From New Jersey to Illinois…

This:

An Illinois appellate court has ruled that part of a law that allows nonprofit hospitals to avoid paying millions of dollars in property taxes is unconstitutional, according to the Chicago Tribune.

The decision not only reopened a statewide dispute, but it is also a blow to nonprofit hospitals across the nation, which have faced scrutiny over their tax exemptions in recent years.

Although the court ruling has created uncertainty, the 2012 Illinois law at the center of the case was meant to provide clarity regarding nonprofit hospital exemptions.

In 2010, the Illinois Supreme Court weighed in on the issue and handed down a decision that suggested nonprofit hospitals in the state that behave like businesses should not qualify for tax exemptions. Subsequently, the Illinois Department of Revenue denied tax exemptions to three hospitals, according to the report.

Last year, NJ-based Atlantic Health System ended a 10-year battle with the City of Morristown over its property tax exemption by agreeing to a $15.5 million settlement for prior-year taxes. In addition, going forward, Atlantic Health System will pay property taxes on some but not all of its property.  The settlement followed a New Jersey Tax Court decision upholding the City of Morristown’s decision to deny a municipal property tax exemption for certain operations that the town saw as for-profit.  In addition, in December 2015, a couple of state legislators introduced a bill that would require all not-for-profit hospitals to pay “Community Service Contributions”, a fancy name for payments in lieu of taxes (PILOT).

The property tax exemption has long been defended as a fair trade for hospitals performing charity care for indigent populations.  Whether or not the value of the property tax exemption is greater or less than the charity care provided depends on a number of factors; however, the position taken by an increasing number of municipalities reflects two realities:

1) Originally, hospitals received property tax exemptions when the facilities were used exclusively to provide charity care.  Obviously, that has since changed.

2) Today, a not-for-profit hospital is not-for-profit in name only.  They act like for-profit companies (some run for-profit divisions), pay executives similarly to their for-profit counterparts, and are forced to compete with for-profit companies.  Not-for-profit hospitals may not be as income-statement-driven as their for-profit counterparts but operating margins and financial metrics are critically important, as the better the performance, the better the rating and the cheaper the access to capital.

This trend won’t go away, and there’s no reason that it should.

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35 thoughts on “From New Jersey to Illinois…

    • On the basis of the added expense due to the tax contributions?

      Zero.

      The original proposal seems to treat all hospitals the same; however, the hospitals in lower income areas that have a much higher percentage of the payor mix coming from the uninsured and Medicaid should be exempt from making any contributions, especially if they are independent community hospitals operating without the strength of a larger system.

      Even if NJ did expand Medicaid, the reimbursement amounts don’t come close to covering the cost of care. Add in the one-two punch of high readmission risk and reduced reimbursements for readmission under the ACA, I’d say that those hospitals are more than pulling their weight, so much so many of them are in distress.

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      • Well, this should be measurable.

        Are there X hospitals today? If there will be X (or even X + N (where N is a natural number)) hospitals, oh, two years after this gets fully implemented, my intuitions will prove to be 100% wrong.

        (Doing something like “X hospitals per N people” and seeing how that ratio has been trending for the last 30 years and seeing what happens to that ratio over the next 30 years will take at least 30 years so that’s probably crazy talk.)

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        • I’m not sure that can be measured given the number of factors that are currently influencing the healthcare industry.

          Without taking the tax issue into consideration, my guess is that if you start out with X hospitals containing Y beds today, you’ll end up with X-N1 hospitals containing Y-N2 beds (N1 and N2 are both natural numbers).

          I see rural hospitals being shut down in favor of outpatient facilities that include urgent care and/or emergency services. I also see hospitals that have to build replacement hospitals due to antiquated facilities building them with far fewer inpatient beds than what they currently have.

          Measuring the impact of adding a property tax-type expense is too difficult to measure because it needs to be done on a case-by-case basis. A hospital operating in an affluent suburb that offers all sorts of retail amenities to patients and visitors should not be subject to the same kind of payment as a rural hospital serving an indigent/Medicaid population.

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          • If it can’t be measured then there is no way of really saying whether this was a good or bad idea even if hospitals close.

            Is there anything that is measurable? It seems to me that Tax/PILOT numbers might suffer from similar inability to measure (or, at least, it’s not obvious to me that we’ll be able to say that numbers that went up were due to this or numbers that went down went down despite this).

            Which means that there’s no way for anybody to say whether or not this met some objective.

