States pur­sue hos­pi­tal taxes

Hos­pi­tals in­creas­ingly have to de­fend ex­empt sta­tus

Modern Healthcare - - Front Page - Joe Carl­son

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.

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