A number of recent developments at the federal and state levels significantly affect tax-exempt hospitals and healthcare systems. These developments — potential liability arising out of charity care and billing/collections practices and attacks on federal and state law tax exemption — constitute a present and escalating threat to the finances and operations of exempt hospitals and other healthcare providers.
The issues presented are:
Class Action Lawsuits, Charity Care and Billing/Collection Issues
The most publicized of these developments is the recent spate of class action lawsuits spearheaded by the tobacco lawyers against some of the country's largest (and some not so large) hospitals and hospital systems. Essentially, these lawsuits contend that the charity care and billing and collection practices of certain tax-exempt hospitals and systems violate the responsibilities of charitable entities. Even before these lawsuits, these issues have been a rallying point for advocacy and community groups. Intense and widespread scrutiny is being given to issues such as:
- who is eligible for charity care
- how charity care policies are devised and carried out
- what constitutes such care
- how charity care patients — as well as all uninsured patients — should be charged
- how and to what extent collection actions should be taken
Months before the recent suits were filed, the Yale-New Haven healthcare system in Connecticut was sued in a class action proceeding by former patients alleging that the system's failure to advise them of eligibility for charity care under state law constituted "fraudulent concealment." These allegations may allow the plaintiffs to avoid the statute of limitations and result in the system's $38 million of charity care funds being transferred to and administered by third parties.
In Illinois, Provena Covenant and Carle Foundation have been called to task not only for their failure to properly publicize the availability of charity care, but also for their aggressive collection tactics. A recent New York Times front-page story highlighted collection efforts in New York state that continued for years after the medical care in question had been provided. Similar articles have run in The Wall Street Journal and Time Magazine. The fact that many systems charge indigent, uninsured and underinsured patients their highest published rates — far in excess of those available to Medicare beneficiaries and the clients of third party insurers — has only contributed to the outcry.
Exempt providers are concerned that these issues relate to financial and operational stability and note that they increasingly have been subject to cost shifting due to changes in Medicare and third party insurer reimbursement and the growing pool of uninsured patients. Nevertheless, it is possible for exempt healthcare providers to come to grips with these issues without impairing their economic performance in any material way despite the complex, myriad and seemingly contradictory set of legal and regulatory issues involved. The first step is clearly defining their charity care and billing and collection policies to reduce their exposure to litigation to the lowest level possible.
Congress and IRS Review of Hospital Tax Exemptions
Congressional committees have initiated reviews of tax-exempt charities and, in this context, are questioning whether hospitals should be allowed to retain their ยง 501(c)(3) status. While no one can predict the outcome of these hearings, one thing is clear: the Internal Revenue Service is undertaking its own broad-ranging inquiry into transactions between exempt organizations and their "insiders" — i.e., officers, directors, and other persons in positions of significant influence, which often include members of the medical staff. The IRS has announced that some 2,000 tax-exempt organizations, including many hospitals and healthcare providers, will receive letters over the next few months. At issue are "excess benefit transactions" under the Intermediate Sanctions provisions of the Internal Revenue Code. The most important step a system can take at this point is to review these transactions to ensure that the substantive and procedural requirements have been met. This review should include an investigation into such issues as executive compensation, paying physicians as medical directors, leasing of office space to physicians and joint ventures with physicians in ambulatory surgery and imaging centers.
State Tax Exempt Status at Risk
Municipalities and other state government bodies are struggling to find sufficient sources of tax revenues, and some have begun to challenge the property tax exemptions enjoyed by tax exempt hospitals. In most jurisdictions, in order to qualify for state tax-exempt status, the property must be used exclusively for charitable purposes. In a landmark decision, which is currently under appeal, the State of Illinois Department of Revenue determined that a major hospital system, Provena Covenant, was not using its property "exclusively" for charitable purposes. The decision was not without issues, but the fact is that the system has paid close to $2 million in property taxes, which it is now attempting to recover through administrative proceedings. The county board that recommended removing the exemption took the view, adopted by the State Department of Revenue, that allowing use of the system's facilities by for-profit entities, such as medical practices and operators of the cafeteria, meant that the property was not being used exclusively for charitable purposes and that "profits" were being generated by those private parties for non-charitable purposes. In addition, the county board based its decision partly on the fact that substantial moneys were being upstreamed by the hospital to its parent and affiliates. In related recent developments, the Attorneys General of three states — New York, Connecticut and Illinois — have announced investigations into charity care and other exemption-related business practices of not for profit hospitals and the Lieutenant Governor of Illinois made clear his support for a suit against Resurrection Healthcare by appearing at a press conference with the plaintiffs and their counsel.
Given that many exempt entities collaborate in business activities with for-profit entities, and even though that many of those collaborations help carry out the entity's charitable purpose, it is increasingly likely that the local governmental view taken in the Provena case will be adopted elsewhere. In New Hampshire, because of the heavy local reliance on property taxes as a primary source of funds, exempt providers should assume that municipalities will be giving increased scrutiny to property use with the goal of bringing currently exempt properties back onto the tax rolls. It is important that exempt entities review their relationships with for-profit providers, including the use of their property by these private entities and the exempt system's use of its excess of revenues over expenses. In addition, it may be necessary to reach out to local authorities to forestall the type of result experienced by Provena Covenant.
These issues, which strike at the heart of the traditional preferences accorded exempt organizations, have great significance for these organizations. In order to be prepared to meet these challenges, exempt providers should begin by conducting an appropriate risk assessment, followed by measures that are designed to lessen, and to the extent possible, eliminate liability. Otherwise, the issues which have plagued other systems throughout the country may become an unhappy and expensive reality.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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