            If the objective, of course, is to address some form of resentment that the hospitals are getting away with crap, well… I suppose that we can get a qualitative (if not quantitative) measurement of that.

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              • It seems to me that Tax/PILOT numbers might suffer from similar inability to measure (or, at least, it’s not obvious to me that we’ll be able to say that numbers that went up were due to this or numbers that went down went down despite this).

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            • If it can’t be measured then there is no way of really saying whether this was a good or bad idea even if hospitals close.

              That depends on your perspective. Municipalities receive next to no property tax revenue from hospital-owned facilities (if hospitals lease them, different story altogether). They’ll benefit from any property tax revenues they can get from them. Is having hospitals pay more for an increased share in the cost of city services they incur? Sure, why not?

              Since the motivation for this is requiring hospitals to help fund the cost of municipal services, that objective can and will be met if something like this passes.

              Municipalities can already go after towns, and I know of at least two cases in NJ where they are. In one, the hospital is negotiating a PILOT program.

              I think resentment is taking things a bit too far.

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              • Municipalities receive next to no property tax revenue from hospital-owned facilities (if hospitals lease them, different story altogether). They’ll benefit from any property tax revenues they can get from them. Is having hospitals pay more for an increased share in the cost of city services they incur? Sure, why not?

                If a hospital closes (something we seem to have acknowledged might happen) and we seem to not be able to tell whether it would have happened anyway, it seems to me that the municipality is unlikely to get any money from that particular hospital at all.

                And that’s without taking into account whether hospitals that do not provide tax/PILOT monies are a positive good in and of themselves.

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  1. Wait… you mean the trend of “non-profit” becoming a BS hand waving term rather than meaning providing a public service without monetary gain as incentive should continue?

    I’m not seeing the Why here.

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  2. Non-profits that pay a certain percentage of their income as income to employees should be closely scrutinized. This would probably include *all* hospitals.

    Now, this can get a bit tricky. It’s sometimes perfectly reasonable for non-profit to spend almost *all* their income on employees. Like for example a homeless shelter where people mostly donate time and food, and any money that is donated is used to pay a guy who lives here to keep it clean and maintain it and deal with problems. That seems a perfectly reasonable charity operation to me.

    Meanwhile, there are charities without any employees at all, that really *shouldn’t* have any employees. A literary organization that meets once a month at the library and throws parties to encourage kids to read probably should be entirely volunteer operated…but even then, maybe they hire a DJ or something.

    The problem is, logically, a non-profit hospital *has* to pay doctors and nurses and administrators. Those are full time jobs. And perhaps the conclusion we need to come to here is *hospitals should not be non-profits*. If we want non-profits helping with medical care, perhaps we should have them, you know, offer to help pay bills and whatnot, not operating a hospital.

    But coming up with some sort of rule of thumb for reasonable behavior is hard.

    Although now that I think about it, I have one: Non-profits that pay a certain percentage of their income to *executives* should be especially scrutinized.

    We already have the business-world problem of interlocking boards, and executives sitting on boards of other companies, which is bad enough in the for-profit world…but in the non-profit world, boards *are not supposed to make money from the company*. (Because that would be, duh, ‘profit’.)

    But put the executive of one charity on the board of another, and the executive of the second company on the board of the first, and suddenly they’re both paying *each other* out of the charity funds.

    And, of course, nothing stops board members from hiring *themselves* as executives, except that it looks a bit dubious. Well, nothing except the members replacing that board member, but I really suspect most of these giant non-profits do not have any sort of open membership.

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      • Yeah, the IRS collects that stuff currently.

        It doesn’t seem to do anything with it, though.

        I am fairly active in a local non-profit theatre, and a few years back it went through a board that made a lot of dumb decisions, including having executives and staff that it could not possibly afford. This was, uh, during the recession.

        Now, to be clear, these people were *not* being paid a lot, and were in line with past employees, and it sorta slowly ramped up without anyone noticing…but the end result is that we had a dozen paid staff when we needed one or maybe two, and thanks to the recession and sponsors getting fed up, their salary went from a reasonable percentage of the income to…a huge percentage. I wouldn’t be surprised if it was more than the entire total income of the non-profit. And, of course, the theatre had *other* expenses.

        Not a peep from the IRS about that. Apparently, the IRS is fine with non-profits distributing money to employees faster than they bring it in.

