What ethical standards govern the charges that tax-exempt hospitals can charge for medical services? Is disparate pricing for health care services an ethical practice? What ethical considerations would permit self-paying patients to be charged higher rates than insured patients for the same medical services? When should non-charitable, for-profit entities (physician group practices, pharmacies, cafeterias) be able to derive profits from the use of tax-exempt hospitals? Under what circumstances should tax-exempt hospitals be required to provide mutually affordable health care to patients? Define what should constitute reasonable and socially tolerable collection procedures for the collection of medical debt. How should uncompensated care offered by tax-exempt hospitals generally be defined, and when should it become an implied obligation?
Answer:
Economic Incentives and Ethical Obligations
The expression of the physician's ethical obligations to the patient has long been seen as subject to influence by economic and organizational arrangements. It is significant, for example, that powerful defenses and successful critiques of the traditional fee-for-service payment system have been stated in such terms.
Professionally generated codes of ethics, most notably those of the American Medical Association, long held that departures from fee-for-service arrangements between independent physicians and individual patients held potential for dividing or diluting physicians' loyalties. A philosopher recently stated the argument thusly:
Those who wish to eliminate fee for service may overlook the fact that the physician-patient relationship is one of deep intimacy and trust.
The patient's monetary. power, large or small, is the symbol attesting to the fact that the physician is the agent of the patient. Surprisingly, "unholy mammon" more adequately protects the fiduciary-covenant relationship of physician and patient than if the former is salaried by a company, the military or the government (Benjamin, 1981:64).
Under the influence of earlier versions of this argument, the language of ethics was used in arguments against many practices that have subsequently gained wide and even universal acceptance—including third-party payment, salaried practice, and prepaid health care.
Yet, fee-for-service has also been criticized for the incentives it provides physicians to serve their own economic interests. It has long been observed that a kind of conflict of interest is present whenever the person who is consulted about the need for services is also the most likely provider (for a separate fee) of the services that are recommended (Shaw, 1911). Fee-for-service incentives encourage provision of marginally necessary or even unnecessary services and the substitution of more generously compensated for less well compensated services. This was not widely seen as a problem when most physicians were primary care providers (who had to "live with" the results of their treatment and referrals) and when physicians had relatively few tests and procedures to offer.
The growth of technological sophistication and subspecialization has resulted in increased concern about the incentives of fee-for-service medicine, particularly when linked with the widespread and generous insurance programs that have been developed over the past few decades, which give both physicians and patients the feeling that the physicians' choices have no economic impact on patients.
The incentives present in fee-for-service health care are neither new nor concealed, and they are probably understood by most patients. Large numbers of Americans retain a preference for arrangements (epitomized by fee-for-service) that preserve their freedom to select or to change their own physicians.
The criticisms and defenses of the private, fee-for-service mode of organizing health care are well known and need not be rehearsed further here, except to note that certain criticisms (about stimulating unnecessary services) and defenses (about stimulating responsiveness to patients' needs and desires) both rest on the belief that economic rewards affect physician behavior.
However, recent years have seen a growth in public policies and private initiative methods to eliminate or attenuate the effects of the incentives inherent in the fee-for-service mode of organizing health care: HMOs, prospective rate setting, programs that encourage or require a second opinion prior to surgery or screening prior to hospitalization, various utilization review programs, and so forth. Of course, alternatives to fee-for-service payment create their own incentives, possibly encouraging under-treatment of patients and failing to encourage productivity.
All compensation systems—from fee-for-service to capitation or salary—present some undesirable incentives for providing too many services, or too few. No system will work without some degree of integrity, decency, and ethical commitment on the part of professionals. Inevitably, we must presume some underlying professionalism that will constrain the operation of unadulterated self-interest.
The question is not to find a set of incentives that is beyond criticism, but to seek arrangements that encourage the physician to function as a professional, in the highest sense of that term. Certain changes that are occurring in our increasingly entrepreneurial health care system could undermine patients' trust in their physicians and society's trust in the medical profession.
For those who believe that the professionalism of the physician is an essential element in ensuring the quality of health care and the responsiveness of institutions to the best interests of patients, an important question is whether that professionalism will be undermined by the increasingly entrepreneurial health care market in which physicians play a major part.
Approximately 2,900 nonprofit hospitals furnish health care in the U.S., representing half of all U.S. hospitals.2 Under Section 501(c)(3) of the Internal Revenue Code, nonprofit hospitals may qualify for tax-exempt status if they meet certain federal requirements.
The estimated value of hospitals' tax-exempt status in terms of federal, state, and local tax revenues foregone amounted to $12.6 billion in 2002.3 Of course, hospitals' tax-exempt status is worth far more than the value of the tax exemption to the business enterprise, as tax exemption allows hospitals to raise billions of dollars annually in charitable contributions. The total estimated worth of these charitable contributions stood at $5.3 billion in 2010 alone.4
Prior to 1969, the IRS specified that to maintain tax-exempt status, hospitals were required to provide charity care. While facilities were given latitude to define the amount of care required, the obligation was defined under the law. In 1969, however, the IRS replaced this relatively defined obligation with a more ambiguous standard; Revenue Ruling 69-5455 eliminated the obligation to furnish care on an uncompensated basis. Since 1969, a far broader community benefit standard has prevailed; this standard turns on the facts and circumstances of the case6 and generally takes a broad community benefit7 approach to hospitals' obligation. A legal challenge to this shift in policy failed in the mid-1970s;8 thus, the standard was successfully diluted to the point of non-enforceability.
As with the “financial ability test” for exemption that existed prior to 1969, the community benefit standard is also sufficiently vague as to make measurement and enforcement difficult.9 Although certain states have taken a more aggressive stance over the years and have refused to recognize tax-exempt status in the absence of measurable performance,10 the federal government has not taken similar direct enforcement action. In recent years, however, nonprofit hospitals have come under increasing congressional11 and IRS6scrutiny. Similarly, widespread evidence has mounted regarding the dearth of measurable charitable activities, confusion over what might constitute a charitable activity to begin with, and actual evidence of conduct that is decidedly uncharitable (e.g., refusal to discount or forgive bills in the case of indigent people or imposition of the highest possible charges on uninsured and underinsured patients accompanied by aggressive collection actions). A 2009 report by the IRS found “considerable diversity” in hospitals' community benefit activities; similarly, a 2008 U.S. Government Accountability Office report3 valued the federal tax exemption alone at nearly $13 billion in 2002 (a figure that does not include the total value of the exemption to hospitals when state tax laws also are considered), and concluded that the vagueness of federal requirements precluded effective enforcement. As a result, community benefit activities have, until the passage of the ACA, remained largely a matter of individual hospital discretion, state law requirements, and informal IRS guidance.
In recent years, nonprofit hospitals have been the subject of more than 45 class-action lawsuits challenging their tax-exempt status on the basis of their billing practices and treatment of low-income uninsured individuals.9 However, these lawsuits have confronted the vagaries of the community benefit standard, which essentially has required nothing on the part of hospitals.
At the same time, early signs of significant change began to emerge. In 2009, nonprofit hospitals were required to file supplemental information with the IRS to illuminate their community benefit-related spending.12 However, given the limited nature of the supplemental data collection, and the difficulties inherent in attempting to measure expenditures against so amorphous a notion of community benefit,13 the debate continued.
What ethical standards govern the charges that tax-exempt hospitals can charge for medical services? Is disparate...
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