TIGHTENING THE NOOSE ON NONPROFITS?
Nonprofits targeted for reform — whether needed or not
BY LINDA S. MORONEY
Wisconsin nonprofit health care providers are undergoing more scrutiny than ever before. Recent months have brought a wave of criticisms and attacks from parties who, even in the most generous light, could be described as strange bedfellows. Like tax-exempt hospitals across the country, several Wisconsin hospitals have found themselves targeted by class-action litigation filed by uninsured patients distressed with what they perceive as unfair and illegal pricing, followed by the indignity of outrageous and harassing collection techniques. Spearheaded by the notorious Dickie Scruggs, of tobacco litigation fame, the original claims were filed in federal district courts across the country. After experiencing a resounding thud (based on judicial observations that the claims were unsupportable under federal income tax laws), the plaintiffs have soldiered on by refiling claims in state courts, applying alternate theories based primarily on state contract laws and consumer protection statutes. Across the country, labor unions have seized upon the charity-care cases, along with whatever additional fodder can be gathered (such as IRS criticisms of compensation paid to nonprofit healthcare executives), in their efforts to generally discredit the leadership of many nonprofit hospitals. Now it appears that unions may be eying Wisconsin as their next stomping grounds in their efforts to organize the workforces of nurses and other health care institution employees. The SEIU and AFSCME are fully engaged in battle against Chicago hospital systems, with all participants generally expecting these “corporate campaigns” to continue for years. Already, at least one Wisconsin hospital has encountered its own mini-campaign when negotiations with its nurses over retirement benefits broke down. While that controversy recently was settled, Wisconsin hospital systems are rightfully wary these days as to potential organizing efforts in relation to their workforces. At the same time (not so coincidentally), state and local tax and charity officials across the country have begun to enter the fray, and Wisconsin is no exception. Following the lead of attorneys general in states like Minnesota and New York, the Office of the Wisconsin Attorney General is now investigating the pricing and collection practices of Wisconsin nonprofit hospitals. And, in a particularly unsettling move, Wisconsin property tax officials appear to be applying new twists to property tax exemption statutes, so as to call into question the treatment of various health care facilities that have long enjoyed exemption from Wisconsin property taxation.
In hearings held by various Congressional committees, the critiques of nonprofit healthcare have come fast and furious, with proposed reforms that vary wildly in the severity of their approach.
Wisconsin officials are likely paying close attention to pending litigation involving an Illinois Catholic hospital that had been exempt for decades, only to have its tax-exempt status yanked by local officials in 2004 based on a conclusion that the institution was not sufficiently “charitable.” State legislatures are taking interest, with several states now having enacted formulaic approaches to determine the circumstances under which hospitals are entitled to property tax exemption.
Federal Lawmakers Getting Involved
In what appears to be taking the concept of “piling on” to entirely new levels, Congress has joined the fray. Over the past 18 months, no less than three congressional committees (including the House Ways and Means Committee, the House Energy and Commerce Committee, and the Senate Finance Committee) and innumerable subcommittees have taken upon themselves the task of scrutinizing nonprofit organizations and, in particular, nonprofit health care providers. Exhibiting the typical rhetoric, congressional leaders have defended these inquiries as entirely warranted, given that the legal standards for Section 501(c)(3) tax-exempt status of health care organizations were established over 35 years ago; such standards remain largely unchanged yet today, although the health care industry has evolved such that today's provider environment bears little resemblance to that which existed when the standards were established. More cynical observers speculate, however, that the current inquiries are motivated by pressure from unions and the plaintiffs' bar; the bipartisan nature of congressional interest lends itself to such banter, as do circumstances such as the fact that Dickie Scruggs is Trent Lott's brother-in-law. In a series of public hearings, the critiques of nonprofit health care have come fast and furious. At the thousand-foot level, the common assertion is that nonprofit and for-profit hospitals today are remarkably similar in their operations and practices; the absence of substantial distinctions between the two groups suggests that there is little basis for allowing nonprofit hospitals to enjoy federal income tax exemption (and the other benefits that flow from Section 501(c)(3) status, such as the ability to receive tax-deductible contributions and the opportunity to utilize tax-exempt bond financing) while forprofit hospitals pay substantial tax bills. Witnesses have offered statistics to the effect that, while nonprofit hospitals may offer some additional amount of uncompensated care (defined to include both true “charity care” as well as amounts written off as uncollectible), in comparison to for-profit hospitals, the differential is not nearly
