States pursue hospital taxes
Hospitals increasingly have to defend exempt status
If any CEO at a not-for-profit provider hasn’t gotten the message yet, consider this a wake-up call: The days when hospitals could take their tax exemptions for granted are over. Legislators and government bureaucrats have long hungered for the revenue that hospitals and health systems could deliver if placed on the tax rolls, and executives at healthcare providers have gotten used to periodically beating back those efforts behind closed doors and in the public arena.
But observers say revenuecollection efforts in a spate of localities across the country are evidence that this long-simmering struggle has become a pitched battle in the wake of the Great Recession, as cash-starved governments try to tap hospital finances in order to balance their own books.
The newfound thirst for revenue by local governments comes just as hospitals, as an industry, agreed to cede $155 billion in Medicare payments over 10 years to the cause of reform. And virtually no one expects federal lawmakers to ease up on the pressure to define their tax-exempt status in terms of hospitals’ charity care, even though the number of uninsured people eligible to receive charity care is expected to drop precipitously.
And by the way: Starting this year, new tax forms are giving the public far deeper insight into exactly how much not-for-profit hospital CEOs take home each year for running large, complex businesses that don’t pay taxes.
“Clearly hospitals in particular are having to justify their tax exemptions far more than ever before, because of what’s going on at the state and federal level,” said Nicholas Mirkay, an associate professor of law at Widener University in Wilmington, Del.
Boston officials want to jack up voluntary payments from hospitals, Rhode Island lawmakers have floated the idea of a sales tax on hospitals and Baltimore leaders are considering a per-bed tax on hospitals. From Cleveland to Palo Alto, Calif., to Oneonta, N.Y., city governments are publicly talking about how much hospitals could help city coffers. The city of Minneapolis, for example, has even proposed a streetlight tax to help the city recoup the cost of light bulbs.
The situation has become serious enough that lawyers are advising hospitals not to ignore requests for voluntary payments from governments until all the impacts and circumstances of the individual situations are considered.
On one hand, these payments in lieu of taxes—commonly called PILOTs—may seem tough to swallow given slim hospital margins and the services that communities receive from their local hospitals.
However, fighting in court or at the state- house to prevent the imposition of a new tax or PILOT program may also prove damaging, because defeat would mean that hospitals lose the chance to negotiate lower voluntary payments and keep them out of official tax code.
Consider the recent experiences in Rhode Island and Illinois.
In a victory for hospitals in Rhode Island, advocates for tax-exempt organizations protested and eventually defeated a longrunning legislative proposal that would have imposed a sales tax on not-for-profit hospitals, which would have apparently been a firstof-its-kind in the country.
But in a nationally watched case in Illinois, officials with 202-bed Provena Covenant Medical Center in Urbana became liable for a full property tax bill when the Catholicsponsored hospital’s exemption was revoked after a four-year legal battle with the state revenue department over whether the hospital was providing adequate charity care (March 22, p. 12).
Illinois is not one of the dozen or so states that require hospitals to provide and document a specific level of charity care in order to qualify for exemption from state and local taxes. Many of those states took action in the 1990s, after the collapse of efforts at the federal level to impose charity-care requirements, which at the time were incorporated in President Bill Clinton’s formulation of healthcare reform.
These days Iowa Republican Sen. Chuck Grassley, ranking member of the Finance Committee, rarely skips an opportunity to tout the finding in a 2005 General Accounting Office report that said not-for-profit hospitals on average devoted “only slightly more” of their operating expenses to charity care than their tax-paying, investor-owned competitors.
The Joint Committee on Taxation estimated
Mirkay: Hospitals now need to justify their tax status more than ever.