        Maybe the IRS thinks it’s perfectly fine if a business runs itself into the ground, and that seems reasonable…until you remember that a non-profit is not supposed to be allowed to distribute profits, and can’t sell itself…so the only way for board members to ‘steal’ a non-profit is to do exactly that: Hire people and bleed all the money out of it. (Although normally that’s done via the board hiring companies under board member’s control(1) and writing checks to them, but it certainly *could* be done with paid employees.)

        The fact the IRS appeared willing to let a non-profit commit suicide via employee pay tells me they aren’t really paying a lot of attention to employee pay.

        1) Which, yes, is also legal. It has to be *disclosed* to the other board members, but it’s legal.

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          • Nonprofit Hospitals have state controls saying that they’ve got to keep solvent.
            (state has a compelling interest in making sure they stay put)

            I don’t know how the state can even think about enforcing that. I know that in NJ, the state has provided aid to certain hospitals in lower income areas so they’d remain solvent, but that’s not the same thing you’re suggesting.

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          • Well, that’s good, I guess, but my point wasn’t really that the IRS lets non-profits commit suicide(1), my point is that the IRS doesn’t seem to be paying *any* attention to employee pay, at all. They collect the highest paid employees specifically, and I also assume that the (non-)taxes that get turned in would include a section about ‘payroll expenses’ so they could compare total pay with how much money the corporation has.

            But they don’t seem to *care* what that is. They collect it and ignore it.

            I mean, this article is about a *state* court saying ‘You know, there’s an awful lot of money going through there for a non-profit. In fact, except for how your ownership works, you seem to be exactly a business.’.(2)

            The IRS? Nothing.

            1) Well, non-profits are normally allowed to commit suicide, but any stuff they have left over is supposed to end up in the hands of *other non-profits*, not slipped into the pocket of board members.

            2) Which is, of course, the technical difference between a non-profit and a for-profit. For-profits owners are entitled to a share of the profits. Non-profits owners are specifically barred from collecting any profit. That is…literally the entire difference in the law, whether the owners can collect profits. (And, if the company dissolves, if its assets end up in their pockets.)

            I find myself thinking we should actually require more than that, at least to be under a 501(c)(3), aka, a ‘charity’.

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        • So long as the executive compensation packages are reflective of market conditions (what others in the same kinds of position in the same area of paid), the IRS requirements are met. The only time it would need to do something is when the conditions aren’t met.

          Poorly managed non-profits aren’t an IRS problem.

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          • So long as the executive compensation packages are reflective of market conditions (what others in the same kinds of position in the same area of paid), the IRS requirements are met. The only time it would need to do something is when the conditions aren’t met.

            Poorly managed non-profits aren’t an IRS problem.

            Are you asserting a non-profit board hiring a dozen ‘managers’ that kick-back part their salaries to the board in an attempt to bleed assets of the corporation into the boards’ hands isn’t an IRS problem? Because I’m pretty certain it is.

            If board members attempt to steal from a for-profit corporation, the other owners will presumably stop them…and if there are no other owners, well, that’s not really theft, that’s just a dumbass way to distribute profits. The IRS will get pissy if it’s not reported as income, but it’s legal.

            But that’s *not* legal with a non-profit. If there are five board members (and that’s all the members) that are running a million dollar endowment fund non-profit, and they decide they’d each rather just take $200,000 and walk away…that is not legal. And it’s not legal if they do it via writing checks to themselves, and also it’s not legal if they set up a shell corporation to ‘bill’ the fund, and it’s still not legal if they hire 5 people people to ‘manage’ the fund at $80,000 a year, and each of them gets a kickback from every person of $10,000.

            Non-profits cannot disperse money to owners like that, even if all the owners agree. The IRS needs to pay attention to executive salaries, not just to make sure they are in line with what the industry standard is, but also to make sure they are in line with *what the non-profit can afford*, because if they are not, that might be indication that the non-profit is poorly managed, yes…but it *also* might indicate the board is attempting to steal from the non-profit via third-parties.

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            • Non-profits cannot disperse money to owners like that, even if all the owners agree. The IRS needs to pay attention to executive salaries, not just to make sure they are in line with what the industry standard is, but also to make sure they are in line with *what the non-profit can afford*, because if they are not, that might be indication that the non-profit is poorly managed, yes…but it *also* might indicate the board is attempting to steal from the non-profit via third-parties.

              Don’t states already monitor non-profits in order to catch instances of charitable fraud? This is why I claimed that this isn’t an IRS problem. States should be doing this already, and I think they are.

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