Pittsburgh Mayor: City Will Challenge Hospital’s Tax-Exempt Status

 

Mayor

March 20, 2013; Source: Modern Healthcare.com

It seems like about half of the reports about nonprofits being arm-twisted into payments in lieu of taxes (PILOTs) take place in Pittsburgh, as the Steel City’s mayor has long been on something of a PILOTs crusade. The battles between the city’s nonprofit sector and the revenue-desperate Mayor Luke Ravenstahl have been instructive. Most of the nonprofits in Pittsburgh banded together to make an unusual joint payment through the Pittsburgh Public Service Fund, which does not disclose how much each member of the consortium contributed and how that amount was calculated. The University of Pittsburgh Medical Center (UPMC) does not participate in the fund, but has been able to circumvent the city’s request for a PILOT through making a large, multi-year contribution to the Pittsburgh Promise scholarship fund.

UPMC’s relationship with the city and with citizens has been off-and-on tense, but now the latest is that Ravenstahl says the city’s legal department is going to challenge UPMC’s charitable tax status. Under the state’s formula for meriting a property tax exemption, UPMC will allegedly fall short of three criteria, including its allegedly insufficient charity care and its allegedly excessive executive salaries. Ravenstahl’s news release challenges UPMC to “act like the charity it claims to be” and “engage in a serious conversation with the city and key stakeholders about its responsibilities to our community.” The mayor said that a city legal opinion concluded that UPMC’s “commitment to charity is dwarfed by its preoccupation with profits.”

By the numbers, UPMC paid compensation of $15 million to eight executives (including $5.5 million to the president/CEO), reported income of $277 million on revenues of $6.6 billion for a profit margin of 4.2 percent, and spent somewhere between 1.7 percent and 3.6 percent of patient revenues on free care for people unable to pay. The ability of Pennsylvania to conduct case-by-case inquiries into the sufficiency of the charitable activities of nonprofit property owners leaves a big gray area for subjective interpretation. There are two elements of the mayor’s challenge to UPMC that bear watching.

One plank is the questioning of a nonprofit hospital’s nonprofit status, which is akin to the case in which the Illinois Supreme Court ruled that the Downstate Provena Covenant Medical Center wasn’t providing enough charity care to be considered a nonprofit hospital. As some nonprofit hospitals are under attack – some quite legitimately – for functioning too much like for-profit hospitals, these questions don’t necessarily stop with behemoths like the 60,000-employee UPMC. This question will be even more complex to understand as the Affordable Care Act goes into full implementation, as it remains to be seen whether charity care will still be a relevant issue or measure going forward.

The other element to this episode is the “deal” that UPMC had with the city for some years regarding the Pittsburgh Promise scholarship fund. This part of the equation bears watching particularly because the state’s largest city, Philadelphia, is gearing up to perhaps replicate Pittsburgh’s aggressive stance with its nonprofit property owners. Like UPMC, Philadelphia hospitals such as Children’s Hospital have said that they are open to contributing to public purposes but prefer being able to direct where their moneys go. Children’s Hospital executive Peter Grollman told the Philadelphia Inquirer, ”As we look at what we do by way of any investment in the community, as you can expect, we want to do what we can to improve the lives of children.” Other taxpayers to municipal governments do not have the latitude to tell City Hall how they want their payments spent.

Mayor Ravenstahl in Pittsburgh and Mayor Michael Nutter in Philadelphia are trying to balance city budgets stressed by unfunded pension liabilities and other general costs. Ravenstahl’s announcement about questioning UPMC’s charitable bona fides may signal that city governments are less interested in the good things that a nonprofit hospital like UPMC might do – such as millions of dollars in scholarships for Pittsburgh public school students – than they are in finding revenues for depleted City Hall coffers. —Rick Cohen

 

  • Frank A. Monti, CPA

    We see state and local governments renege on their contractual pension promises to retirees and their widows. We see the federal government renege on the contractual agreement implied in the Federal Insurance Contributions Act (FICA) and reduce social security benefits to retirees. The Federal government will do the same thing with Medicare sometime in the near future. State and local governments are going after tax-exempt organizations reneging on their previous promises to hold them tax-exempt. The people of Cyprus see the government steal money right out of their savings accounts. How much more will happen before the people rise up against the government(s)?
    What the Pitttsburgh Mayor is trying to do is outrageous. It is even more outrageous when you realize that he is doing this as a result of the failure of government to do their job – not do their job well, mind you; just do their job at a passing grade level. The Mayor is out of money because of poor management over an extended period of time. The hospital (and other successful not-for-profits) have accumulated funds for their financial security for the exact opposite reason. To go ofter the money in the not-for-profit world just because there happens to be some money there is
    unconscionable. I urge the hospital (and other not-for-profits) to fight this trend with everything they have.

  • David Zuckerman

    I think this standoff raises interesting questions regarding the role of anchor institutions (public and nonprofit institutions rooted in the community), such as hospitals. Obviously, UPMC should be doing more but removing its tax exemption will only serve to increase bottom-line incentives that are currently driving UPMC’s limited community engagement — in essence, losing the opportunity to leverage an important community asset.

    Similarly though, forcing nonprofit hospitals to prioritize charity care as their primary community benefit is an equally poor idea (but the one most advocated). Charity care is the most costly point of intervention and least effective at actually promoting community health. Social, economic, and environmental determinants (~50%) are far important to an individual’s health than access to healthcare (~10%). Hospitals should seize the new opportunity afforded by revisions to Schedule H instructions to focus their interventions on community health improvement and community building efforts. UPMC’s $100 million to the Pittsburgh Promise is a good example of this. Students going to college is a significantly better community benefit and more effective way to approach public and population health than charity care.

    Hospitals should do more outside their walls since health is inherently place-based. A more proactive and beneficial strategy than forcing UPMC to pay taxes would be to encourage it to leverage the full resources of this community institution to benefit the surrounding low-income neighborhoods and existing residents of the Hill District and elsewhere. The Hill District has some of the poorest census tracts in not just the City but the entire County and it is within two miles of some of the wealthiest institutions and largest employers in the region. Granted, this will take community and local government pressure, along with enlightened leadership at UPMC. Yet the benefits of forcing UPMC to pay taxes while losing the ability to leverage the other human and financial assets of this $10 billion health system with nearly 60,000 employees are akin to winning the battle and losing the war.

    This blog entry explains some additional benefits of anchor institutions thinking more proactively about engaging their communities: http://community-wealth.com/content/fed-governor-raskin-talks-anchor-institutions-evergreen

    (And, slightly off topic, but some communities are beginning to explore the idea of participatory budgeting: expanding democratic participation by giving residents greater say over local government budgets.)

  • rick cohen

    Dear Devid: Thanks for sharing the comment. I think your report at the Community Wealth website–http://community-wealth.org/sites/clone.community-wealth.org/files/Zuckerman-HBHC-2013-summary-twopage.pdf — is very interesting on this topic. Regarding charity care, however, I think the point of charity care is that it is intended to address not overall community health, but the healthcare options available to lower income people who don’t have much in the way of alternatives if any. Your report contains very interesting examples of hospitals-as-anchor development strategies that have long been promoted by top community development intermediaries over the years. But the challenge is still one of providing decent healthcare to the poor. Perhaps the Affordable Care Act obviates the issue, since it will lead to the provision of healthcare coverage for many millions of Americans who are currently uninsured, but then the question of what is a nonprofit hospital arises. In light of your case studies, I would be curious to see what the five anchor hoopitals say in their CHANs. Thanks for your input