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Tax exemption brings scrutiny for nonprofit health systems

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The new UPMC Pinnacle Memorial rises in West Manchester Township, York County, on the site of the former Hawk Lake Golf Course. Construction of the 220,000 square-foot hospital is expected to wrap up in 2019.
The new UPMC Pinnacle Memorial rises in West Manchester Township, York County, on the site of the former Hawk Lake Golf Course. Construction of the 220,000 square-foot hospital is expected to wrap up in 2019. - (Photo / )

As UPMC Pinnacle and WellSpan Health consolidate more practices and more hospitals into their networks, they can often seem to patients like behemoths swallowing up the health care landscape.

But midstate residents watching these giants might be surprised to learn they are also some of the largest tax-exempt charities in Central Pennsylvania.

In its last annual report — released in 2016 before its purchase of four midstate hospitals from Community Health Systems or its partnership with Pittsburgh-based UPMC — Harrisburg-based PinnacleHealth billed itself as the “largest charitable organization in the region” with nearly $1.1 billion in revenue.

York-based WellSpan, with $2.2 billion in revenue according to its 2017 community benefit report, is likewise a nonprofit charity.

WellSpan Health and UPMC Pinnacle, like all nonprofits, work with multiple layers of government to justify their tax-exempt status and negotiate how they might otherwise benefit the communities they serve. According to Paula Bussard, chief strategy officer for the Hospital and Healthsystem Association of Pennsylvania, negotiations often start at the municipal and county level.

Nonprofits will frequently negotiate payment in lieu of taxes, or PILOT, programs with the municipalities where their hospitals operate. UPMC Pinnacle is in the middle of such negotiations with officials in West Manchester Township where the new UPMC Pinnacle Memorial hospital is currently under construction.

Occasionally, a health network will negotiate a service in lieu of taxes, or SILOT. 

“Sometimes in a rural county, that provider may provide EMS service to the county. There’s lots of different ways there can be payment in lieu of taxes and services in lieu of taxes,” said Bussard.

The discussions over what, exactly, those payment and services might look like are entirely up to the local governments and the health networks themselves whenever a new facility or hospital is being built or when an existing, for-profit facility comes under the ownership of a nonprofit.

“That is worked out between the entity and the municipality, and nothing in state law precludes how they might work it out,” said Bussard, who noted health networks are typically very eager to show what they can do for a community.

Alongside such agreements, nonprofit hospitals and health networks retain their tax-exempt status by filing a report of their finances to the Internal Revenue Service on a document known as a Form 990. On the form, the organization must express a charitable purpose in order to remain exempt from federal corporate and income taxes.

But health care networks — and hospitals they own — are also exempt from state and local taxes, including property taxes. Pennsylvania requires organizations to file the same paperwork with the Department of Revenue that they do with the IRS, but the state standards for tax-exempt status are more involved than those at the federal level.

The Pennsylvania Constitution allows the General Assembly to reduce the burden of taxes on what it calls “purely public charities.” While the definition of what constitutes a purely public charity is left out of the Constitution, the state Supreme Court set a five-point test in a 1985 decision in Hospital Utilization Project v. Commonwealth.

In that case, the project — a nonprofit formed as a joint effort by several Pennsylvania health networks to better manage and share patient data — appealed a decision by the Department of Revenue that had removed its tax-exempt status. The court, ruling against the project, formed a five-point test now commonly known as the HUP test.

The test consists of five questions regarding a nonprofit’s activities. In order to be tax exempt, the organization must have a distinct charitable purpose, render a substantial portion of its services towards that purpose, benefit a population with those services and relieve the government from otherwise providing those services, all while existing separately from a “private profit motive.”

In a statement, UPMC Pinnacle Health said it provided $56.6 million in community benefit in 2016, the most recent year for which Pinnacle has offered numbers and before the company had purchased the four hospitals from CHS. WellSpan Health, in its annual community benefit report, said the health network supplied $197.2 million in charitable services to the region.

That community benefit often stems from programs that do not bring any income to the hospitals — including treatment costs not fully reimbursed by Medicaid as well as internal programs to alleviate the cost of health care for low-income patients. Those programs are often known as charity care.

Charity care is a form of financial aid for patients. Depending on their need, patients may enroll for free or low-cost care from the hospital.

“We’ve been doing community benefit work for many years,” said Kevin Alvarnaz, director of community health and wellness for WellSpan.

According to Alvarnaz, WellSpan is currently in the middle of its most recent community health needs assessment, a survey conducted every three years to help the network direct its program as required by the Affordable Care Act.

WellSpan’s last assessment, published in 2016, sought to identify barriers to health care and landed on poverty as a key roadblock.

“We partner with our other providers in the community, whether they’re affiliated with another health care system or an independent provider. So we really have worked together as a community to address that access issue especially around financial need,” said Alvarnaz.

That last report convinced the health network to loosen its charity care eligibility standards. Officials increased the income limit for eligibility from 300 percent of the federal poverty level to 400 percent, allowing more people to apply for charity care.

As health networks grow so, too, must the community benefit they provide. Pinnacle acquired four hospitals last summer — Lancaster Regional Medical Center and Heart of Lancaster Regional Medical Center in Lancaster County, Memorial Hospital in York County and Carlisle Regional Medical Center in Cumberland County — from for-profit Community Health Systems. UPMC Pinnacle will have to expand the services it offers to the community in order to justify the new tax-exempt status of those four facilities.

According to a UPMC Pinnacle spokesperson, the community benefit will be shown in time.

“We have put tools and processes in place to capture their charity care and community benefit, and we will be prepared to share that information at the end of this fiscal year,” said the spokesperson.

Like WellSpan, UPMC Pinnacle touts its charity care as a hallmark of the community benefit provided by its hospitals. In a statement, the network said it had already approved 800 emergency room patients for charity care and worked with 193 others to enroll them in the state’s Medical Assistance program at its four new hospitals.

Correction: The original version of this article used revenue figures from tax documents for WellSpan and PinnacleHealth that did not account for all sources of revenue for those networks. The story has been updated to reflect the total reported revenue of both health networks.

The article incorrectly described the county's use of the morgue at WellSpan York Hospital. The use of the morgue is a donation.

The article incorrectly described how WellSpan treats Medicaid billing as part of WellSpan's community benefit. It should have described Medicaid charges as being billed but not fully reimbursed.

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