Health systems face challenges to nonprofit status

Two school districts in the Lehigh Valley are challenging the tax-exempt status of two major hospital networks in an effort to force the nonprofits to pay property taxes.

In Allentown, officials are asking a nonprofit medical practice to pay the city’s business privilege tax.

And Pennsylvania’s top lawyer is challenging the nonprofit status of one of the state’s largest health systems.

Debates about the tax-exempt status of nonprofits are not new, experts said. For years, banks have complained about competition from nonprofit credit unions, for example.

But growth and consolidation have made hospital systems a target for those who claim the entities are acting more and more like for-profit entities.

And they are tempting targets for school districts and local governments, which may be facing their own financial pressures, whether from rising pension costs or diminished state funding. They see growing health systems putting up offices and clinics on commercial lots that otherwise might be generating revenue from property taxes.

“There’s always scrutiny over who pays taxes and how much,” said Barak Richman, a professor of law and business administration at Duke University in Durham, North Carolina. “Part of what’s driving that attention is the recognition that nonprofit hospitals pursue business strategies that look a lot like the strategies that for-profit hospitals pursue. They capitalize on market power the same way anyone else does.”

The trends raise questions about why nonprofit health systems should be treated differently, he said.

Those questions are at the heart of recent legal actions taken against prominent health systems, which defended their role as nonprofit entities. And experts noted that any change in status could have negative, unintended consequences.

Seeking a ‘fair share’

Lehigh Valley Health Network is facing a lawsuit from Salisbury Township School District, while St. Luke’s University Health Network is being targeted by the Stroudsburg Area School District.

The districts contend that the two health networks should pay their fair share of property taxes for facilities in each district.

The suits are not challenging the quality of care, but rather the business model behind it, attorneys said.

“What has happened in the last 30 years is the horizontal and vertical integration of health care. They have every right to do it, but it’s our belief that the evidence will prove that they are doing so as a for-profit entity and they have to pay their fair share of taxes just like everybody else,” said Mark Altemose, managing partner of Cohen, Feeley, Altemose & Rambo, a law firm based in Bethlehem Township, which is representing the Stroudsburg school district.

The case is against St. Luke’s Monroe, a 108-bed hospital in Stroud Township, as well as the St. Luke’s network, which is based in Fountain Hill, Altemose said. Also representing the district is Aaron J. Freiwald, managing partner of Freiwald Law in Philadelphia.

In a prepared statement, St. Luke’s spokesperson Samuel Kennedy said the health network expects to retain its tax-exempt status. The system declined to comment further.

“St. Luke’s Monroe Campus is a nonprofit hospital that provides life-saving emergency care to those who need it, regardless of their ability to pay,” Kennedy said. “We are a community safety net as well as a major driver of the local economy. We are fully confident that we meet all of the requirements for nonprofit status. The county taxing authority validated our nonprofit status in the fall, and we are confident our nonprofit status will be reaffirmed in the appeals process.”

The second case is against Lehigh Valley Hospital Inc. and the overall health network, based in Salisbury Township. Altemose and Freiwald are the attorneys on that case, as well.

The health network has three parcels of land at its campus in Salisbury Township. The estimated tax bill is $5.6 million, said Randy Ziegenfuss, superintendent of the Salisbury school district.

The hospital had been making an annual payment in lieu of taxes of $150,000 under agreements stretching back 20 years, Ziegenfuss said. But, he said, the hospital declined to continue after the last one expired in July 2018.

“We feel we need to pursue this revenue,” Ziegenfuss said.

Brian Downs, a spokesperson for LVHN, issued a statement in response to the lawsuit but did not provide further comment.

“We intend to vigorously defend the matter,” Downs said. “We believe the health network fulfills its charitable mission including improving health care, advancing medical science and providing education.”

Easton Hospital in Wilson Borough has paid more than $2.5 million in local taxes over the past two years, said Brendon Abbazio, spokesperson for Steward Health Care, in a statement. Steward is the for-profit parent of Easton Hospital.

City argues over tax

LVHN also is facing a tax bill from the city of Allentown, which is seeking nearly $1 million in business privilege taxes from the health network’s physicians group, the Lehigh Valley Physicians Group, or LVPG. The nonprofit medical organization employs more than 1,000 doctors and clinicians.

LVPG maintains that as a nonprofit, it is tax-exempt, and should not owe the $931,692 the city seeks to collect for years 2007 through 2016.

