On Wednesday, March 20, 2013, armed with a publicly circulated legal opinion and a complaint filed in the Court of Common Pleas of Allegheny County, the City of Pittsburgh initiated its challenge to the payroll tax exemption claimed by the University of Pittsburgh Medical Center (“UPMC”), which claims the exemption on the basis of its status as an “institution of purely public charity,” or “IPPC,” under Pennsylvania law. At stake for the parties are millions of dollars of payroll taxes that Pittsburgh argues UPMC has improperly failed to pay because UPMC does not actually qualify as an IPPC. The case presents potential precedential or, at least, influential case law characterizing many of the common features of health systems today as non-charitable.

The legal opinion’s description of UPMC’s alleged offenses is at times colorful, such as its reporting of a “rumor” that UPMC’s Italian operations were established as a “pleasant post-retirement assignment” for its founder. At other times, the opinion appears to rush to shocking conclusions, such as when it accuses UPMC of a “well-documented” record of closing facilities as part of a “patient-dumping” practice while admitting in a footnote that “we [i.e., the law firm] are still learning the details.”

The laundry list of UPMC’s alleged offenses enumerated in the legal opinion (although not necessarily in the complaint) is long, including:

  • In the last two fiscal years, generating excess revenues totaling almost $1 billion and amassing reserves in excess of $3 billion.
  • Expanding business operations that include investment partnerships and more than 50 taxable corporations.
  • Not offering charitable services through many of its 400 doctors’ offices and outpatient sites.
  • Closing facilities in locations with relatively high numbers of Medicare-eligible, Medicaid-eligible or uninsured patients and opening or expanding facilities where there are proportionately more privately-insured patients.
  • Supporting its insurance business through capital contributions.
  • Engaging in business or financial activities abroad to provide “junkets for favored executives and staff.”
  • Paying more than 20 officers, directors and key employees compensation in excess of $1 million, with the CEO receiving significantly more, as well as a lavish office space, private chef and dining room, private chauffeur and private jet.
  • Verifying patients’ insurance coverage before providing medical services.
  • Turning over unpaid accounts to a collection agency or a law firm for further collections and legal action against its patients.
  • Limiting its charity care to emergency services, services for life threatening conditions, and medically necessary services.
  • Further limiting “full” charity care to patients whose annual income is less than two times the poverty level.
  • Donating only a small fraction (alleged to range somewhere between 3.9% to less than 1%) of its net patient revenue to charity care.

The above list is, of course, presented from the point of view of UPMC’s legal adversaries and its bias and accuracy have not yet been challenged by a response from UPMC. Nevertheless, the legal opinion and the lawsuit raise a significant and serious question: Have health systems developed such a level of diversity and sophistication in their business operations that they can no longer legitimately claim that they are charitable organizations deserving of tax-exempt status?

After all, keeping in mind the biased origin of the above list and perhaps with the exception of the personal chef, are other non-profit health systems so different from UPMC? They commonly have for-profit subsidiaries. Increasingly they are forming and capitalizing their own insurance companies to serve the population within their service area. With decreasing revenues from federal and state programs, such as Medicare and Medicaid, some health systems, if not many, are taking a closer look at unpaid accounts and pursuing collections more vigorously than in the past. Other than in the case of an emergency or at a specifically designed free clinic, perhaps no health system provides care prior to determining a person’s insurance coverage or qualification for reduced pricing or free care. Many health systems have also begun expanding operations abroad. Do these activities suggest such a pecuniary motive as to render health systems non-charitable, or is Pittsburgh and its legal counsel misunderstanding and oversimplifying the nature of these activities?

Propelled by federal health care reform under the Patient Protection and Affordable Care Act , we live in an era of “accountable care.” We expect our health systems to do more than treat people when they become sick. We expect them to be accountable for a patient’s health by coordinating and managing all aspects of the patient’s care to improve the patient’s health and keep the patient healthy. Given this expectation, it may be time to expand our concept of what constitutes charitable care beyond the narrow view expressed in the legal opinion to include direct patient care provided at reduced or no cost as well as those business operations that support or enable health systems to provide not only free or affordable care but also accountable care.

However, health systems cannot manage the entire spectrum of a patient’s care without financial and clinical integration with a sufficient number of types of health care providers. Therefore, health systems are acquiring other providers that impact the patients served by the health systems, including physician practices that are not themselves nonprofit entities. Through this control, however, a health system can improve the quality of health care by dictating industry-best standards and protocols with which its physicians and other health care providers must comply.

Likewise, the ownership of one or more health insurance companies offers a health system the opportunity to design benefit structures that are in line with the health system’s overall strategy of improving and maintaining patient health. These benefit structures may include an emphasis on wellness programs (e.g., gym memberships, smoking cessation programs and nurse hotlines) and provider payment arrangements that emphasize quality incentives and cost maintenance.

This trend toward accountable care comes with a high price tag. Acquiring hospitals, physician practices and other providers is expensive. Even more so, forming a health insurer requires significant capital to meet a state’s capital and surplus, net worth and risk-based capital requirements. If a health system is successful, any of these investments may provide a stream of revenue; however, even more so, they are valuable tools in caring for and managing the health of patients.

When the Pennsylvania court reviews the status of UPMC’s tax-exemption under Pennsylvania law, it will be analyzing UPMC under the criteria defining an IPPC, criteria which were developed nearly thirty years ago in 1985. Even though the Pennsylvania Supreme Court reaffirmed these criteria just last year, that case involved a religious summer camp, not a health system. Given that Pittsburgh’s lawsuit is in its early stages with the only arguments having been presented by Pittsburgh and its legal counsel, it will be interesting to watch as this case develops.

Whether UPMC has crossed a line that justifies the loss of its state tax-exempt status is a decision that the Pennsylvania court has been asked to make. Hopefully, the court will not make its decision based on a view of UPMC’s operations through the lenses of 1985 but on a full understanding of this era of accountable care. Otherwise, a case like this one could have problematic repercussions, which undermine efforts to support accountable care, on subsequent decisions around the country not only under state law but also potentially federal law.