Valley Children’s gets millions in tax breaks. Does it give back enough?
Valley Children’s Hospital, the largest pediatric hospital in Central California, reinvested the lowest amount of money into its region when compared to the nation’s other largest nonprofit children’s hospitals that have the same tax-exempt charitable status, a Fresno Bee analysis found.
The Bee examined the amount Valley Children’s reported spending on what the IRS considers “community benefit,” such as free medical care provided certain patients. Located in Madera County, Valley Children’s is the 16th largest children’s hospital in the U.S., with 358 beds. When compared to the nation’s 15 larger such hospitals, Valley Children’s came in last in how much it gives back to the community as a percentage of total expenses. And it wasn’t close.
Looking at the hospital’s tax returns from the 2021-22 tax year, the latest available, Valley Children’s total expenses were almost $775 million, and its supplemental Schedule H shows community benefit expenses of $15.4 million, or about 2% of its total expenses. Among Valley Children’s peer group, the next highest is about 6% at the 511-bed Rady Children’s Hospital in San Diego, and the highest was 23% at Texas Children’s Hospital, which has 860 beds.
Dr. Vikas Saini, president of the nonpartisan Lown Institute, a Massachusetts-based hospital industry policy think tank, told The Bee that Valley Children’s numbers demonstrate “a big mismatch” between what was spent for community benefit and the estimated value of the tax breaks.
The federal tax code calls for community benefit giving that justifies a hospital’s tax breaks, yet there is no minimum requirement for charitable spending for a nonprofit hospital to maintain its tax-exempt status. The nonpartisan federal Government Accountability Office has recommended that Congress amend the tax code to specify services and activities that might represent sufficient community benefits and take additional steps to beef up IRS oversight.
The issue has been discussed on Capitol Hill as the subject last year of a congressional hearing by the oversight subcommittee of the powerful House Ways and Means Committee.
“Congress has taken actions (in tax laws) that convey an expectation that hospitals, in exchange for a tax exemption, should provide services and activities that benefit the immediate communities in which they operate,” Jessica Lucas-Judy, director of strategic issues for the federal GAO, said in testimony to Congress in 2023.
“However, a broad range of activities fall within the Internal Revenue Code’s requirements for a tax exemption for charitable organizations, making it challenging to ensure that the community benefits that hospitals provide justify their tax exemption,” Lucas-Judy added.
Valley Children’s Hospital – the largest pediatric hospital between Los Angeles and the San Francisco Bay Area – has come under intense criticism this year for the high salaries of its CEO Todd Suntrapak and a cadre of senior vice presidents, especially when compared to the pay and perks for executives at other similar nonprofits across the state and nation.
Suntrapak was paid almost $5.2 million in the 2021-22 tax year. When combined with 22 other senior vice presidents and vice presidents, the senior executive compensation total balloons to more than $25.3 million that year.
“The CEO compensation in 2022 in one year (at Valley Children’s) exceeds what the hospital spent on financial assistance to members of the community who needed care,” said Saini, the president of the Lown Institute. Additionally, the combined compensation for Suntrapak and the squadron of vice presidents amounted to more than the total community benefit figures reported by the hospital on its tax return.
Valley Children’s is the nation’s 16th largest children’s hospital, according to Becker’s Hospital Review, which ranks hospitals based on bed counts. It treats children from across a 45,000-square-mile region of Central California. More than 70% of those children are covered by or eligible for Medi-Cal, the state insurance program for low-income people.
Between October 2022 and September 2023, the hospital saw almost 173,000 individual patients, some of whom made multiple visits for care or treatment in specialties including neonatal care; diabetes and endocrinology; gastroenterology including surgery; kidney issues; neurology and neurosurgery; orthopedics; respiratory and lung surgery; pediatric cancer; urology and others.
IRS-defined community benefits include free or discounted care to patients, shortfalls in what the government pays for treating patients on Medicaid (Medi-Cal in California) or other need-based government programs; health professions education; subsidized health services; research; contributions of cash or services to promote improved health; and community-building activities.
But the tax code’s lack of a minimum threshold for charitable hospitals’ spending on community benefit has been described by critics as vague and a loophole. Valley Children’s says that most of its charitable spending falls outside the IRS definition.
Zara Arboleda, a spokesperson for Valley Children’s, told The Bee that IRS Schedule H, the form that details community benefit spending, is so narrowly focused that it does not accurately reflect the facility’s true benefits to the central San Joaquin Valley. Schedule H, she said, “is not a full picture of how Valley Children’s has impacted the community.”
But Schedule H is the instrument the IRS uses to evaluate community benefits toward the tax-exempt status of all charitable hospitals, including Valley Children’s.
An expectation to give back
Thanks to its tax-exempt status as a charitable nonprofit, Valley Children’s pays no federal or state income tax on its net income –more than $354 million for the 2021-22 tax year, according to the hospital’s tax return – nor does it pay property taxes to Madera County on the property owned by the hospital.
