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The Second National Uninsured Congress
How Tax-Exempt Hospitals Become Targets of
Fraud Claims and Other Controversy
September 23, 2008
Patrick S. Coffey
Partner
Locke Lord Bissell & Liddell LLP
LONDON
LOS ANGELES
NEW ORLEANS
NEW YORK
SACRAMENTO
WASHINGTON DC
Outline of Presentation
1. The Exemption Controversy and Relationship
to the Un and Under Insured
2. Survey of Exemption Challenges
3. The Illinois Experience
4. Managing Challenges to Exempt Status
-National
-State
-Attorney General
-NFP Litigation
-Community Benefits
1
5. Questions
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1. The Controversy Over Tax Exemptions
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Media Scrutiny of Hospital Tax
Exemptions
THE WALL STREET JOURNAL
FRIDAY, APRIL 4, 2008 - VOL. CCLI NO. 79
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What’s News
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Nonprofit Hospitals, Once
For the Poor, Strike It Rich
With Tax Breaks,
They Outperform
For-Profit Rivals
BY JOHN CARREYROU
AND BARBARA MARTINEZ
Nonprofit hospitals, originallyset up to serve the poor,
have transformed themselves into profit machines.
And as the money rolls in,
the large tax breaks they
receive are drawing fire.
Riding gains from investme
-nt portfolios and enjoying
the pricing power that
came from a decade of
mergers, many nonprofit hospitals have
seen earnings soar in
recent years. the combined net income of
the 50 largest nonprofit hospitals jumped
nearly eight-fold to
$4.27 billion between
2001 and 2006, according to a Wall Street
Journal analysis of
data from the American Hospital Directory.
AHD, an informationservice company, com-
piles data that hospitals report to the
federal government.
The cleveland Clinic
swung from a loss to
net income of $229
million during that
period. No fewer than
25 nonprofit hospitals or hospital systems now earn more
than $250 million a
year. Once nonprofit
hospital system, Ascension Health, has a
treasure chest of $7.4
billion - more than
many large, publicly
Officials
Say They
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Ranging Views on Tax-Exempt Hospitals and
Obligations to Serve the Uninsured
•
“We are not obligated by law to give anything.” Reported
statement by health system counsel to city council.
•
“Some tax-exempt healthcare providers may not differ
markedly from for-profit providers in their operations, their
attention to the benefit of the community or their levels of
charity care.” Letter to Senate Finance Committee by Mark
Everson, Commissioner of the IRS.
•
“[C]urrent tax policy lacks specific criteria with respect to
tax exemptions for charitable entities and…standards could
be established that would allow nonprofit hospitals to be
held accountable for providing services and benefits to the
public commensurate with their favored tax status.”
Testimony before Committee on Ways and Means by David
W. Walker, Comptroller General of the United States.
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Ranging Views on Tax-Exempt Hospitals
(cont’d)
•
“For many non-profit hospitals, we found the link between tax-exempt
status and the provision of charitable activities for the poor or
underserved is weak. Currently, the Internal Revenue Service (IRS)
has no requirements relating hospitals’ charitable activities for the poor
to their tax exempt status. If the Congress wishes to encourage nonprofit hospitals to provide charity care and other community services
that benefit the poor, it should consider revising the criteria for tax
exemption.” Mark Nadel, Associate Director of the GAO (in July, 1991).
•
“I don’t know when these charity people are going to get it, but we need
to build more accountability into the nonprofit world if people are going
to get these big tax breaks.” Dean Zerbe, former investigator to Senate
Finance Committee.
•
“When nonprofit hospitals sit on big cash reserves, I wonder how much
public service they’re offering.” Senator Chuck Grassley.
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Key Features of Exemption
Controversy
•
Estimated 46 million uninsured at issue in still evolving crisis.
•
Focus on whether hospitals are providing sufficient charity with
increasing efforts to mandate minimum obligations.
•
Rising healthcare costs amidst national recession and huge state
revenue shortfalls.
•
Chargemaster pricing and collections continue to spawn challenges.
•
IRS compliance initiatives and new Form 990 require hospitals to justify
“privileges and benefits” of exempt status.
•
Class action rulings equate hospital conduct with “unfair” and deceptive
business practices.
•
Media focus on lack of charity, aggressive collections, executive
compensation and other “for-profit” conduct.
