Charity Care and Property Taxes: Why They Are Now Inseparable
For tax-exempt hospitals, March 2010 signaled an important moment. It was almost a national epiphany, indicating that non-profit hospitals and their property tax exemptions were no longer a foregone conclusion.
In March 2010, the Illinois Supreme Court ruled the state was justified in stripping Provena Covenant Medical Center in Urbana of its property tax exemption because it did not prove it provided enough charity care. The case actually dates back to 2003, when the state first said Provena Covenant was not eligible for its tax exemption due to insufficient levels of charity care.
Roughly a year later, the Illinois Department of Revenue denied property tax-exempt statuses to three more Illinois hospitals — Northwestern Memorial's Prentice Women's Hospital in Chicago, Edward Hospital in Naperville and Decatur (Ill.) Memorial Hospital — for the same reasons.
After more than a year of back-and-forth negotiations, Illinois Gov. Pat Quinn signed a bill into law this past summer, establishing that tax-exempt hospitals can keep their exemptions if their uncompensated care figures equal or exceed the estimated property tax liability, which is determined by the fair market value from an impartial third party. Charity care, health services to low-income and underserved patients, and direct financial subsidies would count toward a hospital's property tax exemption valuation.
Although Illinois somewhat resolved its issue with tax-exempt, non-profit hospitals, the topic is gaining traction in other portions of the country. California's state Senate recently questioned whether non-profit hospitals are deserving of their tax-exempt status after a state auditor's report revealed many state non-profits have loose rules for how much charity care they provide. In September 2012, the Pittsburgh Post-Gazette unveiled a four-part series asking if the University of Pittsburgh Medical Center — one of the largest health systems in the country that is exempted from paying $42 million in annual property taxes — should retain its tax exemption.
Hospital executives always know that a tax exemption carries a special privilege. However, the increased scrutiny from governments now begs the question: Are a hospital's property tax exemption and charity care figures now inseparable?
Increased attentionEddie Phillips, a principal in Draffin & Tucker's healthcare tax practice, has worked in the healthcare finance field for more than 30 years. He's worked mostly with non-profit hospital systems in the Southeast justifying tax exemptions and uncompensated care costs, and he reminds hospitals that their tax exemptions cannot be taken for granted, especially considering they are a privilege, not a right.
"Hospitals are supposed to be providing a valuable service by helping out low-income members of community, and the cost of care to indigent patients generally should be equal to or greater than the tax exemption hospitals are given," Mr. Phillips says. "However, this [tax exemption] is legislative grace — it's not really a right."
The more recent heightened attention in hospital tax-exempt statutes doesn't really come as a surprise, says Aaron Crane, CFO of non-profit Salem (Ore.) Health.
Mr. Crane has been with Salem Health since 2004. The health system includes its 454-bed flagship facility, Salem Hospital, as well as a 25-bed critical access hospital, West Valley Hospital in Dallas, Ore. In its most recent community benefit report, Salem Health posted $109 million in community benefits — which includes charity care, uncompensated care, research programs and other services provided to the health system's community. He says the community benefits have greatly outweighed the health system's estimated property tax burden of $10 million to $15 million. However, scrutiny persists across the country, and it stems from two main pressures: a lack of governmental funds and demand for accountability and societal worth.
"Part of this is a revenue grab. States and the federal government are strapped and need revenue sources," Mr. Crane says. "People are saying for-profit entities are paying their taxes, so why can't everyone? The other part of the conversation is about value. Am I getting my dollar out of healthcare, and if not, why are [hospitals] getting a tax break? I believe that's a legitimate concern, but people are jumping to conclusions as to the root causes of that."
Financial ramifications of losing tax exemptionsThe elimination of property tax exemptions would have varying consequences. Government coffers would receive a much-need injection of funds, while hospitals would be forced to pay hundreds of thousands, if not millions, of dollars in new levies. The UPMCs of the world would be more able to handle the new tax obligations, but Mr. Crane points out that regardless of an organization's ability to handle a property tax, commercially insured patients would be the recipients of a new cost shift, or entire service lines would be cut to offset the measure.
"Every cost we have will be passed on," Mr. Crane says. "If I get a new cost like a tax, it'll become more difficult to manage the pricing of services. Eventually, I will have to cut something else."
