Health Care Reform Could Be Taxing for Hospitals

While the new health reform law maintains the tax code for hospitals, provisions expanding health insurance could reduce hospitals’ charity care costs and put their tax-exempt statuses in jeopardy.

Federal and local governments classify nearly 3,000 U.S. hospitals as not-for-profit, a status that generally allows such facilities to receive tax exemptions in exchange for providing “community benefit,” such as no-cost care.

Background on California Tax Exemptions

Roughly 220 not-for-profit hospitals in California benefit from tax exemptions that were worth $242 million in uncollected annual income and property tax, according to a December 2007 report from the California State Auditor.

To earn not-for-profit status in California, hospitals must submit an annual community benefit plan. They also must have profit margins of less than 10% or be able to prove that profits exceeding a 10% margin “are for specific purposes,” such as debt repayment, facility investments or reserves.

Although the profit margin threshold is unique to California, the state, like many others and the Internal Revenue Service, has not defined “community benefit.”

This uncertainty, and some hospitals’ high profits, prompted challenges to California hospitals’ taxable status in recent years. Assembly member Johan Klehs (D-Hayward) in 2005 proposed automatically classifying not-for-profit hospitals with operating margins over 10% as for-profit, which would have affected at least 15 not-for-profit hospitals.

Also that year, San Francisco officials separately pursued California Pacific Medical Center for back taxes, saying the hospital’s high operating margin — which ranged from 10.45% to 17% between 2001 and 2003 — may have disqualified the hospital from receiving the state’s not-for-profit property-tax exemption.

In 2008, Betty Yee, a key official on California’s Board of Equalization, proposed that hospitals spend at least 5% of their revenue on no-cost care to secure not-for-profit status.

Reform Brings New Focus

While these efforts and others largely failed in California, there is new attention on hospitals’ tax exemptions because of health reform, a key court case and a shifting economic climate.

As part of Congress’ health reform package, legislators weighed a “bright line” test: Hospitals would have to earn tax-exempt status by proving that a certain percentage of revenue was spent on community benefit.

This provision ultimately was dropped after hospital representatives won a broader deal, although several measures that made it into the law — such as a requirement that hospitals regularly assess the community’s health needs — will add scrutiny to hospitals’ not-for-profit status.

Moreover, as millions of uninsured residents are slated to enroll in public insurance programs — like Medi-Cal, California’s Medicaid program — beginning in 2014, hospitals’ charity care costs likely will be lower, eliminating a key argument for hospitals’ tax exemptions.

Regional Events Could Have Ripple Effect

While the effect of health reform on tax exemptions might not be known for years, a handful of regional events could have a more immediate impact. The Illinois Supreme Court last month ruled that state officials were justified in stripping Provena Covenant Medical Center of its property-tax exemption in 2003 because it provided too-little community benefit. Officials in Illinois and other states say they will use the case as precedent when determining hospitals’ tax exemptions.

Boston officials, meanwhile, are proposing that the city’s hospitals and other historically tax-exempt organizations increase their voluntary “payments in lieu of taxes,” or PILOTs, given the city’s budget woes. Pending the proposal’s outcome, other cash-strapped municipalities say they may institute or grow their own PILOT programs.

Not-for-profit hospitals in California may soon have a specific challenge from the state’s Board of Equalization, which in 2009 surveyed the facilities to see if they were earning their tax exemptions. Led by Yee, the board — which has authority to determine whether specific entities deserve not-for-profit tax status — is expected to release its report this spring.

News From the States

  • The health insurance system in New York state “has been a working laboratory” for the requirement that insurers offer coverage to people regardless of any pre-existing conditions in the new health reform law, the New York Times reports. New York in 1993 became one of the first states to require that insurers provide individual or small group coverage to anyone, regardless of pre-existing conditions, and charge the same rates for the same benefits, without regard to the health or age of individuals. However, premiums have increased and healthy residents are dropping out of the plans. As a result, the insurance pool is shrinking to include only those with costly health issues, which in turn pushes premiums higher (Hartocollis, New York Times, 4/17).
  • Jon Kingsdale, the founding executive director of the Massachusetts Health Connector — the agency “at the heart” of the state’s 2006 implementation of health reform — announced his resignation on Thursday and hinted that he hopes to play a role in implementing the nation’s new health reform law, the Washington Post reports. Observers largely credit Kingsdale with enforcing the state’s insurance mandate and creating the Connector, the Massachusetts exchange allowing residents to purchase insurance. National reform law also contains an individual mandate and calls for the creation of similar insurance exchanges (MacGillis, Washington Post, 4/16).
  • Mississippi Gov. Haley Barbour (R) said the state could join a multistate lawsuit challenging the constitutionality of health reform by the middle of May, the AP/Miami Herald reports. Barbour had asked state Attorney General Jim Hood (D) to join the suit but Hood declined and told Barbour he could hire a private attorney to join the legal challenge. Barbour last week sent Hood a letter stating that attorney Michael Wallace will represent the state in the suit at no public expense (AP/Miami Herald, 4/13).

On the Hill

  • Congressional Budget Office Director Douglas Elmendorf on April 12 said in a speech that the new health reform law contains at least $50 billion in discretionary spending between 2010 and 2019 that Congress might never spend, CQ HealthBeat reports. “CBO did not complete estimates of these amounts” because Congress may opt never to use them, Elmendorf said. The discretionary funds could be allocated for programs to train new health employees, fund school-based health clinics, improve treatment for post-partum depression, develop trauma care centers and increase the supply of public health workers in the U.S. (Reichard, CQ HealthBeat, 4/12).

Reactions to Reform

  • Members of the so-called tea party movement released a new “Contract From America,” the New York Times reports. The seventh of 10 positions in the contract says candidates should agree to “defund, repeal and replace government-run health care” (Becker, New York Times, 4/14).
  • Health Care for America Now, a pro-health reform coalition formed in summer 2008, says it will stay in Washington, D.C., to ensure that the health law is implemented effectively, Politico reports. Specifically, the group plans to help shape reform’s political narrative ahead of November’s midterm elections, which they say could have “a significant impact” on the law’s future. However, Politico reports that the group will downsize by 50% and focus its efforts on advising and coordinating initiatives (Frates, Politico, 4/13).
  • Half of U.S. residents oppose the new health reform law, the highest level of opposition all year, a new Associated Press/GfK poll shows, the AP/Washington Times reports (Sidoti, AP/Washington Times, 4/15). Thirty-nine percent of respondents support the law while 10% are neutral. Politically, 68% of Democrats, 40% of independents and 9% of Republicans support the law, while 85% of Republicans, 44% of independents and 18% of Democrats oppose it. Fifty-two percent of respondents disapprove of how President Obama handled health care, compared with 46% in March, the poll found (Alonso-Zaldivar, “Nightly Business Report,” AP/PBS, 4/15).
  • House Minority Leader John Boehner (R-Ohio) last week said that repealing the health law would be Republicans’ “number one priority” should they regain control of Congress in November, The Hill‘s “Blog Briefing Room” reports. According to Boehner, “voters’ ire” over the reform law has fueled GOP candidates’ rise in poll rankings (O’Brien, “Blog Briefing Room,” The Hill, 4/12).
  • Senate Finance Committee Chair Max Baucus (D-Mont.) has begun advertising in Montana about the benefits of the health reform law, Politico‘s “Ben Smith” reports. “Taking on a tough issue like health care may not have been the politically safe thing to do, but it’s the right thing to do for Montana,” the ad states. Baucus is up for re-election in 2014 (Smith, “Ben Smith,” Politico, 4/14).

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