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2. Survey of Exemption Challenges
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Minnesota Applies “Purely Public Charity”
Standard for Exemption
• Property tax exemption for hospitals,
churches and schools judged by “purely
public charity” standard.
• In December 2007, Minnesota Supreme
Court ruled that Under the Rainbow Child
Care Center provided only “incidental”
charity which did not qualify for exemption.
• Moratorium sought to protect existing
nonprofit property tax exemptions in
Minnesota.
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Union Challenges to Exempt Hospital
Practices
• In 2007, United Nurses Association of California
filed action alleging Sharp hospitals provide charity
at less than one percent of operating expenses.
• In March 2008, California Nurses Association
declared a third strike against Sutter Medical
Foundation hospitals alleging overcharging of
uninsured, reduced charity to indigent patients,
excessive executive compensation and abusive
collection practices.
• SEIU challenges Beth Israel Deaconess Medical
Center “commingling of charity care and bad debt”
in financial reporting.
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Indiana Grants Exemption to Physician
Offices and Chaplain Residence
• July 8, 2008 ruling reversed decision
imposing property taxes on physician offices
and hospital chaplain residence owned by
Saint Margaret Mercy hospital.
• Ruling affirmed chaplain residence and
employed physician offices were used in
service of hospital’s charitable mission.
• Tax refund of $400,000 decried by
authorities given budget shortfalls and
opening of “floodgate” for similar requests.
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Indiana Denial of Tax- Exemption on
Predominant Charitable Use Basis
• Methodist Medical Plaza of Carmel leased land to
Clarian Health Partners, a nonprofit provider with
charity and medical education program.
• Charitable, educational and hospital purposes
exemption denied and appealed.
• Tax court upheld denial based on lack of “any
evidence showing [property] used more than 50%
of the time to educate medical students or to
provide charitable health care.”
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Continuing Challenges to Ohio
Hospitals and Facilities Exemptions
• Ohio tax authorities continue challenges taxexempt status of nonprofit healthcare providers.
• Charitable tax exemption denied to Cleveland
Clinic outpatient clinic and surgery center in test
case where less than 2% “charitable care
provided to indigent persons or those who cannot
afford full cost of care.”
• Challenges serving to define tax-exempt status by
the ratio of charity care to all hospital services.
• Trend is for exemption to be allowed when charity
care exceeds 5% but denied when below 2%.
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Michigan Rejects Quantum of Charity
Test for Exemption
• Wexford Medical Group denied tax exemption
based solely on the amount of free care given in
the tax year at issue.
• Michigan Supreme Court reversed holding that
charitable exempt status is determined by analysis
of charitable purpose - not some threshold level of
charity care.
• Appellate court overturns similar denial of
exemption to McLaren Regional Medical Center
and affiliated practice group based on Wexford.
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Washington Court Restores TaxExemption for Hospital Imaging Center
• Legacy Salmon Creek Hospital was denied
exemption for imaging center adjacent to
hospital.
• Imaging facility deemed insufficiently
integrated to be part of the “hospital unit.”
• In August 2007, court restored exemption
finding facility was sufficiently integrated to
meet exemption requirements.
• Ruling appealed by Washington Department
of Revenue.
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New Jersey Denies Exemption to
Satellite Hospital Facilities
• In 2007, Hunterdon Medical Center’s
physical therapy, pediatric and wellness
center ruled ineligible for property tax
exemption.
• New Jersey appeals court affirmed based on
lack of integration between hospital and
satellite facilities.
• New Jersey law requires “hospital purposes”
use and function to extend tax exemption
coverage.
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Louisiana Court Extends TaxExemption to Medical Office Building
• Willis Knighton Medical Center challenged finding
that leases to physicians constituted a commercial
and non-exempt use of office property.
• Trial court ruled medical office leases did not
“cross over the line” and constitute non-exempt
commercial use.
• In March 2008, appellate court affirmed exemption
finding leases related to the hospital’s tax-exempt
purpose of providing medical care.
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Carlton Cove and Related Challenges to
Exemptions for Retirement Facilities
• In 2007, Alabama appellate court held that Carlton
Cove retirement facilities were not exempt from
property tax solely because of 501(c)(3) status.
• Carlton Cove failed to meet state standard of
“use[] exclusively ….for purposes purely
charitable” given small amount of charity.