In a March legal filing, the physician group stated that during the years in question it served as a nonprofit with “charitable and educational purposes,” and is a tax-exempt organization under IRS rules, and a “purely public charity.” LVPG also argued that any work it has done in the city has been at a financial loss.

The city, however, contends that LVPG doesn’t satisfy case law to show it operates entirely free from “private profit motive.”

The city also has been trying to collect business privilege taxes from Good Shepherd Rehabilitation Network and other nonprofits, according to media reports.

Passing the test

The cases hinge, in part, on the interpretation of a five-point test laid down by the Pennsylvania Supreme Court. The court ruled in 1985 that nonprofits must pass the test if they wish to avoid being subject to property taxes.

To qualify, a hospital must advance a charitable purpose; donate or render gratuitously a substantial portion of its services; benefit a substantial and indefinite class of persons who are legitimate subjects of charity; relieve the government of some of its burden; and operate entirely free from profit motive.

One of the issues in the school district cases involves tax write-offs for Medicare and Medicaid. Hospitals charge a set amount for a service but they get back only a portion of that from Medicare and Medicaid. The hospitals call the difference a charitable contribution. Altemose said he disagrees with that characterization.

Freiwald said the firm has asked for documents that may reveal what the firm wants to know, including how executive compensation is established and other factors that could help determine whether the nonprofits operate more like for-profits.

Richard Anderson, CEO of St. Luke’s, earned a salary of $2.1 million in 2016, while LVHN CEO Brian Nester earned $1.5 million, according to 2016 tax returns filed by both organizations.

A matter of consent

One of the more prominent cases involving questions about a health system’s nonprofit status pits Pennsylvania Attorney General Josh Shapiro against Pittsburgh-based health system UPMC, which operates numerous hospitals and medical offices in Central Pennsylvania.

Shapiro filed a lawsuit against UPMC in February, claiming that the nonprofit health system’s actions in recent years have been inconsistent with its promise to give back to the community in exchange for its tax exemptions and funding from taxpayers.

The lawsuit is seeking to extend a consent decree that required UPMC to accept Highmark insurance. The decree, which expires this summer, ended a feud between UPMC and Highmark that began after Highmark took over Allegheny Health Network, an eight-hospital academic medical system in western Pennsylvania.

But Shapiro’s lawsuit also challenges UPMC’s nonprofit status.

 “Our petition today has a simple goal: to restore fairness to the health care system in western Pennsylvania and promote the public interest by ensuring patient access to affordable care and facilities which they have funded through their tax dollars,” Shapiro said in a February press conference. “We have concluded that UPMC is not fulfilling its obligation as a public charity.”

The claim has alarmed not just UPMC, but also the Hospital & Healthsystem Association of Pennsylvania, both of whom have argued that Shapiro is attempting to rewrite the rules governing nonprofit hospitals by essentially forcing them to contract with all insurers.

“Hospitals would have their hands tied,” Andy Carter, the association’s president and CEO, said in a statement in late March. “This new health care regime, hastily imposed through litigation, will force cost-cutting over improving quality and outcomes, resulting in lower reimbursements for hospitals and increased administrative costs.”

A widespread conversation

The “is it a non-profit or is it not?” conversation is happening all over the state, according to Patrick Plummer, an assistant professor of business at Penn State Mont Alto.

“This debate has been going on for years as hospitals have shifted from being operated by religious entities and obvious nonprofits to more of a business,” he said. “There is tension because local governments need more money and are using the business privilege tax as a way to ‘fill the coffers.’”

Many hospitals already make payments in lieu of taxes to their communities.

“I think it’s fair to say that that is a fairly common practice as a way of avoiding an all-or-nothing situation,” said Terry Williams, an attorney at MKC Law Group in State College. “They don’t want to give up tax exemption but they also recognize those local municipalities, counties and school districts … because they are drawing from that population.”

And hospitals, often the largest employers in their regions, pay other taxes, such as payroll taxes, while their employees pay income taxes. LVHN employs about 15,705 people, while St. Luke’s boasts a workforce of about 8,550. They also hire many for-profit vendors in areas ranging from food service to information technology.

And as nonprofits, they are required to reinvest in their communities, said Chad Meyerhoefer, associate professor of economics at Lehigh University in Bethlehem.

“There’s a lot of good reasons a hospital system should be a nonprofit,” Meyerhoefer said.

Taking away that status could have ripple effects, he said. Communities, for example, could lose programs that a for-profit operator might see as unprofitable.

 “If you give the hospitals incentives to just think about making profits, I think you are going to reduce access to care,” Meyerhoefer said.