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By Monica E. Oss

Yesterday, my colleague Sarah C. Threnhauser outlined the effect of the Patient Protection and Affordable Care Act (PPACA) on individuals (see It’s Tax Day! What Does That Mean For The Uninsured?) – particularly the tax penalties for uninsured individuals. But the PPACA is likely to have another big tax effect – the reexamination of the tax-exempt status of non-profit health care organizations.

Challenges to non-profit tax-exempt status in the field are not new, and we’ve covered a few:

  1. Illinois Catholic Hospital Loses Tax Exempt Status
  2. Illinois Department of Revenue Decision Regarding Property Tax Exemptions Requested by Three Non-Profit Hospitals
  3. Minnesota Decision Raises Questions on Tax-Exempt Status of Some Non-Profit Organizations
  4. Holy Cross Village at Notre Dame Denied Religious-Based Tax Exemption by Local County Board of Appeals
  5. IRS Revokes Tax-Exempt Status of Four Credit Counseling Agencies
  6. UPMC Motion To Dismiss City Of Pittsburgh Challenge To Property Tax Exemption
  7. IRS to Revoke Tax-Exempt Status of 300,000 Organizations

But the issue gained new attention from the media last month when the State of California revoked the tax exempt status of Blue Shield of California (the state’s third largest health insurer, right behind non-profit Kaiser Permanente and for-profit Anthem). The California Franchise Tax Board did not release a statement about the reasons for the decision. Some sources have noted high executive pay, premium rate hikes for consumers, and the insurer’s $4.2 billion in financial reserves as possible reasons for the decision. Blue Shield is contesting the decision, but has still been ordered to file tax returns dating back to 2013 (see With Billions In The Bank, Blue Shield Of California Loses Its State Tax-Exempt Status and Blue Shield of California loses tax-exempt status).

But it isn’t only health insurers that need to be concerned in this market – hospital systems have seen similar challenges. Currently, in New Jersey a court case could decide whether the Morristown Medical Center owes millions in property taxes, if the center’s tax-exempt status is revoked (see Case Could Cost Nonprofit NJ Hospitals Millions — and Their Tax-Exempt Status). And the state of Connecticut is currently considering a bill that would revoke the tax-exempt statuses of hospitals in the state that are not operated in the same location as an emergency department or federally-qualified health center (see An Act Concerning The Tax Exempt Status Of Certain Hospital Facilities).

OPEN MINDS subscriber J. Kevin Fee, President of Angler West Consultants, Inc., shared some insights on this issue with me. He wrote:

Over the years I’ve noted that many developments that begin with health insurers later impact hospitals, and thereafter, human services organizations. In this instance, I hypothesize that once the market share of for-profit health insurers reaches a certain threshold in a market that also includes non-profit providers, the public (and their representatives) come to see for-profit and non-profit insurers as indistinguishable – as indeed they are, since the non-profits are compelled to operate like for-profits in order to retain their market share. Ultimately, this leads to a recognition that tax revenues can be increased by effectively forcing non-profits to convert to for-profit status (or at least, eliminating or reducing their tax exemption benefit).

He went on to note that several of the nation’s largest health care systems might have cause for concern:

If revoking the tax exempt status of non-profit health insurers becomes a trend, it’s easy to see that trend spreading to the hospital industry, where HCA now owns 165 hospitals and employs more than 200,000 staff. Perhaps a few years down the road, UHS, Civitas (formerly National Mentor), and Providence will reach the tipping point in the human services industry, and questions will arise as to the basis for granting tax exemption to nonprofit human services organizations.

I think the issue is fundamental to the changes in the U.S. health care system. With parity and universal coverage, the need for “charity care” is greatly diminished – and with it, the public policy rationale to grant tax abeyance to health care organizations is greatly decreased. In addition, as recent cases have used a narrower standard for “charity care” defined as care given with no expectation of remuneration (this is my non-legal summary), this eliminates consideration for care delivered under a sliding fee scale, bad debt, and contractual allowances and losses from Medicaid and Medicare payments.

I expect we’ll see more challenges to the tax-exempt status of non-profit health care organizations in the years ahead. And those challenges will be more likely from cash-strapped city, county, and state governments. In addition to outright challenges, we’re likely to see more payment-in-lieu-of-tax movements (see Mayor of Boston’s PILOT Task Force Final Report & Recommendations and Payments in Lieu of Taxes: Balancing Municipal & Nonprofit Interests).

What should executive teams do? Like my approach to playing chess, the best defense is an aggressive offense – and that has four components. The first priority is to develop financial management systems that allow you to quantify the amount of charity care you deliver by type – free care, sliding fee scale care, bad debt, and losses/contractual allowances for Medicaid and Medicare. The second priority is to establish written criteria for eligibility for how consumers can access “free” care at your organization, and make sure your entire organization operationalizes that criteria. The third priority is to have clear application of charitable contributions to specific charitable needs in your community.  And lastly, communicate to your community (elected officials, policymakers, funders, the public at large) information about these statistics and policies.

For a look at how you can prepare your organization for the coming challenges, check out our resources on the issue of tax-exempt status:

  1. Tax-Exempt Versus Non-Profit: Big Implications for the Field
  2. Tax-Exempt Versus Non-Profit: The Definitions Will Soon Have Big Implications for the Field
  3. Health Reform Adds New Requirements for Tax-Exempt Hospital Organizations
  4. Emerging Performance Reporting Issues for Non-Profit Health Care Provider Organizations Required for Maintenance of Tax-Exempt Status
  5. Non-Profit Health Care Provider Organizations Facing New Challenges to Maintain Tax-Exempt Status
  6. Ensuring Your Tax-Exempt Status: An Executive Briefing
  7. Charity Care Issues In An Era Of Expanded Health Care Coverage
  8. The Taxman Cometh: How To Demonstrate Your Charity Care & Protect Your Tax-Exemptions
  9. Charity Care Vs. Community Benefit
  10. Who Gets Your Charity Dollars?
  11. An Early Effect Of Medicaid Expansion? A Drop In Charity Care Admissions
  12. Charity Care Is In The Eye Of The Beholder

I think this is a sleeping policy issue in the field – and one we’ll see more of in the near future.

Editor’s Note: This article was updated April 22, 2015. An earlier version of this article incorrectly attributed statements about the revocation of Blue Shield of California’s tax exemption to the California Franchise Tax Board.

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