• Growing trend of challenges involving senior living
facilities serving the “financially well-off” prompting
use of PILOTs and other measures.
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3. The Illinois Experience
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Community Health Care Denied,
Then Restored to Exempt Status
•
In 2007, Illinois appellate court ruled Community Health
Care, a federally qualified heath center, was not sufficiently
charitable to warrant exemption.
•
Provision of free or discounted care to 27% of patients
deemed inadequate under “exclusively” charitable
exemption requirement.
•
State authorities subsequently rely on case to argue
exempt hospitals must provide more than 27% of net
revenue in free care.
•
In July 2008, Illinois Department of Revenue reverses
course and approves charitable exemption to FQHC on
new application.
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Carle Foundation Hospital Denied
Tax-Exemption
•
•
•
•
•
Tax board sought revocation because hospital property not
“actually and exclusively used for charitable…purposes.”
Recommendation found less than one half of one percent
of hospital revenue devoted to charity care and use of
property for private gain.
Tax board further alleged hospital had “unfair policy of
overpricing services” and bringing collection actions
against uninsured patients.
Carle returned to the tax rolls and headed to administrative
hearing on charitable exempt status.
Related litigation challenging basis for IDOR denial
remains pending.
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Richland Memorial Denied, Then
Restored to Tax-Exempt Status
• Hospital ownership converted in 2005 and spurred
reapplication for property tax exemption.
• Tax board recommended that hospital be allowed
charitable exemption.
• In 2007, Illinois Department of Revenue director
denied exemption finding that hospital “operates
primarily as a business.”
• In 2005, 75% of hospital patients were Medicaid,
Medicare or charity recipients and 14% of budget
went to uncompensated care.
• Tax authority later reversed revocation decision
without public explanation.
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IDOR Grants Exemption to Armenian
Church of Lake Bluff
• In June 2008, amidst controversial challenges to
exempt status of community hospitals, IDOR
grants exemption to mansion converted to church.
• Exemption ruling grants $80,000 annual tax break
over objection of local tax authorities.
• Residential mansion deemed exempt by IDOR on
basis of sworn affidavit and other submissions.
• Case raises serious questions about fairness,
consistency in operation of property tax system.
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IAG Initiatives on Charity Care and
Tax Exemption
• “Tax-Exempt Hospital Responsibility Act”
introduced in 2006 proposing 8% of hospital
operating costs be devoted to charity care.
• Attorney General seeks discounting scheme for
uninsured and reporting requirements, warning
hospitals to “lack confidence” over tax-exempt
status given Provena Covenant controversy.
• Investigations of nonprofit hospital business
activities and other ongoing efforts intended to
generate support for new law in Illinois.
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Assessor Report on Exempt
Hospitals
•
In November 2007, Cook County Assessor issued report
estimating that property tax on Chicago area hospitals
would generate $240 million per year.
•
Report not intended to “answer the question of whether
these hospitals should be taxable or not, but instead
provides an estimate of what their value would be were
they deemed to be taxable.”
•
Report noted “current litigation” over hospital exemptions
and “uncertain” outcome of that litigation.
•
County budget deficit was then estimated at approximately
$240 million.
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Proposed Resolution on Exempt
Hospitals
• In September 2007, two Cook County
commissioners proposed removal of tax
exemptions from hospitals failing to provide
adequate charity.
• Resolution sought investigation of the charity care
provided by 50 hospitals within Cook County.
• Commissioners asserted citizens “have been
repeatedly defrauded by these hospitals that are
not providing sufficient levels of charity care…”
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Denial of Property Tax-Exemption to
Provena Covenant
•
In 2006, IDOR Director denied charitable property exemption to
Provena Covenant based on the following findings:
– Level of charity care failed to “prove that its primary purpose was
charitable care.”
– Provena provided “seriously deficient” charity measured by “total
revenues” in given tax year.
– Charity policy use federal poverty guidelines was inconsistent with
charitable purpose and exempt status.
– Later revisions to hospital assistance policy demonstrate the failure to
provide adequate charity.
– ED and other contracts with for-profit providers are inconsistent with
charitable exemption.
– Medicare, Medicaid and other uncompensated costs deemed irrelevant to
tax-exemption.
– Charitable contributions other than free care not relevant to exempt status.
– Any collections action against patients is incompatible with charitable
exemption.
