The Business of Healthcare
by James C. Sherlock
A generally accepted rule of thumb for the minimum profitability required for a hospital to maintain operations and fund its future is 3%.
Virginia’s community hospitals as a group in 2019 had an operating margin of 10%. Most of them are filed with federal and state governments as not-for-profit public charities and are untaxed at any level of government.
I yesterday wrote a column that disclosed 34% increases in the 2019 profitability of Virginia hospitals that were generated by taxpayer funds sent directly to the hospitals through Medicaid expansion and increases in Medicaid payments passed by the General Assembly in 2018.
There were several good reasons for Medicaid expansion. Better access for the poor. Financial stability for rural hospitals. I was for Medicaid expansion myself, and Republican votes put it over the top.
I am not sure why the General Assembly also had to raise Medicaid payments simultaneously except that the hospitals wanted the money.
Using taxpayer money to make Virginia’s regional urban/suburban monopoly health systems richer than they already were was not among the good reasons for Medicaid expansion and payments increases.
They hit three home runs — more paid patients, fewer unpaid patients, and higher reimbursements for each Medicaid patient. Doesn’t get any better than that. All without lifting a finger if you discount the political contributions.
Readers of yesterday’s column indicated that they thought there was no way to recover the excess profits that their tax money has funded because those multi-billion dollar non-profits are tax exempt.
I disagree on a couple of levels — taxes and payments in lieu of taxes.
Background
The federal Revenue Act of 1954 established the modern tax code, including section 501(c) for exempt organizations.
When that law was passed in the heart of the post-war industrial boom, non-profit educational and medical (ed and med) corporations simply did not play the same outsized role they do in a modern economy.
We still have the basic 1954 tax rules for exempt organizations not only in the federal tax code but, by reference to that code, in Virginia’s.
Over the last 50 or so years, ed and med nonprofits have grown in size and importance in the economies of many areas of America.
During that same period manufacturing has disappeared and development has moved to the suburbs, leaving much of the best land in some cities and counties off the property tax rolls. Richmond is an example. So are Roanoke, Norfolk, Portsmouth, Harrisonburg, and others.
In 1972, Virginia passed the Certificate of Public Need law.
Together, the tax exemptions and COPN’s granting of regional healthcare monopolies to non-profits laid the foundations for the creation with taxpayer money of the highly profitable, untaxed economic and political powerhouses we have today.
Now the Governor and many in the General Assembly tremble before them on healthcare business issues. And take their money.
What can be done?
Taxes. Let’s see how Virginian’s might get a little of that largesse back.
Charity property tax exemptions, currently protected by the Virginia Constitution, are subject to definitions by the General Assembly of what constitutes a charity. The Constitution itself doesn’t define the term.
Code of Virginia § 64.2-701 offers the following definitions:
“Charitable organization” means (i) a person, other than an individual, organized and operated exclusively for charitable purposes or (ii) a government or governmental subdivision, agency, or instrumentality, to the extent that it holds funds exclusively for a charitable purpose.
“Charitable purpose” means the relief of poverty, the advancement of education or religion, the promotion of health, a municipal or other governmental purpose, or another purpose the achievement of which is beneficial to the community.
Virginia corporate and sales tax exemptions for charities do not appear to be protected by the Virginia Constitution. If not, the exemptions can then be made subject to caps.
Or the simple definition standards in Virginia law above can be applied.
Readers will point out that the chances of the General Assembly passing and the Governor signing legislation to alter the tax status of the non-profit hospitals approaches zero.
I agree with them.
Payments in Lieu of Taxes. Major non-profit and state-owned hospitals and educational institutions, like federal facilities, create big holes in many urban government property tax bases. Especially when the economic benefits including the highest paid employees and their taxes go to the suburbs. And the services to the hospitals — police, fire, rescue, waste management, etc. — are provided by the cities and towns.
Under Public Law 94-565, enacted in 1976, the federal government makes impact payments to make up for some property tax losses.
Even if Virginia’s major non-profit businesses are not taxed directly, cities and counties disproportionately affected by the resulting holes in their property tax receipts can pursue the non-profit business giants for payments in lieu of taxes.
That has been done successfully in other states. Some Virginia municipalities may have those arrangements already.
You might ask why the big, powerful non-profits would make such payments since they own and operate the General Assembly.
Easy answer – risk management.
Cities in other states have gone to court to challenge the charitable status of the non-profit hospital corporations when they were turned down, Pittsburgh most famously suing giant medical non-profit UPMC.
Payments in lieu of taxes must be negotiated to avoid the courts, but the hospitals have several compelling reasons to settle. They include:
- Do these multi-billion dollar corporations want to go to court and prove that they meet the Code of Virginia definitions of charitable organizations? They clearly don’t.
- They might win on a claim that they meet the federal 501c standards to which Virginia law currently refers for tax purposes, but they might not. Neither the IRS nor Virginia enforces those standards but a court might.
- Such a suit would roil the political waters in a big way here in Virginia by exposing a lot of things that most Virginians know nothing about and won’t like when they find out. Are minorities disproportionately affected by the business practices and profits of the hospitals? Why is the health of minorities and the poor so bad in Sentara’s Hampton Roads? Do the non-profit hospital corporations want to find out?
- The payments would not approach in scale the total tax bill that would owed if a hospital system lost its charitable status in a court decision. Some of for-profit HCA’s hospitals in Virginia pay north of $50 million a year in taxes. Each.
- The woke press, which often lets them alone because of the non-profit mystique, is unlikely to give them a pass on this. Struggling cities. Rich executives. Poor people. A racial angle. Pulitzer material.
So on a risk-reward basis, the hospitals are likely to pay up.
We see this payments arrangement increasingly used in Pennsylvania, California and at least 16 other states.
It is a potential avenue in this now-blue state to fund some of our struggling local governments after the blue federal government exhausts its multi-trillion dollar splurges.
And it is a way to transfer some of the citizens’ money from the hospitals to the local governments that host them to mute property tax rate increases for the rest of us.
