National Congress on the Un and Underinsured Roundtable on Law and Regulation and Serving the...

LOS ANGELES NEW ORLEANS NEW YORK SACRAMENTO WASHINGTON

LOCKE LORD BISSELL & LIDDELL LLP

ATLANTA AUSTIN CHICAGO DALLAS HOUSTON LONDON

National Congress on the Un and Underinsured

Roundtable on Law and Regulation and Serving the Uninsured

December 10, 2007

Patrick S. Coffey


ATLANTA AUSTIN CHICAGO DALLAS HOUSTON LONDON LOS ANGELES NEW ORLEANS NEW YORK SACRAMENTO WASHINGTON


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Tax Exemption Challenges Arising Out of The Uninsured and Underinsured Patient Crisis



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Hospital Exemption Controversies Continue Across the U.S. • Healthcare over 16% of GDP and uninsured patient population

grows to estimated 46 million.

• Exemptions for nonprofit hospitals and related facilities are under increasing scrutiny and attack.

• IRS inquiries and compliance initiatives as well as the new 990 focus on what hospitals do to merit tax exemption.

• Attorneys General continue investigating billing, pricing and collection practices involving uninsured and other patients.

• NFP litigation continues with class action settlements and rulings recognizing consumer fraud theories.

• Media continues negative coverage of nonprofit and exempt health sector with continuing focus on charity.



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State Level Hospital Exemption Controversy• Pressure grows for justification of tax-exempt status as

uninsured problem and healthcare costs increase.

• Billing, pricing and collection practices continue to drive criticism.

• Community benefit confused with state exemption standards.

• State tax authorities seek new and better defined requirements for “modern hospitals.”

• Challenges increasingly based on unprincipled demands with resulting erosion of charitable exemptions.

• The Illinois experience continues to spark controversy and concerns that it will spread.



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Attorneys General Investigations Relating to Uninsured Patients• Illinois AG investigating pricing, collection and “charity delivery

services” by over half of the state’s hospitals based on claim that hospitals are not giving enough charity care and unfairly treating patients.

• Minnesota AG threatened enforcement action against all hospitals and achieved industry settlements proscribing discounting and charity practices.

• Wisconsin enforcement based on unfair pricing resulted in deals to end “overcharging of non-insured health care consumers” as well as billing and collections guidelines.

• Kansas, Montana and other states investigating hospital and system billing and collection practices deemed inconsistent with tax-exempt organizations.



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Continuing AG Scrutiny and Consumer Action• AGs will continue to pursue consumer related issues, including

deceptive or unfair business practice claims involving uninsured.

• Discounts, pricing of goods and services, and collections will continue to be triggers for scrutiny.

• The manner of charity delivery, quality of community benefit reporting, and justification of exempt status will be key to reducing exposure.

• Debate will intensify over hospital tax-exempt status in cases where uninsured and other patient related enforcement is pursued.

• Expect scrutiny of joint ventures, for-profit subsidiaries, executive compensation, vendor contracts and other nonprofit hospital business conduct.

• IL, MN, NY and other states will seek further charity, billing and collections guidelines and laws.



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The Not-for-Profit Hospital Litigation

• Nearly every federal NFP lawsuit dismissed but state cases remain.

• Uninsured patient class certified in Missouri (Quinn et al. v. BJC Healthcare) in early 2007.

• Settlements in cases alleging overcharging of uninsured and unfair collection practices in California (Sutter Health Uninsured Pricing cases and Dancer v. Catholic Healthcare West).

• Class settlements in Oregon (Legacy Health System and Providence Health System).

• Pricing to uninsured, collections and charitable exempt status continue to be noted in state law claims.



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Billing to Uninsured Drives Attacks

• Healthcare payment system continues to spawn claims of overcharging to uninsured and other needy patients.

• May 2007 Health Affair study finds uninsured and self-pay patients were charged on average:– 2.5 times more for hospital services than insurers.– 3 times more than Medicare.

• Chargemaster pricing and billing to uninsured and self-pay continues to generate consumer claims and controversy over hospital conduct and satisfaction of exemption standards.

• AGs continue consumer investigations based on “unfair” pricing.

• NFP class settlements require discounting to all uninsured patients and end of billing full hospital rates to uninsured patients.



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New Form 990 Targets Hospitals

• June 14 release called “the biggest thing the tax-exempt division has done in the last quarter century.”

• IRS effort to “enhance transparency, promote compliance and minimize burden”

• Hits hospitals and education hardest and calls for more reporting of how much hospitals spend on charity care, scope of charity policy and overall community benefit.

• Focus still on governance, compensation, loans to insiders but more on major transactions, billing, collections, management agreements, joint ventures, for-profit subsidiaries.

• Continues trend of expanding information being reported and requiring greater disclosure by exempt hospitals.



