Thursday, August 29, 2013
Back in March, the City of Pittsburgh decided to file suit to have the University of Pittsburgh Medical Center's state property-tax exemption revoked. I'm not an expert in Pennsylvania law, so I've refrained from commenting on the merits of this effort. But I am an expert in tax-exemption under Internal Revenue Code Section 501(c)(3), and in reviewing the background of this particular dispute, an interesting point popped up: UPMC may not qualify for exemption under even the generous community benefit standard adopted by the IRS in Rev. Rul. 69-545.
First, some background for those not steeped in the law of hospital tax exemption under Internal Revenue Code 501(c)(3). Essentially from the beginning of the income tax until 1969, the IRS took the position that hospitals were tax exempt only when they provided substantial free care for the poor. This view was set forth in Rev. Rul. 56-185, which held that nonprofit hospitals would be exempt when operated to the extent of their financial capability to provide free or below-cost services for those who could not afford to pay.
In 1969, the IRS changed its position, and adopted what most now refer to as the "community benefit" standard for exemption of nonprofit hospitals in Rev. Rul. 69-545. In this ruling, the IRS held that providing health care services for the general benefit of the community was a charitable purpose, even if a segment of the population (uninsured poor) was excluded "provided that the class is not so small that its relief is not of benefit to the community." The ruling then found that "Hospital A" was exempt under this test, because it had a community board, an "open" medical staff (admitting privileges granted to all who met standards of competency) and most importantly for purposes of this blog post, "By operating an emergency room open to all persons and by providing hospital care for all those persons in the community able to pay the cost thereof either directly or through third party reimbursement, Hospital A is promoting the health of a class of persons that is broad enough to benefit the community." (Emphasis added). Thus the third and fourth criteria for exemption were an "open" emergency room, where all patients were treated without regard to ability to pay and treatment of all patients with third-party insurance (including insurance provided by government, such as Medicare and Medicaid).
So what does all this have to do with UPMC? One of the issues at the heart of Pittsburgh's dispute with UPMC revolves around UPMC's decision to "freeze out" people who signed up for insurance with a competing health provider. Essentially, UPMC is locked in a battle with competitor Highmark over access by patients with Highmark's health insurance to UPMC facilities. UPMC decided not to permit Highmark customers "in network" access to UPMC, meaning that these facilities would be far more expensive to patients with Highmark insurance than patients who insure via UPMC's own captive insurance company. The Chair of UPMC's Board of Directors has been remarkably candid about this, even penning an explanation in a guest column in The Pittsburg Post-Gazette.
So here's the question. If an exempt charitable hospital adopts policies that intentionally discriminate (economically) against patients with "third party reimbursement" designed essentially to force patients with "other" insurance to use "other" facilities, then is that hospital "providing hospital care for all those persons in the community able to pay the cost thereof either directly or through third party reimbursement"? UPMC's policy arguably is purposefully exclusionary, and such an exclusionary policy could be read as inconsistent with the test adopted in Rev. Rul. 69-545. (I realize there is a counter-argument here: that argument is that Highmark's patients would still be able to access UPMC's services as "out of network" patients. Hence, no one is being excluded from UPMC; it's just going to cost Highmark patients a whole lot more. But "any fool knows" what is going on here: UPMC is adopting a purposefully discriminatory stance to punish a competitor). My own view on this is simple: "charitable" hospitals ought not be permitted to discriminate economically with respect to its geographic patient base. This kind of behavior is what we would expect of cut-throat for-profit businesses . . . but perhaps that's exactly what UPMC and other nonprofit hospitals have become.