The business of health care
by James C. Sherlock
A generally accepted rule of thumb for the minimum profitability a hospital needs to keep it running and fund its future is 3%.
The Virginia community hospitals as a group had an operating margin of 10% in 2019. Most of them are filed with federal and state governments as not-for-profit charitable organizations and are untaxed at every level of government.
I wrote a column yesterday This resulted in a 34% increase in Virginia hospital profitability in 2019, generated by tax dollars sent direct to hospitals through the expansion of Medicaid, as well as the increase in Medicaid payments approved by the General Assembly in 2018 were adopted.
There were several good reasons for Medicaid to expand. Better access for the poor. Financial stability for rural hospitals. I was in favor of expanding Medicaid myself, and the Republican votes overdone it.
I'm not sure why the General Assembly had to collect Medicaid payments at the same time, other than that the hospitals wanted the money.
Using taxpayer dollars to make the regional urban / suburban monopoly health systems in Virginia richer than they already were wasn't one of the good reasons Medicaid expanded and increased payments.
They made three home runs – more paid patients, fewer unpaid patients, and higher reimbursements for every Medicaid patient. It couldn't be better. All without lifting a finger when you discount the political contributions.
Readers of yesterday's column said they believe there is no way to reclaim the excess profits their tax dollars funded as these billions of dollars worth of nonprofits are tax-free.
I disagree on a couple of things – taxes and payments instead of taxes.
background
The Federal Revenue Act of 1954 introduced modern tax legislation, including Section 501 (c) for exempt organizations.
When this law was passed in the heart of the post-war industrial boom, nonprofit educational and medical (ed and med) companies simply did not play the outsized role they play in a modern economy.
We still have the basic tax rules of 1954 for exempt organizations, not only in the federal tax code, but by reference to those rules in Virginia as well.
Over the past 50 years, nonprofits have grown in size and importance in the economies of many regions in America.
Over the same period, production has disappeared and development has shifted to the suburbs, with much of the best land in some cities and counties being removed from the property tax list. Richmond is an example. So are Roanoke, Norfolk, Portsmouth, Harrisonburg, Danville and others.
In 1972, Virginia passed the Certificate of Public Needs Act.
Together, COPN's tax exemptions and the granting of regional health monopolies to non-profit organizations laid the foundation for creating the highly profitable, untaxed economic and political power plants that we have today with taxpayers' money.
Now the governor and many members of the General Assembly tremble before them on health issues. And take your money.
What can be done
Taxes. Let's see Virginians get something that size back.
Charitable property tax exemptions currently protected by the Virginia Constitution are subject to the General Assembly's definitions of what constitutes a charity. The constitution itself does not define the term.
Code of Virginia Section 64.2-701 provides the following definitions:
“Charitable Organization” means (i) any person other than an individual who is organized and operated solely for the benefit of the community, or (ii) a government or government department, agency or body, provided that it holds funds for the purely charitable purpose.
“Charitable cause” means the alleviation of poverty, the promotion of education or religion, the promotion of health, a community or other governmental cause, or any other cause the achievement of which is to benefit the community.
Virginia corporation tax and sales tax exemptions for charities do not appear to be protected by the Virginia Constitution. If not, the exceptions can be made dependent on upper limits.
Or, the above simple standards of definition in Virginia law can be applied to determine whether a multi-billion dollar, highly profitable corporation with uncommitted reserves of billions of dollars that controls dozens of for-profit corporations both on and off the coast pays a seven-digit salary A corporate VP for mergers and acquisitions qualifies as a nonprofit. Don't mention any names. Just saying.
Readers will caution that the chances of the General Assembly passing and the governor signing laws to change the tax status of nonprofit hospitals are nearly zero.
I agree with them. In fact, some Virginia politicians probably owe me a big favor to increase the opportunity.
Campaign donations will increase.
Payments instead of taxes. Large nonprofit and state hospitals and educational institutions, such as federal institutions, create big holes in many of the city government's property tax bases. Especially when the economic benefits, including the highest paid workers and their taxes, go to the suburbs. And the services for the hospitals – police, fire brigade, rescue, waste management, supply, etc. – are provided by the cities.
Under Law 94-565, passed in 1976, the federal government makes impact payments to offset some property tax losses.
Even if the major Virginia nonprofits are not directly taxed, cities and counties disproportionately affected by the resulting gaps in their property tax revenues can track the nonprofit corporate giants for payments instead of taxes.
This has been successfully done in other states. Some Virginia communities may already have these agreements.
You might wonder why the big, powerful nonprofits would make such payments since they own and run the general assembly.
Simple answer – risk management.
Cities in other states have gone to court to question the nonprofit status of hospital nonprofits when they were rejected. Pittsburgh is best known to suing the giant medical medical UPMC.
Payments instead of taxes have to be negotiated to evade the courts, but hospitals have several compelling reasons to come to an agreement. They include:
- Are these multi-billion dollar companies trying to go to court and prove they meet the Code of Virginia definitions for nonprofits? They clearly don't.
- They could win by claiming they meet the 501c federal standards that Virginia law currently applies to for tax purposes, but they couldn't. Neither the IRS nor Virginia enforce these standards, but a court could do so.
- Such a suit would mess up the political waters here in Virginia in a big way by exposing many things that most Virginians don't know about and that they don't like when they find out. Are minorities disproportionately affected by the business practices and profits of hospitals? Why is minority and poor health so bad in Sentara's Hampton Roads? Can a nonprofit CEO be canceled? Do the hospital nonprofits want to find out?
- The payments would not approach the total tax burden that would be owed if a hospital system were to lose its charitable status in a court decision. Some of the HCA nonprofit hospitals in Virginia pay more than $ 50 million in taxes annually. Everyone.
- It is unlikely that the lively press, which often leaves them alone because of the charitable mystique, will pass this on to them. Fighting cities. Rich leaders. Poor people. A racist point of view. Pulitzer material.
So on a risk-return basis, the hospitals should pay off.
We see this payment arrangement becoming increasingly applied in Pennsylvania, California, and at least 16 other states.
There is a potential avenue in this now blue state to fund some of our struggling local governments after the blue federal government has used up its multi-billion dollar spending.
That way, you can transfer some of the citizens' money from the hospitals to the local governments where they are housed to mute the property tax rate hike for the rest of us.