Valley Children’s tax-exempt status represents an estimated tax break of about $45 million for 2021-22, according to the Lown Institute. The organization bases that figure on a nationwide average estimate of tax benefits for nonprofit hospitals of 5.9% of total expenses.
“Hospitals are big business,” said Saini, the president of the Lown Institute. “These aren’t the mom-and-pop nonprofit down the street anymore.”
“These hospitals are, in exchange for not paying certain taxes, making a commitment” to their communities, said Joan Allen, a government-relations advocate for healthcare workers union SEIU-UHW, in a Lown Institute panel discussion in March. “So, if they are not currently living up to their commitment, then we have every responsibility to ask them to do more.”
“Hospitals have to report community benefit spending to the IRS, but there’s no minimum amount in almost any state that they have to spend, …” said Judith Garber, a senior policy analyst with the Lown Institute, in a March discussion.
Tax-exempt hospitals “have to conduct a health needs assessment to identify the most important health needs in a community,” Garber said. “But there’s no link to then say, ‘OK, now you have to spend X dollars to help address those problems.’”
Closing a regulatory loophole
The federal GAO concurs that additional regulatory oversight would boost the accountability for tax-exempt hospitals.
The lack of clarity in the tax code “creates challenges for IRS in administering tax law,” Lucas-Judy said in her congressional testimony. Under the current rules, she said, a hospital could spend little to no money on charity care or community benefit activities but maintain its tax exemption so long as it operates an emergency room that’s open to everyone and accepts Medicare and Medicaid patients.
In 2016, the agency identified 30 hospitals that reported no spending on community benefits, 48 others that provided no financial assistance, and 108 that spent less than 1% of their budgets on community benefits. Yet, Lucas-Judy said, “IRS officials told us that the agency had not revoked a hospital’s tax-exempt status for failing to provide sufficient community benefit in the previous 10 years.”
The lack of a community-benefit minimum is a loophole that needs to be closed, said SEIU-UHW’s Allen.
“So long as we are asking them to do more in order to justify the revenue they’re receiving, the tax breaks they’re receiving, then I think it’s entirely fair … to ask for the transparency to make certain that what they are doing is actually benefiting the community in the ways that we expect,” she said.
IRS return “is not a full picture”
Valley Children’s reported that in 2021-22, it spent less than $182,000 on financial assistance or charity care, and no money on subsidized health services.
Arboleda noted that figures for charity care at Valley Children’s and other children’s hospitals in California are lower than many similar hospitals nationwide because “in California, every kid has access to some kind of insurance, whether it’s MediCal or California Children’s Services.”
“By virtue of that, our charity care is significantly lower when you compare to adult facilities, and even children’s hospitals from other states that don’t have the robust insurance coverage that is provided to kids in California,” she added.
Unlike other hospitals that report significant sums on health education or research among their community benefit expenses, Valley Children’s is neither an academic teaching hospital nor is it a traditional research institution, Arboleda told The Bee. “We do what we can, but it’s another example that if you go just by the narrowly prescribed IRS definition of community benefit, it’s going to be lower.”
Arboleda offered information showing that over the past 10 years, Valley Children’s has spent more than $850 million “on facilities and programs improving access to care” in its service footprint that ranges from southern San Joaquin County to Bakersfield and from the Central Coast to the Sierra Nevada.
“These investment-supported operations, program expansions, new services, partnerships with other healthcare providers, a pediatric residency and hospitalist fellowship program, and staff education, to name a few,” she added.
The hospital has numerous community partnerships and sponsorships, worked with schools to install drinking fountains for clean water, partner with food banks, provided books for children’s literacy programs, and sponsorship of fairs in the region to provide free tickets for children. Many of those types of activities are reported on a different IRS form, but they are not counted by the IRS toward “community benefit” on Schedule H. The hospital also produced an annual community benefits report and plan touting its efforts.
Less than other tax-exempt Valley hospitals
Valley Children’s reported the lowest percentage of its budget in the 2021-22 tax year going toward IRS-defined community benefits, among the nation’s 16 largest children’s hospitals, and its figure of just over 2% was also the lowest among other tax-exempt, nonprofit hospitals of all kinds in the central San Joaquin Valley:
- Valley Children’s Hospital, Madera: $15.4 million claimed in community benefit spending, 2.02% of its budget.
- Community Medical Centers, Fresno: $268.5 million, 12.5% of its budget.
- Saint Agnes Medical Center, Fresno: $59.1 million, 9.6% of its budget.
- Adventist Health - Hanford: $14.2 million, 3.8% of its budget.
- Adventist Health - Tulare: $24.8 million, 27.7% of its budget.
- Adventist Health - Reedley: $18.5 million, 9.8% of its budget.
Arboleda said general hospitals typically are going to have a higher share of expense for charity care because they treat adults who, unlike children in California, may be uninsured and experience greater shortfalls in reimbursements for treating MediCal patients.
Other hospitals may report much more spending on health education because they have larger residency programs and internships, she added.
This story was originally published June 4, 2024 at 2:32 PM.
