The subject of countless congressional hearings, IRS scrutiny, media reports and class action lawsuits, tax-exempt hospitals remain under the government microscope. The states, IRS and Congress have all been busy assessing whether benefits received by communities from exempt hospitals justify the tax breaks they get from government at all levels. Some states, including Texas, New York and California, require minimum levels of charity care, discounted care and/or reporting of charitable care by tax-exempt hospitals, while others have barred hospitals from using aggressive billing practices to obtain payment. Many states, including the state of Illinois in the highly publicized Provena case, also have sought to revoke a hospital's ad valorem tax exemption for failing to provide sufficient levels of charitable care. As state governments grapple with tight budgets and a growing uninsured population, it is likely that more states will seek to impose mandatory charity care obligations on tax-exempt hospitals.
The Ohio Charity Care Initiatives
Ohio Attorney General Marc Dann has proposed two new policy initiatives concerning "charity care" that would significantly impact Ohio's tax-exempt healthcare sector. The attorney general apparently intends to quantify the amount of healthcare services that tax-exempt hospitals provide to poor and uninsured patients and then measure it against benchmarks his office establishes. He also apparently intends to require tax-exempt hospitals to provide healthcare services to the poor and uninsured at the same cost they provide to the insured.
State Representative Jim Raussen has proposed far less stringent legislation (H.B. 456) in the Ohio General Assembly. His proposal merely requires tax-exempt hospitals with Medicaid inpatient utilization rates of less than 35% for their annual accounting period to report (1) the charity care costs incurred during that annual accounting period; and (2) the tax savings for the calendar year in which that period ends. Tax-exempt hospitals must post their reports throughout the year on the Internet. The state auditor apparently will monitor compliance with the posting requirement and inform the state tax commissioner and attorney general about non-compliant hospitals.
Although the attorney general has pledged to work cooperatively with the Ohio Hospital Association and tax-exempt hospitals to develop his proposals, he likely has several tools at his disposal to force compliance. The OHA has formed a working group to address this issue.
The attorney general has standing to bring an action to revoke a hospital's tax-exempt status and its corporate charter pursuant to his broad common law powers to act in the public interest. He likely would claim that when tax-exempt hospitals fail to provide sufficient levels of care to the poor or uninsured, or charge such patients more than they would charge insured patients, they are not fulfilling their charitable purpose. Consequently, they should lose their tax-exempt status or, in the most egregious cases, their corporate charter. The mere threat of litigation and the corresponding public pressure the attorney general would generate may become powerful incentives for tax-exempt hospitals to voluntarily comply with his proposals.
The Beachwood, Ohio, school district already has challenged the tax-exempt status of one Cleveland Clinic office building located in that municipality. The district contends that because little to no charity care occurs at the Clinic's building, the property should not be tax-exempt. The district, of course, stands to benefit financially if the building becomes a taxable property. The case, which focuses only on one property and not the overall level and cost of charity care the Clinic provides, currently is pending before the Board of Tax Appeals.
The attorney general also may attempt to use existing rule-making authority to regulate the amount and cost of charity care tax-exempt hospitals provide to the poor and uninsured. This would require an expansive reading of the attorney general's regulatory power over charitable trusts to include tax-exempt healthcare entities. His current regulatory powers likely do not cover tax-exempt healthcare entities that are not operated by charitable trusts.
In Ohio, the charity care policy initiative the attorney general has announced warrants a comprehensive response from the tax-exempt healthcare sector. It should be prepared to engage the attorney general's office immediately with its own set of charity care proposals. If a negotiated resolution fails and the attorney general attempts to compel compliance with his charity care policy proposals, litigation may be inevitable.
Nationally, exempt hospitals should review their organizational and governance structures, as well as policies and procedures, to ensure they can reasonably comply with the new and evolving tax-exempt proposals and standards. For more information, please see the January 10, 2008, issue of the Health Law Update and the July 26, 2007, Executive Alert to Clients. Baker Hostetler's Healthcare Industry Team will be collaborating with the firm's Legislative and Tax-Exempt Teams to assure clients are able to make these critical evaluations of their infrastructures and are well represented as these matters are considered by the states, Congress and the IRS.