Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, March 15, 1992 TAG: 9203150255
SECTION: HORIZON PAGE: F-1 EDITION: METRO
SOURCE: CHARLES HITE MEDICAL WRITER
DATELINE: LENGTH: Long
"When local governments get in a bind, they start looking for things to tax," says Josephine Marshall, a member of the governing body of the small Southside Virginia town.
Council members didn't look far to discover what they thought would be their financial salvation. Their gazes settled on Halifax-South Boston Community Hospital.
The 173-bed facility was in the middle of an ambitious renovation program and it made nearly $1.5 million in profits. A business license tax on the hospital - allowable under Virginia law - would generate more than $100,000 for the 1991 budget.
But during the booming economies of the 1970s and 1980s, few localities took advantage of their power to tax a non-profit, charitable institution.
"Before last year, we didn't have to look at these things," Roanoke City Manager Bob Herbert says. "In the past, we were cutting taxes. You don't look for new sources of revenue when you're cutting taxes."
Local governments won't have a chance to tax non-profit hospitals again until July 1993. The Virginia hospital lobby - alarmed by the taxing mentality seen in South Boston and other cities - helped push through a bill that put a two-year moratorium on a local business tax.
But once the moratorium expires, there is evidence that cities won't be hesitant to impose such a tax:
Local governments across the nation are taxing or imposing fees on non-profit hospitals. Hospitals in at least 24 states face some sort of challenge of their tax-exempt status.
The Internal Revenue Service - concerned about the explosion of for-profit subsidiaries at non-profit hospitals - is conducting special audits of hospitals' unrelated business activities.
A federal watchdog committee concluded in 1990 that some non-profit hospitals do not provide services to the poor equal to the value of their tax exemption. It urged Congress to revise criteria for tax-exemption, and a bill to do just that is being considered.
In Virginia the taxation of hospitals became a dominant issue in the General Assembly after Gov. Douglas Wilder proposed a $30 million annual tax on hospital and nursing-home profits as a way to balance the Medicaid budget.
Through a steady drumbeat of news releases, Wilder painted the state's 100 acute-care hospitals as greedy, well-heeled and highly profitable. He aimed some of his sharpest barbs at the 85 non-profit facilities.
In releasing a list of salaries of top hospital executives, Wilder referred to the "country club memberships" that are often part of compensation packages for administrators at non-profit facilities.
Another news release provided its own headline: "Governor Wilder Amazed By How Little Charity Care Virginia's Hospitals Provide." The release said the "low level" of indigent care supported Wilder's call for a General Assembly study of non-profit hospitals and their tax exempt status.
While the hospital industry was able to lobby the support of enough legislators to kill Wilder's plan, it continues to bristle at Wilder's rhetoric. And industry officials concede the governor has tapped into a public-image problem they know must be fixed.
"We've been our own worst enemies in not making clear what our underlying mission is," says Laurens Sartoris, president of the Virginia Hospital Association.
"What a hospital is, in the end, is a community asset, a resource which has no purpose but to benefit the community," Sartoris adds. "What you have with a non-profit hospital is a total reinvestment of its profit margin into its programs and services."
Consumer surveys confirm most of the public has major misconceptions about hospitals.
"The picture of hospitals in consumers minds is not pretty," says Joe Inguanzo, president of the Nebraska research firm that conducted a survey for Hospitals magazine.
"People see hospitals as corporations that make money," Inguanzo adds. "They think the government takes care of the indigent patients. So they say, yes, tax them."
The image of hospitals as big, impersonal moneymaking machines developed during the 1980s, says Lou Rossiter, a professor of health administration at Virginia Commonwealth University.
"We don't have hospitals any more; we have systems. And the systems have brand names. The hospitals gave up something in the process," Rossiter says.
"Hospitals have taken off their leisure suits and put on business suits because it has become a big business," acknowledges Chris Lumsden, administrator of the South Boston-Halifax hospital. "It's necessary to the survival of the institution."
A new Medicare payment system begun in the early 1980s forced hospitals to compete as they never had before. The old Medicare system simply reimbursed hospital charges. The new system set fixed prices for treating patients.
Also during the decade, hospital officials say, fees for patients covered by Medicaid - the federal and state health program for the poor - fell far behind the actual costs of treatment. At the same time, health insurers and businesses began demanding price discounts from hospitals in exchange for sending them patients.
Not-for-profit hospitals managed to compete well in the new environment. Under Lumsden's direction, South Boston-Halifax Community Hospital had more than $1 million in excess revenues over expenses. City officials saw no reason the hospital couldn't return some of that to the community by paying a business-license tax.
