require hospitals have a financial assistance policy, there’s a separate clause that says they have to implement that policy. “That’s a key thing,” he said.

Another part of 501(r) says that before hospitals can file lawsuits over unpaid bills or send them to collections, they must take reasonable effort to check whether the patients are eligible for financial assistance.

“Nowhere does it actually say under 501(r), ‘You are required to provide financial assistance.’ That is correct,” Hearle said. “But if you read all the provisions and you connect the dots, I think it would be a real stretch to say 501(r) does not require any financial assistance. If I were called as an expert, I would just say that’s bologna.”

Hearle also pointed to a longstanding hospital community benefit standard, IRS revenue ruling 69-545, that since 1969 has outlined how to be considered a tax-exempt hospital.

That provision says charitable hospitals must promote health, including caring for indigent patients. He said that requirement didn’t go away when the ACA became law, it supplemented it.

Young counters that the revenue ruling technically does not stipulate that the care must come in the form of financial assistance.

The ACA’s rules added guardrails to the existing community benefit standard by ensuring hospitals were publicizing their financial assistance policies, said Preston Quesenberry, managing director of KPMG’s Washington National Tax practice.

The IRS standard is intentionally vague so hospitals can decide what their communities need, he said. Financial assistance is one of several possible ways hospitals can comply.

“That has its downsides of being muddy and gray,” Quesenberry said. “It has its upsides in terms of providing hospitals in different types of communities with flexibility in terms of determining how they can benefit and promote the health of their community.”