Scrutiny of hospitals’ property tax exemption grows nationwide as municipalities search for new revenues.   12/18/2008 by Richard Thomas

“The (Lakeview Medical Center) Board gave away our community hospital,” Rice Lake resident Dan Lawler said in a recent testimony before the city council. “Our question is, when do we stop giving?”

Earlier this year Lakeview, an independent hospital in this community of 8,000 in Northwest Wisconsin, affiliated with Marshfield Clinic, a statewide nonprofit healthcare network with nearly $1 billion in annual revenues. To Lawler and other local critics, the community gave away the hospital for free.

Marshfield Clinic plans to relocate Lakeview and build a new hospital a few miles from the current location, next to the new Marshfield Clinic building that opened this year on the outskirts of town near the intersection of Highways 48 and 53. Construction is set to begin in April and finish by fall 2010.

Since Wisconsin hospitals are exempt from property taxes, the community will foot the bill for fire and police protection, water and sewer, snowplowing and street maintenance.

"All other citizens in the community also pay for these same services, and I don't have to remind you just how tough things are for these people in our community and others just like ours," Lawler said.

“How many tax-exempt businesses can we afford? We need a tax base,” Rice Lake Mayor Dan Fitzgerald told BusinessNorth.

Bradley Bekkum, MD, Lakeview’s board chairman and Marshfield Clinic’s northwest division director, did not respond to BusinessNorth’s requests for an interview. Calls to Marshfield Clinic’s public relations office also were not returned for this story.

The city has called upon Lakeview to provide payment in lieu of taxes (commonly known as either PILT or PILOT). The city estimates it would receive around $240,000 a year on the 40-acre property if the new hospital were not exempt.

The city is withholding the building permit until it reaches a PILOT agreement, and negotiations are stalled until January.

The Lakeview/Marshfield Clinic position is that the hospital already provides considerably benefit to the community. According to a position paper presented to the city council by the hospital’s negotiating team on Nov. 6, Marshfield Clinic provided nearly $374,000 in charity care at its Rice Lake Center satellite in fiscal year 2007. Lakeview Medical Center provided $514,000 in charity care in its fiscal year ending March 31.

Lakeview's charitable care amounts to less than 3 percent of its total gross revenue. Marshfield Clinic actually sued 205 patients who did not, or could not, pay their bills in 2007, according to Barron County’s clerk of courts. Meanwhile, Lakeview filed 125 claims for unpaid medical bills during the same year.

According to the Lakeview/Marshfield Clinic position paper, the city’s negotiating team initially “threatened to withhold police and fire protection unless Lakeview agreed. Lakeview challenged the legality of the city’s position of withholding police and fire protection and the city retracted from this position.”

Mayor Fitzgerald said the city made no such threat. “How could we? I don’t know where that comment came from,” he said.

The city maintains the hospital may have to hire its own emergency room security staff, as do many other hospitals.

Lakeview has offered “in-kind” service trade, for instance, adding staff to the fire department’s ambulance crew, thus reducing city-paid overtime. But such service would save the city only $10,000 a year, Fitzgerald said.

While Lakeview Hospital is property tax-exempt, Marshfield Clinic operations are not. The Marshfield Clinic paid $287,000 in property taxes for its Rice Lake real estate in 2007.

In 2001, Marshfield Clinic sued the city of Eau Claire seeking a property tax refund. The healthcare provider lost in both circuit court and on appeal, and the Wisconsin Supreme Court declined to review the case.

The Court of Appeals noted while healthcare is laudable, the service does not necessarily qualify as “benevolent.”

“It might be if the care were provided free of charge or at greatly reduced cost to the poor,” the judges wrote. “Marshfield charges some patients the going market rate for medical care without any discount, and 97 percent of its patients pay in some manner. As a matter of law, this is not a benevolent use of property.”

Rice Lake is not alone

Municipalities nationwide are struggling with budget crises, and looking to negotiate PILOTs with hospitals and other nonprofits. Like the city of Rice Lake, local governments use building permits and zoning changes as bargaining chips.

Hospitals require more services than many businesses and receive the highest priority. But PILOTs are voluntary and not easily won.

In 2004 the city of Milwaukee launched a voluntary program for nonprofits, but got few takers. “The city’s major tax-exempt property owners (namely, healthcare systems and colleges/universities) continue to be reluctant to make PILOTs,” states the Milwaukee city assessor’s 2007 budget report.

In the city of Mequon, construction of an $85 million expansion of Columbia St. Mary’s Hospital was halted in 2005 after the city council rejected the hospital’s payment offer and refused to issue building permits. The delay cost the hospital $325,000.