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IRS Continues to Address Community Benefit, Executive Compensation and Reporting Practices

• IRS issued long-awaited report on executive compensation and benefits in March 2007.

• Compliance check confirms “significant reporting problems” with over $21 million proposed excise tax assessments flowing out of 25 examinations.

• Reviews to continue with reports on compensation practices and community benefits due in later 2007, 2008.

• Form 990 requirements clarified in April 2007 FAQs addressing board structure, reporting of compensation to former key directors and officers, and relationships between officers, directors and other insiders.



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Select Exemption Controversies Around the Country



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Union Seeks Revocation of Sharp Hospitals Exemption• United Nurses Association of California filed complaint in

May 2007 alleging Sharp hospitals provide insufficient charity.

• Complaint alleges Sharp facilities provide less than one percent of operating expenses to charity care.

• Filed amidst contentious contact negotiations but Union claims to act out of “sense of civic responsibility.”

• Sharp claims Union “mischaracterizes” charity care and fails to consider patient education, transport, research and Medi-Cal.



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Indiana Medical Facility Denied Charitable Real Estate Tax Exemption• Methodist Medical Plaza of Carmel leased land to Clarian

Health Partners, a nonprofit provider with charity and medical education program.

• May 2004 application for charitable, educational and hospital purposes exemption was denied at local level and appealed.

• Tax Court affirmed denial in May 2007, holding that taxpayer had failed to demonstrate sufficient charitable use.

• “HCPI did not present any evidence showing that the MMP was used more than 50% of the time (i.e., predominantly) to educate medical students or to provide charitable health care.”



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Cleveland Clinic Facility Denied Exemption• Ohio tax authorities continue to actively challenge the tax-

exempt status of nonprofit healthcare providers.

• Ohio rejected charitable tax exemption for Cleveland Clinic outpatient clinic and surgery center because less than 2% “charitable care provided to indigent persons ofr those who cannot afford full cost of care.”

• Cases reflect qualification for exemption being defined by the ratio of charity to all hospital facility services (exemption allowed if charity exceeds 5% but denied if falls below 2%).



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Wexford Restored to Charitable Exempt Status• Wexford Medical Group denied tax exemption based solely

on the value of the charity care given in the tax year at issue.

• May 2006, Michigan Supreme Court reversed ruling that charitable exempt status is not decided by analysis of the organization’s charitable purpose - not some threshold level of charity.

• May 2007, appellate court overturns denial of exemption to McLaren Regional Medical Center and affiliated practice group on basis of ruling in Wexford.



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Washington Tax Board Restores Exemption for Integrated Imaging Center• Legacy Salmon Creek Hospital was denied exemption for

imaging center adjacent to hospital.

• Denial based on fact that facility was not part of the “hospital unit” or sufficiently integrated.

• August 2007 ruling restored exemption finding that facility was integrated and met exemption requirements for hospitals.

• Ruling being appealed by WDOR.



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Hunterdon Medical Center Facilities Denied Tax Exemption• Nonprofit hospital’s physical therapy, pediatric and

wellness center deemed ineligible for property tax exemption in March 2007.

• New Jersey appellate court ruled that exemption was not proper given lack of integration between hospital and satellite facilities.

• New Jersey law requires “hospital purposes” use and function to extend exemption to other facilities.



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Carlton Cove Retirement Facilities Deemed Non-Exempt• Alabama appellate court held that nonprofit retirement

facilities were not exempt from property tax solely because of 501(c)(3) status.

• Retirement facility held to state law standard of “use[] exclusively….for purposes purely charitable.”

• Record failed to support charitable use requirement given small amount of charity.

• Case cites recent trend of denials involving senior living facilities serving the “financially well-off.”

• Increasing use of PILOTs to defer or avoid challenges in this setting.



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Illinois Exemption Controversies



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Community Health Care Denied Charitable Exemption• Illinois appellate court ruled CHC (a FQHC) is insufficiently

charitable to warrant property tax exemption.

• Free or discounted care given to 27% of patients deemed inadequate under state’s “exclusively” charitable exemption standard.

• Supreme Court denied leave to appeal in March 2007.

• Illinois authorities now ignore Supreme Court precedent and use this case to argue hospitals must provide more than 27% of net revenue to charity.



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Carle Foundation Hospital Denied Charitable Exemption • Local tax board sought revocation of exemption because

hospital property not “…actually and exclusively used for charitable…purposes.”

• Alleged that less than one half of one percent of hospital revenue devoted to charity care and use of the exempt property for private gain.

• Tax authorities further alleged that hospital had “unfair policy of overpricing services” and bringing “collection proceedings” against uninsured patients.

• Carle returned to the tax rolls and denied exemption by IDOR in February 2007.

• Case progressing to administrative hearing in 2008.



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Richland Memorial Hospital Mistakenly Denied Property Tax Exemption• County-owned hospital converted in 2005 and required to

reapply for charitable property exemption.