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Provena Covenant Restored to TaxExempt Status
• In August 2007, IDOR decision denying exemption
was deemed “in error and reversed.”
• Court found that exempt status was demonstrated
by “uncontested and unrebutted evidence”.
• “[A]pplicable law and precedent as set forth in the
Plaintiff’s briefs, and as found by the [ALJ],
establishes by clear and convincing proof” that
Provena Covenant met qualifications for charitable
and religious use exemption.
• Court decision immediately attacked as product of
inattentive court that failed to seriously consider
27
the issues.
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Illinois Appeals Court Reverses Ruling on
Provena Covenant Exemption
• On August 26, 2008, Court of appeals reversed
Circuit Court judgment and upheld IDOR Director’s
decision denying exemption from property taxes.
• Court of appeals determined that IDOR position
denying exemption was required to be upheld
absent clear error.
• Provena Covenant as until later in September
2008 to seek rehearing or petition for appeal to the
Illinois Supreme Court.
• Despite tax-exempt status pending final appeal,
local authorities reported to be demanding hospital
to immediately pay and return property taxes.
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Court’s Ruling Upholding IDOR
Decision Denying Tax Exemption
•
•
•
•
•
Court held it was not clear error for IDOR to conclude that
Provena Covenant was not a “charitable institution.”
Provision of medical care is not, in and of itself, charity.
The number of patients treated for free or at a reduced rate
matters in determining whether a hospital is “charitable.”
By spending only 0.7% of revenues on charity care,
Provena could not have dispensed charity care to all in
need.
Existing charity policy failed to consider the financial
condition of individual applicants and record failed to reflect
operation of charity program.
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4. Managing the Risk of Challenges to
Tax-Exempt Status
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States Will Continue to Lead
Challenges to Tax-Exempt Status
•
•
•
•
•
•
State authorities will press new requirements on “modern
hospitals” and seek to revisit tax-exempt status without
regard to federal action.
Demands for justification of state tax-exempt status will
accelerate as uninsured and healthcare costs increase and
budget deficits mount.
Billing, pricing and collection practices will drive criticism
and challenges.
Community benefit reporting will fan controversy and
confusion with state exemption standards.
State challenges will include unprincipled demands with
resulting erosion of charitable exemptions.
The Illinois experience will spread past the Midwest.
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Managing State Challenges •
•
•
•
•
•
•
Know what AGs are demanding from tax-exempt hospitals.
Consider the use of valuation data.
Understand what drives controversy and implement
necessary measures to protect status.
Use Board approved community benefit plans and
enhanced reporting to make the case for exemption.
Educate local tax authorities, patient advocates and
editorial boards on the hospital value and contributions.
Ensure pricing to uninsured is sensitive to deceptive and
“unfair” practice claims.
Use safeguards to reduce collections controversy.
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AGs Continue Investigations
Challenging Exempt Hospitals
•
In 2005, Illinois AG commenced investigation of “charity delivery
services” by over 100 hospitals based on the alleged lack of sufficient
charity and abusive practices.
•
In 2007, Minnesota AG threatened enforcement and achieved industry
settlements proscribing discounting and charity practices.
•
Wisconsin brought enforcement in 2007 for unfair pricing and
negotiated deals to end “overcharging” and billing and collections
guidelines.
•
In early 2008, Ohio AG reinstituted initiative to define charity care and
other tax-exemption standards, emphasizing concern over charges to
uninsured and indigent patients. AG requiring submission of charity
care information.
•
Kansas, Montana and other states have investigated hospital billing
and collection practices deemed inconsistent with tax-exempt status.
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Managing AG Challenges •
•
•
•
•
•
Use outreach, advertising and other initiatives to prevent
complaints that attract Attorney General attention.
Revise charge and collection practices to avoid legitimate
complaints.
Improve charity care process and document the operating
program.
Enhance governance and reporting efforts to present the
charitable mission and case for exempt status.
Prepare to defend joint ventures, for-profit subsidiaries,
potential conflicts of interest, executive compensation and
other purported “for profit” business conduct.
Consider exemption applications as opportunities for
authorities to revisit qualifications for exemption.
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IRS Enhances Oversight of Exempt
Organizations
•
IRS requires more disclosure through new Form 990 and other reporting on
how “nonprofit hospitals serve the public consistent with the privileges and
benefits of tax exemption.”
