Issue link: https://beckershealthcare.uberflip.com/i/170061
Finance, Revenue Cycle & ICD-10 33 Charity Care and Property Taxes: Why They Are Now Inseparable By Bob Herman F or 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 taxexempt 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 knew 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 attention Eddie 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 should be equal to or greater than the tax exemption hospitals are given," Mr. Phillips says. "However, this 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 25bed 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 exemptions The 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 is just a shade below 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 cannot handle. Larger systems can absorb that, but they will pass [the costs] on." Case study of a successful tax-exempt hospital One 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 the hospital within the Health Care District of Palm Beach County in Belle Glade, Fla. It is both a non-profit hospital and a county-owned hospital in a special taxing district — a double whammy, of sorts. Not only does it not pay property taxes, but like other county-owned hospitals in taxing districts, Lakeside Medical Center 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. 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 lowincome and indigent patients, as well as all other county residents.