• Local tax board recommended that Richland be allowed charitable exemption.

• Richland denied tax exemption based on revenue Director’s finding that hospital “operates primarily as a business.”

• In FY 2005, 75% of hospital patients were Medicaid, Medicare or charity recipients and 14% of budget went to uncompensated care.

• State tax authorities have since recognized their “mistake” and reversed revocation decision without public explanation.



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IAG Legislative Initiative on Hospital Exemptions• “Tax-Exempt Hospital Responsibility Act” introduced in 2006 and

called for 8% of hospital operating cost to be devoted to charity care.

• Bill sought discounting scheme for uninsured patients and reporting requirements.

• Penalties, licensure action, removal of directors and officers and loss of exemption for violations.

• IAG continues to warn hospitals to “lack confidence” over their tax-exempt status given the legal standard and Provena Covenant controversy.

• Ongoing IAG investigations of nonprofit hospitals and efforts to develop support for new law have not progressed and the initiative appears to be stalled.



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Cook County Assessor Issues Report on Exempt Hospitals• A November 6, 2007 Cook County Assessor report

estimates that that property tax on all Chicago area hospitals could generate $240 million per year.

• The Assessor explained that the report was not intended to “answer the question of whether these hospitals should be taxable or not, but instead provides an estimate of what their value would be were they deemed to be taxable.”

• The report referred to “current litigation” over hospital exemptions and allowed that the result of that litigation “is uncertain.”



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Cook County Commissioners Propose Resolution• On September 6, 2007, two commissioners proposed

removal of tax exemptions to hospitals failing to provide adequate charity.

• Non-binding resolution seeks investigation of the charity care provided by 50 county hospitals.

• County citizens “have been repeatedly defrauded by these hospitals that are not providing sufficient levels of charity care…”

• Resolution fails to specify level of charity care required for continued exemption, or address existing legal standards in Illinois.



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The Provena Covenant Decision First Hospital to be Denied Charitable Exemption



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Backdrop to Provena Covenant Decision

• Controversy began in 2002 with disputes over hospital’s charity care, collections and other business practices.

• Provena denied tax exemption in early 2004 and returned to tax rolls.

• December 2004, Provena case tried before an ALJ with overwhelming evidence introduced on the charitable nature of the hospital.

• IDR called no witnesses to rebut the hospital proofs.

• October 2005, ALJ issued decision recommending that the hospital be allowed continued property tax exemption.

• September 2006, IDR Director issues a separate decision rejecting ALJ’s recommended ruling.

• Provena has paid nearly $6 million in property taxes to date.



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Illinois Law on Charitable Exemption

• “A charity is not defined by percentages.”

• For over 100 years, the Supreme Court has ruled that “to qualify for a charitable exemption, property must be actually used for charitable purposes.”

• Charitable use has absolutely nothing to do with the fact or extent of free care given out by a hospital.

• “Charity, in law, is not confined to the relief of poverty or distress or to mere almsgiving…”

• “The charitable nature of an organization depends upon whether its object is to carry out a purpose recognized in law as charitable, or whether it is maintained for gain, profit, or private advantage.”



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The Provena Decision - IDR Director Applies New Legal Standard • “As noted below, to obtain the exemption Covenant

was required to prove that its primary purpose was charitable care.”

• “Covenant admitted that its 2002 revenues exceeded $113,000,000 and that its charitable activities cost it only $831, 724, or about .7% of total revenue.”

• These financial figures fall far short of meeting the primary purpose standard.”



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IDOR Director’s Claims to Support Denial of Exemption to Provena

Covenant



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Insufficient Charity Care

• Hospital provided “seriously deficient” charity care measured by “total revenues.”

• Charity was inadequate regardless of standing offer of unlimited free care to all in need.

• The small amount of free care obviated need to show that hospital placed obstacles in the path of patients who were in need of charity or failed to advertise assistance.

• Hospital ruled ineligible without a single person being shown to have been refused charity care or otherwise treated in a manner that did not satisfy existing exemption standards.



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Charity Program is Deficient

• Charity policy references to federal poverty guidelines deemed inconsistent with exclusive charitable purpose and exempt status.

• Post-2002 tax year revision of the charity care program supports finding that hospital had previously failed to offer adequate charity care or advertise charity.

• Hypothetical hardship cases used to suggest that the charity guidelines failed to offer adequate assistance to patients with limited financial means.



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Hospital Contracts Preclude Exemption

• ED contract proven necessary to deliver full range of emergency care and hospital charity care standards applied to the group.

• IDOR Director rejected basis for contract and disregarded substantial volume of charity provided through hospital ED.

• Director ruled that ED physicians and other for-profit providers must commit to the delivery of charity care and hospital must ensure compliance.

