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Battle over tax-exempt status is a call to arms for hospitals

March 17th, 2016

by Carmela Coyle

As local and state governments across the country struggle to balance their budgets, some have begun turning to alternative revenue sources to plug the gaps--including hospitals, the vast majority of which are not-for-profit.

The Mercatus Center at George Mason University, which tracks the fiscal health of the states, ranks New Jersey and Illinois at 49th and 50th, respectively. Unsurprisingly, these states are leading the charge to redefine the longstanding not-for-profit status of hospitals in a naked cash grab that, if successful, will lead to potentially dangerous situations for residents of those states.

The situation in New Jersey is complex--with multiple municipalities jumping on the bandwagon to take revenue from hospitals since a landmark tax court ruling last year found that Morristown Medical Center operated largely as a for-profit hospital. That case ended in a settlement, and has since opened the door not only to “me-too” municipalities, but also a state bill that would require all not-for-profit hospitals in New Jersey to pay fees in lieu of taxes ($2.50 per day per hospital bed and $250 per day for each satellite emergency care facility).

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In Illinois, a recent appeals court ruling dealt another setback to not-for-profit hospitals, declaring that a 2012 state law defining tax exemptions for hospitals was unconstitutional. This means hospitals must now abide by an older, more confusing law that bases exemptions on the value of charitable contributions.

Similar battles are taking place in Ohio and Pennsylvania. This year, in Maryland, hospitals are fighting a dangerous proposal in our state senate that would require hospitals to explicitly include in their annual community benefits reports the value of all their tax exemptions. A side-by-side comparison of the value of community benefits and the value of tax exemptions, without a deeper examination of hospitals' budgets and operations, as well as the needs of their communities, serves only to invite challenges to hospitals’ tax-exempt status.

While the proponents of this legislation have stated during testimony at a committee hearing that their goal is simply to promote transparency, it's clear that they have a more specific purpose: to foster a “conversation” about the value of the tax-exempt status of Maryland's hospitals.

The Affordable Care Act imposed additional requirements that hospitals must meet to keep their tax-exempt status:

  • Conduct a community health needs assessment at least once every three years
  • Adopt a written financial assistance and emergency medical care policy conforming to statutory criteria
  • Do not charge patients eligible for financial assistance more than “amounts generally billed” to insured patients
  • Do not begin “extraordinary collection actions” before making “reasonable efforts” to determine if a patient is eligible for financial assistance

While the individual efforts of various states and the requirements in the ACA are more than enough for hospitals to address, there’s something bigger happening. These recent movements appear to be the culmination of a significant and worrisome erosion of the trusted relationships hospitals have enjoyed for so many decades with their communities.

Consider New Jersey Tax Court Judge Vito Bianco’s commentary in his 88-page decision last year:

“Non-profit hospitals have changed significantly, from their early origins as charitable alms houses providing free basic medical treatment to the infirm poor. Today they are sophisticated centers of medical care, and in some cases, education, providing a litany of medical services regardless of a patient’s ability to pay … [The hospital created] labyrinthine corporate structures, intertwined with both non-profit and for-profit subsidiaries and unaffiliated corporate entities.”

There remain many battles to be fought over the tax-exempt nature of hospitals, but fixing the root of this issue won’t take place in a courtroom or legislative hearing room. It will take place in each of the communities that hospitals are privileged to serve. In 2006, the American Hospital Association released the 28-page Trust Counts Now report, which called for hospitals to “reaffirm their rightful place as valued and vital community resources that merit broad public support.”

With hospitals’ very nature under assault due to increased governmental budget pressures, that call is as relevant now as it was a decade ago. A website from AHA, Community Connections, offers resources to help with that effort, but it is at the hospital level, where nurses, doctors, trustees and others, will need to begin to rebuild and reaffirm the relationships with their communities, so that hospitals once again are perceived not as a drain on county coffers, but as the invaluable resources they are.

Carmela Coyle is president and CEO of the Maryland Hospital Association

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