•
In 2007, IRS issued long-awaited report on executive compensation and
benefits, confirming “significant reporting problems” and $21 million in
proposed excise tax assessments.
•
IRS reviews continue on compensation practices and community benefits in
2008.
•
In February 2008, IRS issued updated guidance on governance practices,
signaling commitment to pursuing improved corporate governance as element
of EO oversight function.
•
IRS memorandum cross-references Form 990 and telegraphs concerns over
conflicts, document retention, whistleblower policies, and the importance of
board oversight and management policies.
•
IRS final excess benefit rules issued in March 2008 emphasizing the
importance of avoiding transactions which risk the loss of exemption.
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Managing Increased IRS Oversight •
Understand IRS governance guidelines and conduct reviews to ensure
board oversight and management practices are appropriate to the
mission and current legal requirements.
•
IRS focus requires close scrutiny of compensation, process loans to
insiders, major transactions, billing, collections, management
agreements, joint ventures, and for-profit subsidiaries.
•
IRS measure drive reporting of expanding information with greater
disclosure and focus on case for tax subsidy.
•
Use new Form 990 to improve overall reporting and as a checklist for
the compliance health of the exempt organization.
•
Understand IRS final regulations on excess benefit transactions and
implement any needed governance or compliance safeguards to
protect status.
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Continuing NFP Hospital Litigation
•
Every federal lawsuit filed by Scruggs and related counsel beginning in
2004 concluded but state cases continue.
•
In March 2008, certified class action involving uninsured patients in
Missouri (Quinn et al. v. BJC Healthcare) resulted in class settlement.
•
In January 2008, Scripps Health announced a settlement involving a
class of uninsured patients. Case arose from counterclaim that alleged
uninsured patients overcharged for emergency services (R.M. Galicia
Inc. v. Franklin).
•
Similar class settlements in other California cases alleging
overcharging of uninsured and unfair collection practices (Sutter Health
Uninsured Pricing Cases and Dancer v. Catholic Healthcare West).
•
Earlier class settlements in Oregon included Legacy Health System
and Providence Health System.
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Managing NFP Litigation Risk •
•
•
•
•
•
Understand the evolving class action settlement terms.
Compare existing charity, pricing and collection policies to
those prompting class action claims and settlements.
Know that collections actions trigger counterclaims.
Understand how plaintiffs firms view hospitals and mine for
class consumer fraud cases and class representatives.
Know how tax-exempt status is used in “unfair” and
deceptive practice claims.
Consider cases where hospitals were not required to
extend discounts to uninsured (Banner Health v. Medical
Savings Ins. Co. (AZ), Urquhart v. Manatee Memorial
Hospital (FL), and King v. AnMed Health (SC)).
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Accountability Demands Continue to
Impact Community Benefit Reporting
• Local, state and federal demands for
accountability, justification of exempt status will
continue.
• Reporting must effectively address the range of
financial benefits provided to the community.
• Quantifying economic and financial benefits can
help present the hospital mission and case for
exemption.
• Departures from consistent reporting or accepted
guidelines will continue to spawn controversy.
• New Form 990 substantially impacts reporting.
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Managing Demands for Improved
Reporting • Avoid inconsistent reporting in state, federal filings.
• Conform accounting to accepted practices and
know what critics will use to create trouble.
• Evaluate the benefits associated with knowing the
value of tax-exempt status.
• Know the benefits and risks of making the “quid
pro quo” case for tax-exempt status.
• Be prepared to respond to union, media and tax
authorities’ skewed exemption valuations.
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5. Questions
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Locke Lord Business Litigation, Health
Law, and Compliance Practices
•
The development of effective corporate compliance and
financial assistance programs are critical to a strategic
plans to reduce challenges to tax-exempt status. The
attorneys at LLB&L are qualified to offer insights to the tax
and other regulatory enforcement authorities’ views on
exemption standards and assist organizations in structuring
charity care and related operational activities to meet
evolving legal and compliance standards.
•
The firm also aggressively defends tax-exempt
organizations in response to governmental enforcement
challenges and related private actions around the country.
•
Please contact the Locke Lord Bissell & Liddell attorney
with whom you work, or call Patrick S. Coffey at
312.443.1802 (pcoffey@lockelord.com).
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