Lumsden and other hospital officials met several times with a special committee of City Council to try to derail the tax proposal.
They said it would be unfair to single out the hospital while other non-profit community organizations went untaxed. And they argued that the profits of the hospital benefited the entire community.
"Every nickel we make is plowed back into the institution to help fulfill our mission in a better way," Lumsden says. "Every dollar we make is the community's money. There are no stockholders. The administrators don't get a portion of the profit."
Just before the 1991 city budget was passed, a compromise was reached. The hospital agreed to make a one-time donation of $30,000 in recognition of police and fire services it received from the city.
A few months later, the General Assembly put a two-year moratorium on any local business-license taxes on non-profit hospitals. The moratorium also applied to colleges and universities.
The action came too late for George Dawson, president of Centra Health, the holding company for the two non-profit hospitals in Lynchburg. The City Council there refused to compromise and imposed a business-license tax on the two institutions, bringing in about $450,000 a year.
Dawson also argued it was unfair to single out the hospitals and not other non-profit organizations. He told city officials the tax might threaten the hospitals' ability to offer certain services to indigent patients - services that for-profit institutions would never consider because they were money losers.
But in the end, Lynchburg City Council members decided they couldn't live without the new revenues the tax would bring.
"It was the least distasteful of a number of bad alternatives," Dawson says, noting that council members didn't want to increase other broad-based taxes. "In Virginia and especially Lynchburg, there's been a real financial crunch the last few years."
To combat additional attempts by the state or local governments to tax non-profit hospitals, the Virginia Hospital Association is gearing up for a spring campaign to educate the public about benefits that non-profits give communities.
Hospital association officials acknowledge they may have to meet new standards in order to receive a tax exemption.
"I think we should earn our charitable tax status," says William Jacobs, president of Mary Washington Hospital in Fredericksburg and chairman of the hospital association board. "Is there a dollar amount of contribution to the community a hospital must meet? I don't know. It's a fair question."
Currently, hospitals must meet a vaguely defined "community benefit standard" in order to receive tax-exempt status from the Internal Revenue Service. Hospitals can meet the standard if they operate a full-time emergency room open to all people, regardless of ability to pay, and if they provide hospital care for every person in the community able to pay.
But state courts and legislatures have come up with their own guidelines. A 1985 Utah Supreme Court decision cited free care as one factor hospitals must meet to qualify for tax-exemptions.
Since then, the Utah tax commission has proposed six standards for a hospital to earn tax-exempt status. One of those requires that a hospital's "total gift to the community" exceed its property-tax liability. This gift may include indigent care, community education and service, shortfalls under Medicare and Medicaid, donations of time and donations of money.
The Pennsylvania Supreme Court has identified five criteria for tax-exempt hospitals. Those include donating "a substantial portion of its services," giving benefits to "a substantial and indefinite class of persons who are legitimate objects of charity," and relieving government "of some of its burden."
Some non-profit hospitals in the state met the criteria, others did not. Still others have settled property-tax disputes with local governments by agreeing to make payments in lieu of property taxes.
"A big issue is who gets the benefits from the hospital and are they worth the value of the tax exemption," says Jan Clement, an assistant professor of health administration at Virginia Commonwealth University.
Clement is studying ways to measure hospital community contributions other than charity care. These include medical research and education, consumer education and screening programs.
Taxing non-profit hospitals could set a precedent for taxing other community institutions that have traditionally been exempt, says Susan Ward, director of Legal and Regulatory Affairs of the state hospital association.
"It seems logical that if not-for-profit hospitals can be taxed, then the Boy Scouts and Girl Scouts, YMCA, YWCA, senior citizen groups, youth centers, Boys' Clubs and other such organizations can also be taxed and must use Currently, hospitals must meet a vaguely defined "community benefit standard" in order to receive tax-exempt status from the Internal Revenue Service. Hospitals can meet the standard if they operate a full-time emergency room open to all people, regardless of ability to pay, and if they provide hospital care for every person in the community able to pay. funds which would otherwise go into services in order to pay these taxes," Ward says.
The fate of tax-exempt status for non-profit hospitals in Virginia could be determined by one of three General Assembly committees charged with looking at the issue.
The Commission on Health Care for All Virginians, at the request of a bill pushed by Wilder, has been directed to find out if the value of services provided by non-profits is equal to the value of their tax-exemption.
The Virginia Health Services Cost Review Council, an agency that reviews hospital budgets, will examine whether the practice of many non-profit hospitals to establish for-profit subsidiary companies is unfair to commercial health care companies.
A joint subcommittee established after the two-year moratorium on the business license tax was imposed will recommend whether new guidelines should be considered in granting tax-exempt status.
by CNB