NON-PROFIT HOSPITALS that don’t painstakingly document their charitable activities and other benevolent services are running the risk of getting targeted for a PILOT program, health policy specialists say.
PILOT – Payment In Lieu Of Taxes – isn’t a new concept, but its use tends to be cyclical, depending on the government’s budget status. During a period of protracted revenue shortfalls, municipalities look for creative ways to boost income, and not-for-profit organizations are increasingly being flagged for scrutiny, says Paul DeMuro, partner with the San Francisco-based health law firm of Latham & Watkins.
“What you’re seeing is a greater demand for transparency and a sharper focus on what not-for-profits do to justify their status,” he said. “Governments are coming up with value judgments about whether hospitals and other provider organizations should have that tax status. PILOTs are politically popular, and not-for-profit hospitals are a common target.”
Failure to demonstrate a commitment to charity care, education and philanthropy could result in a hospital getting its tax-exempt status revoked, as Provena Covenant Medical Center in Urbana, Ill., learned in September 2006. The Illinois Department of Revenue determined that Provena’s charity care levels were too low – reportedly less than 1 percent of total revenues – and it therefore did not qualify for a property tax exemption.
DeMuro believes hospitals are doing enough to justify their not-for-profit tax status, but they need to become more fastidious in documenting their benevolent activities.
“Most do more than they point to, so they definitely must do a better job,” he said. “They should put together an annual report that accounts for all their outreach activities, charity care and unprofitable services that they continue for the benefit of the community.”
There are many “orphaned” activities that can be easily overlooked, such as projects led by board members, wellness events, transportation services and publishing projects, DeMuro said.
Hospitals also play a major role in community protection, providing services for bioterrorism, epidemics and natural disasters, said health policy specialist Michael A. Murer, executive vice president and general counsel for the Joliet, Ill.-based Murer Group.
“No one is paying them for that – they are just supposed to be there,” he said. “It is their job to educate the police and fire departments about biological hazards. They are looked to as a community resource for all types of disasters.”
Using PILOTs as a revenue enhancement tool represents “a seismic shift” toward taxation of organizations that are commonly understood to have charitable purposes, Murer said. That means that “healthcare seams are popping,” and that hospitals are more vulnerable to negative public perception than ever.
DeMuro concedes that while PILOTs can be viewed as “government overreaching,” the issue isn’t totally black and white. There have been instances in which tax-paying for-profit hospitals have been acquired by not-for-profit organizations, representing the loss of millions of dollars in property taxes that previously had been paid by the for-profit facilities. From a city’s perspective, that understandably doesn’t seem fair, he said. And in other circumstances, not-for-profit hospitals have agreed to pay for certain infrastructure or services as a condition for property purchases or land use agreements.