A Tax Fight in Pittsburgh and the Future of Nonprofit Hospitals Nationwide

A Tax Fight in Pittsburgh and the Future of Non-Profit Hospitals Nationwide By Kate Pickert, Time, June 10, 2013

The University of Pittsburgh Medical Center (UPMC) is one of the most powerful institutions in Pennsylvania, employing some 55,000 people at more than 20 hospitals and 400 outpatient clinics. Like many powerful organizations, UPMC has detractors. The health care system is under fire from local labor organizers who want to unionize its workforce, a competing health care system that’s eyeing its customer base and, lately, the mayor of Pittsburgh, who is suing UPMC to try to force the institution to pay payroll and property taxes.

UPMC is now a tax-exempt non-profit organization categorized as a charity. The mayor’s lawsuit, if successful, could change its status under Pennsylvania law and portend a national wave of local and state politicians attempting to tax large health care institutions with healthy revenue streams. As health systems like UPMC grow larger, buying up physician groups and local clinics in a trend accelerated by the new health care law, they become more attractive tax targets. UPMC generates some $10 billion in annual revenue, netting the organization more than $300 million in operating income in 2012 and nearly twice that in 2011. Changing UPMC’s status to a for-profit institution under state law could net Allegheny County, which includes Pittsburgh, $11 million, on top of $14 million for the local public school, according to the Pittsburgh Post-Gazette.

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The heart of Mayor Luke Ravenstahl’s case is whether UPMC fulfills its state obligation to advance a charitable purpose, donate a significant amount of services to the community and operate without a for-profit motive. UPMC claims it easily meets these criteria and says Ravenstahl filed the lawsuit against the health system to distract from his own political problems. The mayor announced in February that he would run for re-election, but reversed course less than two weeks later. Ravenstahl cited the grueling demands of the job as his reason, but recently fired his chief of police who was under investigation by federal authorities for corruption and has been indicted by a federal grand jury. The investigation threatens to overshadow the mayor’s political legacy in Pittsburgh.

“The mayor’s trying to curry political favor with someone who can soften his landing when he disgracefully leaves office,” says Paul Wood, a UPMC spokesman, referring to the union SEIU, which has led a so far unsuccessful effort to unionize some UPMC workers. UPMC has countersued the city of Pittsburgh, saying its constitutional rights have been violated, and moved the legal proceedings from state to federal court. Ron Barber, a lawyer with an outside firm hired by the city, says UPMC is trying to “delay and obstruct” the legal process. The city has cited UPMC CEO Jeffrey Romoff’s large compensation package, more than $6 million in 2012, and the fact that more than 20 UPMC executives earned more than $1 million in 2012 as evidence the health care system operates more like a for-profit corporation than a charitable organization dedicated to the local community.

But local Pittsburgh politics aside, large non-profit health systems are getting new attention from city and state tax officials across the country facing budget crises. “The fact is hospitals are coming under more scrutiny,” says Gary Young, director of Northeastern University’s Center for Health Policy and Healthcare Research. “The city’s willingness to take on a hospital with the cachet that UPMC has is sending a chill down the spines of many hospitals around the country who are saying, ‘If this is happening in Pittsburgh, what could happen with us?’” The requirements to be a tax-exempt non-profit in Pennsylvania are tougher to meet than in many other states, but generally, health care systems must have a charitable mission and benefit the local community. In exchange, they are effectively subsidized by taxpayers. Under the Affordable Care Act (ACA), beginning next year, hospitals that are exempt from federal taxes must develop and submit to the Internal Revenue Service detailed assessments of the health care needs of their local communities, along with plans to help meet those needs. Young is the lead author of a paper published in the New England Journal of Medicine in April 2013 that found that in 2009, tax-exempt hospitals spent just 7.5 percent of their operating expenses on community benefits. “We are, to some degree, moving into a new era in terms of some of the expectations we have for hospitals that have tax exempt status,” says Young. “Pittsburgh could be a watershed event.”

Some especially large and healthy hospital systems like UPMC, he adds, are “dripping with success and affluence. If you’ve got a mayor struggling to meet a budget, he could look at that and say, ‘Jeez, what are you really doing for the community?’”