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as large as the public is led to believe. By comparison, governmental hospitals appear to provide substantially greater levels of uncompensated care than either nonprofit or for-profit hospitals. For what it's worth, institutions in all three classes of hospitals (governmental, nonprofit and for-profit) appear to view themselves as providing significant “community benefits,” and all tend to report a wide range of programs and services as demonstrating their dedication and service to the communities in which they are located. Consistent with this, critics of nonprofit health care suggest that the typical “community benefit” measures in today's health care industry are simply what any business would do to attract customers, enhance its market reputation, or stay in touch with its customer base. Many critics have launched a more personal charge as well, to the effect that the boards of nonprofit health care institutions (which by tax law are required to include a majority of independent community leaders) are predominantly comprised of ill-informed and disconnected businessmen and women who simply rubber-stamp the decisions of executives; such decisions are noted to include approval of executive compensation and benefits packages that are exorbitant and incompatible with a nonprofit mission. Although not in the same numbers as the critics of nonprofit health care, at least some representatives of the nonprofit health care sector have come forward to offer a defense. Such witnesses have pointed to studies suggesting that nonprofit hospitals are more likely than for-profits to offer certain types of health care services that, although important or even essential, are unprofitable (for example, psychiatric emergency services, home health services, child and adolescent psychiatric care, AIDS treatment, and alcohol and drug treatment). Other studies show that nonprofit hospitals are less market-sensitive than for-profits, and are more likely to preserve their facilities and programs during economic downturns. Others comment that, while government authorities may be inclined to impose rigid formulas defining a
required amount of charity care or community benefit, such standards are intrinsically flawed since “community benefit” is not susceptible to measurement in sheer dollars; for example, certain types of programs and services offered by nonprofits are relatively low-cost, but may have a substantial positive impact on community health. In this context, congressional leaders have proclaimed their intent to offer proposed legislative reforms, including those that are aimed at the nonprofit sector generally (including, but not limited to, hospitals and health care institutions), and those that are aimed at nonprofit health care specifically. In the former category, proposed measures are far-reaching (depending on the particular source of the proposal) and vary wildly in the severity of their approach. Most proposals, however, consistently focus on enhancing federal and state enforcement mechanisms, substantially modifying and expanding IRS reporting and public disclosure provisions, implementing improved financial oversight, bolstering the quality of governing boards and improving their processes and accountability, and imposing both substantive and procedural standards for executive compensation. As to nonprofit health care providers specifically, legislators have been presented with proposals calling for, among other measures, hard and fast charity care and community benefit formulas, mandated community needs assessments, expanded reporting of charity care and community benefit practices, limitations on the amounts that can be charged to uninsured patients, requirements for medical debt repayment plans, and constraints on debt collection practices.
For what it's worth, institutions in all three classes of hospitals … appear to view themselves as providing significant"community benefits." yet this fall. Most insiders expect that the initial legislation will focus on nonprofit organizations generally, rather than healthcare institutions specifically. Until recently, there appeared to be general consensus on both sides of the aisles of Congress as to the need for nonprofit reforms. In mid-September, however, Sen. Rick Santorum (R-Penn.) bucked this trend amid the political wrangling over the passage of the proposed CARE Act and its charitable-giving incentives. In that context, certain legislators have asserted that charitable-giving incentives and nonprofit reforms should be linked together. Faced with the prospect of his charitable-giving incentives being delayed until agreement on charitable-reform legislation, Santorum expressed that the U.S. nonprofit sector doesn't need additional laws (which necessarily divert revenues from charitable programs to compliance efforts), but rather would be better served by more consistent enforcement of the laws already in place. In the meantime, Wisconsin's nonprofit health care providers are left to wait and wonder, as they continue to go about their daily business of serving community health needs. Not a bad way to pass the time, all things considered.
More Laws — or Better Enforcement of Existing Laws?
As with all legislative matters, the outlook is necessarily uncertain. As of this writing, Senate Finance Committee leaders are continuing to assert that a bill will be proposed
Linda S. Moroney is a partner in the Health Law Group at Gardner Carton & Douglas LLP in Milwaukee. She provides tax and corporate advice to nonprofit and other business organizations including health care institutions and other taxexempt organizations. Moroney is a certified public accountant, and she has been listed in "The Best
AS SEEN IN THE WISCONSIN LAW JOURNAL Health Law Special Section Published October 26, 2005
Lawyers in America" since 2003. She can be reached at lmoroney@gcd.com.