• Finding in line with fits general argument that hospitals are abusing exemptions by allowing use of property by physicians and other “for-profit” actors.



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Medicaid/Medicare Costs Irrelevant

• Provena proved unreimbursed costs in excess of $10 million per annum and claimed consideration as charitable contributions.

• IDOR deemed uncompensated costs irrelevant to “charitable care” and property tax exemption standard.

• Evidence linking participation in government health programs to Provena’s charitable and religious mission was rejected.

• Participation in Medicare/Medicaid is merely a business judgment and equated with offering discounts to commercial payors.



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Other Charitable Contributions Irrelevant

• Community contributions other than “charity care” deemed irrelevant to the exemption standard.

• True charitable hospitals are required to deliver some unstated but specific minimum quantum of free care.

• Free care at less that 1% of “net patient service revenue” is alone sufficient to support denial of exemption.

• Homeless shelters, crisis counseling, neonatal programs, screenings, behavioral health, and similar programs are not charitable contributions.



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Collections Practices Support Denial

• Newspaper accounts of aggressive collection action against patients supported finding that hospital failed to meet charitable exemption standard.

• The filing of collection litigation against patients is unjustified and inconsistent with the charitable exemption standard.



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Lack of Charitable Donations

• Denial was further supported by fact that most hospital revenue was generated by healthcare services and not public or private donations.

• Provena Covenant offers “illusion of charity” where charges were based above cost and the majority of revenue was generated by the exchange of payment for patient services.



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Provena Covenant Ordered Restored to Tax-Exempt Status• On August 8, 2007, IDOR Director’s final administrative

decision was deemed “in error and reversed.”

• Based on “uncontested and unrebutted evidence,” Court conducted de novo review.

• The “applicable law and precedent as set forth in the Plaintiff’s briefs, and as found by the [ALJ], establishes by clear and convincing proof that” Provena satisfied the qualifications for charitable and religious use of real estate.

• Ruling starkly rejected years of governmental efforts to foment charitable exemption controversy in Illinois and has received less than gracious reaction.



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Illinois Appeals Provena Ruling

• WhereTheMoneyGoes.com (Published: September 7, 2007):

Today is the last day for the Illinois Attorney General to appeal the ridiculous ruling by a judge (made in less than a few hours in this very complicated case) that overturned the decision by the Director of the Illinois Department of Revenue which declared that the hospital operated by Provena Health (a not-for-profit Catholic health care system in Illinois) was not deserving of its tax-exempt status. This has national implications as we all know.

Although this is Illinois, and anything can happen, sources and my own prediction says that the Illinois Attorney General will file the appeal.

The only reason I can see that she won't is that the Illinois Hospital Association cuts a last minute deal over charity care.

If that's the case, I predict that the Illinois Attorney General will have sold the public short in return for a PR victory!

But if she appeals, based on other court rulings (just type Provena into my search engine) I believe she will ultimately prevail, and for not-for-profit hospitals, like the South, day 3 in Gettysburg, in the Civil War, that judges ruling will have been their high water mark!



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Illinois Has Appealed Ruling Restoring Provena Covenant to Exempt Status• Summary reversal of IDOR ruling has been met with

decision to appeal.

• Appeal will be briefed and heard by appeal court in early 2008.

• State efforts to argue hospitals are at risk have stalled.

• Illinois DOR and AG have failed to secure stays of the final and enforceable order restoring Provena to exempt status.



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• Validate Tax-Exempt Status as Part of Effective Compliance

• Refine Charity Policies and Practices to Avoid Problems

• Adjust Pricing, Billing and Collection Practices

• Improve Outreach and Advertising of Assistance Programs

• Make Community Relations a Priority

• Educate Staff, Community Leaders and Media

• Enhance Governance and Oversight

• Understand the Lessons in Provena and Other Cases

• Consider Settlements and Guidelines as Potential “Best Practices”

Suggestions for Reducing Exposure To Charitable Exemption Controversy



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Questions?



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Supplemental Materials• Exhibit 1: Trial Court Order Reversing Denial of Tax-

Exemption for Provena Covenant Medical Center (filed August 8, 2007).

• Exhibit 2: Illinois Attorney General’s Notice of Appeal (filed September 7, 2007).



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Locke Lord Bissell & Liddell Health Law, Litigation, and Compliance PracticesThe development of effective corporate compliance and financial assistance programs are critical to a strategic plans to reduce challenges to tax-exempt status. The attorneys at LLB&L are qualified to offer insights to the tax and other regulatory enforcement authorities’ views on exemption standards and assist organizations in structuring charity care and related operational activities to meet evolving legal and compliance standards.

The firm also aggressively defends tax-exempt organizations in response to enforcement challenges and private actions around the country.

Please contact the Locke Lord Bissell & Liddell attorney with whom you work, or call Patrick S. Coffey at 312.443.1802 ([email protected]).

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