Revenue-Hungry States and Cities Seek to Strip Hospitals of Tax-Exempt Status

Cash-strapped states and municipalities are looking at nonprofit hospitals as a potential revenue source.

Florida, Illinois, Massachusetts, and New Jersey are among the states that have led the charge to collect revenue from its hospitals. In many cases, states and cities seek payment-in-lieu-of-taxes (PILOT) compensation. However two states are in the midst of a full-scaled battle that has spilled over from the courts, legislatures, and municipalities.

Pennsylvania, at both the state and local level, has been at the forefront of legal challenges and legislation to both eliminate and protect tax-exempt status of hospitals. Last year the Pennsylvania State Supreme Court upheld a 1997 ruling that not-for-profit corporations must meet a five-prong test to qualify as tax-exempt. Nonprofit organizations must:

1. Advance a charitable purpose;
2. Donate or render gratuitously a substantial portion of its services
3. Benefit a substantial and indefinite class of persons who are legitimate subjects of charity
4. Relieve the government of some of its burden
5. Operate entirely free from private profit motive.

In recent weeks legislators in Pennsylvania have been scrambling to pass legislation to change the state constitution to protect hospitals. But local governments are taking advantage of the Supreme Court ruling and suing nonprofit hospitals to recover tax revenue. Late last month, Pittsburgh Mayor Luke Ravenstahl’s administration filed suit against the city’s largest employer, the University of Pennsylvania Medical Center (UPMC) to force the healthcare provider to pay the city’s payroll tax and pay property taxes on its 150 parcels around the city.

In California members of the legislature are working to remove nonprofit status from hospitals by seeking legislation by establishing a means test. Assembly Bill 975 would set performance standards for charity care that hospitals would be required to meet to retain their tax-exempt status, among them:

• Charity care would henceforth be defined as direct care to patients. Bad debt would not be included.
• Hospitals will not be able to count the cost of care to any patient who receives public assistance or some other subsidy for any portion of their care.
• Charity care must equal or better 5 percent of a hospital’s net revenue.

The bill originally was sponsored by the California Nurses Association, and yesterday received its first hearing by a state legislature committee.