The hospital offered $2.5 million over 30 years, far below the tax-generating value of the land, estimated at $407,000 per year. An agreement finally was reached after a change was made over how much of the money would be paid up front.

Technically, the issue in Mequon was not over payment in lieu of taxes, however. The city sought and won the payments to finance expansion of a nearby intersection, and fund replacement of a city fire truck. At five stories the new hospital is the tallest building in Mequon, and the city needed a truck with a taller ladder.

In Rice Lake, city officials have found just two other hospital PILOT agreements in the state as potential models.

After a three-year legal battle, Summit Township near Milwaukee negotiated a 2007 agreement with Aurora Health Care, Inc.— $2.7 million up front and between $100,000 and $250,000 annually thereafter.

On the heels of its battle with Summit, Aurora more readily reached a PILOT agreement with the nearby Village of Grafton. Negotiations took only three months and did not result in high legal fees for either side, said Darrell Hofland, Grafton’s administrator.

Elsewhere, other major hospitals also have ponied up, according to a 2004 study by Policy Matters Ohio. “A number of the nation’s elite hospitals make some kind of payment to the cities in which they are located, in lieu of taxes or for specific services. These range from very little to nearly $2 million a year,” it states.

Hospitals making payments in fiscal 2004 included John Hopkins in Baltimore ($3.1 million in fiscal 2004), Massachusetts General in Boston ($1.9 million) and Stanford (CA) Hospital ($5.8 million).

Scrutiny of tax-exemption grows

Nonprofit hospitals are tax-exempt because, in theory at least, they serve poor people for free or at reduced charge. But hospitals have found themselves defending their exemption in recent years as they increase revenue, pay high salaries and charge market rates to uninsured and under-insured patients.

Laws are vague as to how much charity care a hospital must provide to be tax-exempt.

The issue is especially acute in the Upper Midwest. In Wisconsin, 95 percent of the hospitals were private nonprofit, in 2006, according to the Alliance for Advancing Nonprofit Healthcare. In Minnesota, 69 percent were private, nonprofit with the rest public.

The 2006 national average was 59 percent.

“The tax-exempt status of virtually the entire hospital industry in Wisconsin requires a hidden public subsidy on top of high hospital costs,” states a 2007 report by the Institute for Wisconsin’s Future. “The not-for-profit hospitals operate a win-win system—they charge high rates and have others cover the cost of their municipal services.”

According to the institute’s 2006 estimates, Wisconsin’s 124 nonprofit hospitals own at least $6 billion worth of property. The hospitals’ combined annual revenue is more than $11.5 billion. Annual salaries for CEOs often top $1 million.

The Wisconsin Hospital Association reported Dec. 18, 2008 that hospitals are having their own hard times. “Often misperceived as ‘recession proof,’ hospitals are being hit hard by a nasty one-two punch brought on by the rapid recession,” the association's report stated.

Charity care provided by Wisconsin nonprofit hospitals increased 19.1 percent in the first three quarters of 2008 (compared to the same time period in 2007), bad debt increased 19.6 percent and total margins declined 73.5 percent, according to the report.

“Everyone’s having a tough time,” Jack Norman, research director for the Institute for Wisconsin’s Future, told BusinessNorth. “In a recession it’s hard for communities to keep services going. Hospitals should be paying their share of property taxes.”

In 2007 and again in 2008, Gov. James Doyle pushed for legislation to tax hospital revenues, though under his plan both hospitals and the state would have benefited. The state would have used part of the sales tax to increase federal Medicaid payments to hospitals. In turn the federal government would increase matching funds to the state.

Republicans in the state Assembly blocked the bill twice, but Doyle is expected to re-introduce the measure again in 2009. The Wisconsin Hospital Association initially opposed the measure, calling it a “sick tax,” but later reversed position and supported it.

In 2002 the Champaign County (IL) Board revoked Provena Covenant’s exemption because the hospital’s charity care amounted to only 1 percent of its revenue. In September 2008 the state district appeals court decided against the hospital. The Illinois Supreme Court has agreed to review the case.

In 2007 the U.S. Senate’s Finance Committee estimated nonprofit hospitals receive between $12.6 billion and $20 billion a year in benefits from tax-exemption at federal, state and local levels.

Meanwhile, a 2006 Congressional Budget Office report concluded in a five-state survey that nonprofit hospitals provided only slightly more uncompensated care than for-profit hospitals.

Mark Everson, Internal Revenue Service commissioner, came to a similar conclusion a year earlier. “Some tax-exempt health care providers may not differ markedly from for-profit providers in their operations, their attention to the benefit of the community, or their levels of charity care,” Everson stated in 2005.

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