Mr. Crane also says that a hospital or health system's cash reserves could not be viewed as a tax fund because the more that cash is drained from an organization, the less it can reinvest and the less it can handle any unforeseen catastrophes.
Salem Health has an "A" bond rating from Fitch Ratings and has more than 200 days cash on hand, which exceeds the median for "A" credits. Mr. Crane says there are many other independent, non-profit hospitals and health systems with a perilously low amount of cash on hand right now, and any tax levy could hypothetically force some into closure.
"There are some community hospitals with less than 50 or even 20 days cash on hand," Mr. Crane says. "If you throw taxes on top of that, it's going to stress the system beyond what it can handle. Larger systems can absorb that, but they will pass [the costs] on."
Case study of a successful tax-exempt hospitalOne of the biggest benefits of a tax-exempt hospital is the extensive care and unique programs it can offer to its community, particularly for poorer patients.
Lakeside Medical Center is a hospital within the Health Care District of Palm Beach County in Belle Glade, Fla. It is both a non-profit hospital and a public-owned hospital in a special taxing district — a double whammy, of sorts. Not only does the district not pay property taxes, but like other county-owned taxing districts, HCDPBC also levies $150 million per year in tax revenue, which is used to "provide a comprehensive set of services" to the citizens of the county, says Nicholas Romanello, chief legal officer of the healthcare district. Lakeside Medical Center receives between $6 million and $10 million in tax subsidies.
Mr. Romanello says Palm Beach County is a microcosm of Florida due to its diversity. There are affluent areas near the coastline, and there are also areas of "abject poverty" near the sugar cane fields, which have a large number of migrant workers, he says. Lakeside Medical Center serves as the safety-net institution for those low-income and indigent patients, as well as all other county residents.
As a county-owned hospital, there are extra calls for transparency on the district's allocation of taxpayer money, in addition to the hospital's property tax exemption. In fiscal year 2011, Mr. Romanello says the district had $233 million in total expenditures, 94 percent of which were directly used to provide healthcare services to Palm Beach County residents. The other 6 percent went to administration and overhead.
The HCDPBC has more than 1,000 full-time employees and sits on a large plot of land. Mr. Romanello says the district has proved its value to the community through its transparency and commitment to serve those who pay into it — and other non-profit hospitals should look at their organization the same way.
"The criticisms will always be that non-profit hospitals have a competitive advantage over for-profit folks, but non-profit folks have an obligation to provide sufficient charity care and community benefit that warrants the continuing of the tax-exempt status," Mr. Romanello says.
What hospital executives need to doAs of right now, there is no eminent danger of non-profit hospitals and health systems collectively losing their property tax exemptions. However, the state-by-state scrutiny does not appear to be subsiding any time soon. There are several things hospital executives can do to show their tax exemptions are not being wasted.
First, hospitals and health systems must continue to expand their community benefits reports. Community benefit reports should go beyond the traditional figure of charity care and show all the different ways hospitals are providing benefits to the area, such as coverage for shortfalls from Medicare and Medicaid, investments in local research and sponsorship of wellness initiatives. These reports should also be posted online — and easy to find.
Mr. Crane also says hospitals should re-evaluate their financial assistance policies to make sure people who were eligible are receiving the right care at no cost. Specifically, hospitals should go beyond the federal poverty level when determining a patient's need for financial assistance. At Salem Health, the financial department uses a sliding scale where a patient is eligible for financial assistance up to four times of the FPL.
Finally, hospital executives must continually illustrate to their community why they matter. Tax exemptions are a big deal, and communities must be reminded why their hospital or health system is such an integral part of their lives.
"Non-profit hospitals are all different," Mr. Phillips of Draffin & Tucker says. "There are large systems engaged in medical education, research institutions, tertiary care facilities, critical access hospitals — they all play a role. What each of those hospitals needs to do is understand how to meet minimum [charity care] standards but also to document the other benefits they are providing to those communities, especially for the vulnerable populations."
Hospitals also need to ensure they are not just honing in on "charity care." It is the most common figure to look at, but total investment into the community is the most important idea to disseminate to residents.
"Look at the purpose of a 501(c)(3)," Mr. Crane adds. "That organization does things that otherwise wouldn't be done in the community. Who else is going to put in a trauma system, where within 15 minutes you have highly trained people trying to save your life? That's something that can't be quantified. Community benefit is not just measured in dollars of charity care."
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