‘Payment in lieu of taxes’ for hospitals not a new discussion in Cleveland

A handful of consulting firms suggested this week that Cleveland put in place a selective “payment in lieu of taxes” program for hospitals and other non-profit organizations. The line between for-profit and not-for-profit hospitals is blurring. Are non-profit hospitals on the verge of losing some of the benefits of decades of tax exemption?

CLEVELAND, Ohio — A handful of consulting firms suggested this week that Cleveland put in place a selective “payment in lieu of taxes” program for hospitals and other non-profit organizations.

The suggestion, part of a 344-page report (pdf), painted a fiscal bull’s eye on health care systems like the Cleveland Clinic and University Hospitals — major property owners in Cleveland that don’t pay taxes on their property because, as non-profits, they are exempt.

The trouble is, the city needs to fill a budget gap next year estimated at between $30 million and $50 million, according to the Cleveland Plain Dealer. Mayor Frank Jackson asked for the consultants’ recommendations for balancing his budget — without layoffs or service cuts.

The consultants came up with many ways the city could cut costs or raise revenue. A PILOT program for “select tax exempt institutions” could raise $5 million in revenue a year, based on what the select institutions agree to pay.

Thanks to the worst recession since the Great Depression, many municipalities nationwide are talking about PILOT programs to lessen budgetary pain. Why not? Most of the municipalities provide their hospitals with fire and police protection. Some pay for road improvements and traffic lights. These services have costs, which hospitals do not help to pay with property taxes.

In Ohio, which funds its school districts largely through property taxes, the tax exemptions also deprive the schools of operating revenue.

It’s not the first time Northeast Ohio has floated the idea of requiring tax-like payments from hospitals. In 2004, Cuyahoga County Treasurer Jim Rokakis asked policy analysis firm Policy Matters Ohio to look at the merits of a PILOT program for the county. Policy Matters Ohio concluded (pdf) that Cleveland Clinic and University Hospitals alone owned $1.3 billion-worth of tax-exempt real property in the county.

If the hospital systems were for-profit institutions, the property would generate $34 million in tax receipts per year, according to Policy Matters Ohio.

In the intervening five years, the Internal Revenue Service (IRS) and congressional leaders like Iowa Senator Chuck Grassley have challenged the tax-exempt status of hospitals on different grounds — whether the hospitals provide sufficient benefit to their communities for not paying taxes.

The nation’s efforts to reform its health care system is adding new wrinkles to the community benefit debate. Grassley, who is ranking minority member on the Senate Finance Committee — the only congressional committee attempting to craft bipartisan health care reform — says if most Americans get health insurance as a result of reforms, that would dramatically cut the charity care given by hospitals.

Prior to 1969, the IRS required tax-exempt hospitals to satisfy charity care standards, according to law firm Pepper Hamilton LLP. “Charity care” meant free or low-cost medical care for patients who couldn’t afford it. After the Medicare and Medicaid programs were put in place in the mid-1960s, however, much of those charity care costs were paid by the federal government. So in 1969, the IRS broadened its charity care concept to one of “community benefit.”

Today, there is no dollar amount of community benefit that hospitals are required to meet. And many hospitals define “community benefit” as loosely as possible. The Cleveland Clinic and University Hospitals gave away more money in Northeast Ohio last year in response to growing joblessness, according to the Plain Dealer. University Hospitals upped its community benefit by 25 percent to $210 million in 2008 from 2007, while the Clinic spent 3 percent more in region at $436.1 million, the Plain Dealer reported.

In addition, many Ohio hospitals are running their operations more like for-profit businesses, blurring the line between for-profit and not-for-profit hospitals. The Clinic even launched a for-profit wellness enterprise this year.

At the same time, many Ohio hospitals are feeling the stress of the worst economy in decades, according to the Ohio Hospital Association. One in three hospitals that responded to the association’s member survey in April said it would lay off more workers in the following six months. At that time, 42 percent of hospitals had frozen hiring or salaries and 29 percent of hospitals had delayed or canceled construction projects in the prior six months.

Over the next two years, Ohio hospitals will pay a new corporate franchise fee — which many of them call a “tax” — of about $145 million, according to the Ohio Hospital Association. The Clinic alone is paying a monthly fee of $3 million. That’s an additional $36 million a year.

The fee was a way for the state to attract more Medicaid dollars to fill a big budget gap. At one point, the hospitals were sure the state would return the fee in extra Medicaid payments. But when Gov. Ted Strickland finally signed the contested budget bill in July, there was no relief for hospitals.

Are Ohio hospitals returning enough to their communities to warrant continued tax-exempt status? I don’t know. But the hospitals already are paying more to their communities and the state. Would it be fair to add payments in lieu of taxes to the mix?