Becker's Hospital Review

Legal & Regulatory Issues 43 Pittsburgh v. UPMC: Legal Arguments Behind the Tax-Exempt Challenge By Molly Gamble I n March, Pittsburgh Mayor Luke Ravenstahl announced the city was launching a formal challenge to University of Pittsburgh Medical Center's tax-exempt status. The city filed a lawsuit with the Court of Common Pleas of Allegheny County contesting UPMC's exemption from city payroll taxes. The city is also challenging the tax-exempt status of UPMC's 150 properties in Pittsburgh before the Allegheny County Board of Property Assessment, Appeals and Reviews. That appeal remains before the board. For the lawsuit filed in March, Pittsburgh based the challenge on a review led by the city's attorney, E.J. Strassburger from Pittsburgh-based Strassburger McKenna Gutnick & Gefsky. Mr. Strassburger shared some background on the legal arguments involved in the case and why the city decided to pursue action against UPMC. Pittsburgh is seeking UPMC's payment of six years' worth of back payroll taxes, which amounts to 0.55 percent of payroll expenses and is paid to the city quarterly. Questions surrounding UPMC and the HUP test Mr. Strassburger and his team assessed whether UPMC is meeting the state's HUP test, a fiveprong test that defines "purely public charities" and qualifications for real estate tax exemption. The test was established by the 1985 Pennsylvania Supreme Court decision Hospital Utilization Project v. Commonwealth. Under the HUP test, non-profit organizations qualify as an institution of purely public charity and receive property tax exemptions if they meet five conditions: 1. Advance a charitable purpose. 2. Donate a substantial amount of its services. 3. Benefit a large portion of people who need charity. 4. Relieve the government of some of its burden. 5. Operate entirely free of a profit motive. Mr. Strassburger and his team claim UPMC "fails at least three of these requirements, and arguably, fails all of them," according to a 13page letter from the law firm to city solicitor Daniel D. Regan on March 5. He says the system most clearly fails to meet the first, second and fifth prong, with the second and fifth "leading the league." The firm cited UPMC's financial information, including excess of revenues over expenses, or profit, totaling nearly $1 billion in the last two fiscal years and reserves in excess of $3 billion. In an emailed statement, Paul Wood, vice president of public relations for UPMC, said the city's challenge to UPMC's meeting the HUP test "appears to be based on the mistaken impression that a non-profit organization must conduct its affairs in a way that pleases certain labor unions, certain favored businesses or particular political constituencies." Mr. Wood also said the HUP test is "distorted" in certain aspects. He said Pennsylvania is the only large state in the country without public hospitals, which complicates the fourth requirement — that organizations relieve the government of a burden it would otherwise have to fund. "Pennsylvania hospitals and health systems, like UPMC, serve as the healthcare safety net for the poor and uninsured," said Mr. Wood. "If not for UPMC, the responsibility for charity and other uncompensated care could fall to the local government and its taxpayers. A city- or county-run public hospital like, say, Cook County Hospital in Chicago, would cost taxpayers millions of dollars annually to operate and certainly wouldn't be the first choice of many to seek care." Mr. Wood also addressed the fifth prong of the HUP test — the requirement that institutions of purely public charity operate entirely free of a profit motive. "Numerous people have tried to distort the meaning of that component to attain a politically attractive result," he said. "It does not mean a non-profit shouldn't strive to have a positive operating margin — organizations that don't do that go out of business. It also does not mean a non-profit cannot compete vigorously with other non-profit institutions — indeed, the nation's antitrust laws require just that." Mr. Strassburger says, for the most part, this is an accurate statement. "But there's a big difference between a surplus of so much money, and having a half-billion surplus," he says. "If it looks like a duck and quacks like a duck, then it is a duck." In the firm's letter to the city solicitor, Mr. Strassburger named a range of activities that allegedly disprove UPMC's compliance with the fifth prong, including the closure of facilities in locations with relatively high numbers of Medicare, Medicaid or uninsured patients; more than 20 UPMC employees receiving at least $1 million in pay in 2011; and global business financial activities that "appear to have little to do with… UPMC's charitable mission…and more to do with trying to attract wealthy patients." Will this case sound the alarm? Mr. Strassburger said he doesn't expect this case to set off a ripple of governmental challenges to hospitals' tax-exempt status. UPMC's enormous organizational structure and business affairs make its standing unique. "I don't think this is a floodgates situation," he said. "UPMC is an unusually large, diverse business that is subject to laws of Pennsylvania. There aren't a lot of UPMCs around." Mr. Strassburger also presented another side to the argument, comparing UPMC to some other major organizations in Pittsburgh. He named the Pittsburgh Steelers, Pirates and U.S. Steel as just a few organizations that are very beneficial for the community, but that doesn't make them tax-exempt. In his statement to Becker's Hospital Review, Mr. Wood said, "Any sort of new, discriminatory tax scheme would certainly result in less monies for the region and, while satisfying to some, would be bad public policy resulting in many unintended consequences, including diminishing the economy and competitiveness of the region." Conclusion The challenge itself has been a noteworthy development, as non-profit health systems continue to grow in size and scale. Pending on the outcome of Pittsburgh v. UPMC, hospitals and non-profit health systems may need to revisit their financial structures, charity care policies and other business strategies to ensure they meet the appropriate legal requirements in their city, county or state. Editor's note: On April 19, UPMC filed a 16-page complaint in federal court against the city of Pittsburgh and Mayor Luke Ravenstahl, claiming the city's lawsuit questioning UPMC's taxexempt status is a campaign to target and damage UPMC. In that suit, UPMC is demanding a monetary judgment against the city for its allegedly "gross violation of the constitutional rights of UPMC." Expect continuing coverage on the matter from Becker's Hospital Review. n

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