Yesterday, Pittsburgh Mayor Luke Ravenstahl announced the city would mount a formal challenge to revoke the tax-exempt status of healthcare giant University of Pittsburgh Medical Center, and ripple effects from this challenge could spread quickly within the non-profit hospital sector.
Specifically, Pittsburgh is arguing UPMC does not meet the requirement of an "institution of purely public charity." According to the Pennsylvania Supreme Court, non-profit organizations qualify as an IPPC and receive tax exemptions if they meet five conditions:
1. Advance a charitable purpose.
2. Donate a substantial amount of its services.
3. Benefit a large portion of people who need charity.
4. Relieve the government of some of its burden.
5. Operate entirely free of a profit motive.
Mayor Ravenstahl and other Pittsburgh officials said UPMC fails on at least one, and perhaps three, of those conditions. According to UPMC's Form 990 from fiscal year 2011, less than 2 percent of UPMC's net patient revenue ($5.7 billion) went toward patient financial assistance and charity care. In addition, the mayor's office said UPMC operates many of its divisions and subsidiaries as for-profit entities, and UPMC "exhibited an anticompetitive, pro-profit motive" through closures of hospitals — such as UPMC Braddock (Pa.) Hospital — and riffs with health insurer Highmark.
To that end, Pittsburgh is seeking that UPMC no longer be exempt from paying the city's payroll tax and that UPMC pay all payroll taxes dating back to March 2007, which could cost the health system tens of millions of dollars.
In an emailed statement, UPMC Vice President of Media Relations Paul Wood said the city's challenge to the health system's tax-exempt status "appears to be based on the mistaken impression that a non-profit organization must conduct its affairs in a way that pleases certain labor unions, certain favored businesses or particular political constituencies."
Mr. Wood also said the state Supreme Court's five-pronged test is being "distorted" in certain aspects. He said one of the main conditions, that organizations relieve the government of a burden it would otherwise have to fund, is difficult to interpret in the state due to no safety-net providers.
"Pennsylvania is the only large state in the nation without public hospitals, and therefore, Pennsylvania hospitals and health systems, like UPMC, serve as the healthcare safety net for the poor and uninsured," Mr. Wood said.
In response to Mayor Ravenstahl's challenge that UPMC is mostly out for profits, Mr. Wood said income is necessary for all non-profits to survive, and the health system strives to reinvest excess income into its communities.
"It does not mean a non-profit shouldn't strive to have a positive operating margin — organizations that don't do that go out of business," Mr. Wood said. "It also does not mean a non-profit cannot compete vigorously with other non-profit institutions — indeed, the nation's antitrust laws require just that. And, it does not mean that a non-profit should pay its officers and employees anything other than compensation pegged at market equivalents. What it does mean is that [the] "profits" a non-profit might generate must be invested back into the organization or paid out to the community rather than used to reward or motivate private individuals. UPMC has always adhered strictly to that standard."
Roger Baumgarten, director of media relations for The Hospital & Healthsystem Association of Pennsylvania, said his organization has not weighed in specifically on the UPMC issue, but he pointed to a recent state bill, Senate Bill 4, that would clarify how non-profit organizations in Pennsylvania qualify as an IPPC.
He said the HAP's position and rationale supporting SB4 is so that Pennsylvania can "restore clarity to the criteria used to determine a charitable institution's real property and sales tax exemption status," which especially impacts non-profit hospitals and health systems in the state.
Specifically, Pittsburgh is arguing UPMC does not meet the requirement of an "institution of purely public charity." According to the Pennsylvania Supreme Court, non-profit organizations qualify as an IPPC and receive tax exemptions if they meet five conditions:
1. Advance a charitable purpose.
2. Donate a substantial amount of its services.
3. Benefit a large portion of people who need charity.
4. Relieve the government of some of its burden.
5. Operate entirely free of a profit motive.
Mayor Ravenstahl and other Pittsburgh officials said UPMC fails on at least one, and perhaps three, of those conditions. According to UPMC's Form 990 from fiscal year 2011, less than 2 percent of UPMC's net patient revenue ($5.7 billion) went toward patient financial assistance and charity care. In addition, the mayor's office said UPMC operates many of its divisions and subsidiaries as for-profit entities, and UPMC "exhibited an anticompetitive, pro-profit motive" through closures of hospitals — such as UPMC Braddock (Pa.) Hospital — and riffs with health insurer Highmark.
To that end, Pittsburgh is seeking that UPMC no longer be exempt from paying the city's payroll tax and that UPMC pay all payroll taxes dating back to March 2007, which could cost the health system tens of millions of dollars. In an emailed statement, UPMC Vice President of Media Relations Paul Wood said the city's challenge to the health system's tax-exempt status "appears to be based on the mistaken impression that a non-profit organization must conduct its affairs in a way that pleases certain labor unions, certain favored businesses or particular political constituencies."
Mr. Wood also said the state Supreme Court's five-pronged test is being "distorted" in certain aspects. He said one of the main conditions, that organizations relieve the government of a burden it would otherwise have to fund, is difficult to interpret in the state due to no safety-net providers.
"Pennsylvania is the only large state in the nation without public hospitals, and therefore, Pennsylvania hospitals and health systems, like UPMC, serve as the healthcare safety net for the poor and uninsured," Mr. Wood said.
In response to Mayor Ravenstahl's challenge that UPMC is mostly out for profits, Mr. Wood said income is necessary for all non-profits to survive, and the health system strives to reinvest excess income into its communities.
"It does not mean a non-profit shouldn't strive to have a positive operating margin — organizations that don't do that go out of business," Mr. Wood said. "It also does not mean a non-profit cannot compete vigorously with other non-profit institutions — indeed, the nation's antitrust laws require just that. And, it does not mean that a non-profit should pay its officers and employees anything other than compensation pegged at market equivalents. What it does mean is that [the] "profits" a non-profit might generate must be invested back into the organization or paid out to the community rather than used to reward or motivate private individuals. UPMC has always adhered strictly to that standard."
Roger Baumgarten, director of media relations for The Hospital & Healthsystem Association of Pennsylvania, said his organization has not weighed in specifically on the UPMC issue, but he pointed to a recent state bill, Senate Bill 4, that would clarify how non-profit organizations in Pennsylvania qualify as an IPPC.
He said the HAP's position and rationale supporting SB4 is so that Pennsylvania can "restore clarity to the criteria used to determine a charitable institution's real property and sales tax exemption status," which especially impacts non-profit hospitals and health systems in the state.
More Articles on Non-Profit Hospitals and Charity Care:
Pittsburgh Pursues Removal of UPMC's Tax Exemption
Protesters Demand UPMC "Pay Its Fair Share"
Charity Care and Property Taxes: Why They Are Now Inseparable