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Big 3 hospitals say community benefits equal $1.3 billion in tradeoff for tax exemption

August 19, 2018

Big 3 hospitals say community benefits equal $1.3 billion in tradeoff for tax exemption

CLEVELAND, Ohio – Scaffolding and construction machinery dot the landscapes of each of Cuyahoga County’s three largest hospital systems. 

From MetroHealth’s massive $946-million transformation project on West 25th Street to the Cleveland Clinic’s $515-million on-site health education campus to University Hospitals’ new $24-million women and children’s center in Midtown, each of the systems are using their financial success to expand their footprint. 

But, even as these systems grow, as nonprofit entities, taxes aren’t levied on most of their property. 

In a place like Cuyahoga County, where rates of infant mortality, opioid addiction and chronic illness are perpetually high, critics question if the healthcare behemoths are doing their part for the community. Hospitals, on the other hand, say the millions they spend each year on community health outreach and caring for the county’s poorest more than makes up for forgone property taxes.

“If we were not here, the government would have to relieve that burden,” said Heidi Gartland, vice president of government and community relations for UH.

Gartland said hospitals’ nonprofit statuses allow them to provide care for the community in ways for-profit systems driven by financial returns couldn’t. 

Nonprofit private hospital systems such as the Clinic and UH are required by federal law to provide what is known as community benefit to the areas in which they operate in order to maintain tax-exempt status. While loosely defined, community benefit generally includes education, outreach, research, charity care and non-reimbursed Medicaid care. MetroHealth, as a public hospital, isn’t held to the same standards. 

In 2016, MetroHealth directed 22 percent of its $1.04 billion in operating revenues to community benefit endeavors, while the Clinic and UH contributed 10 percent ($809 million) and 9 percent ($304 million), respectively. Combined, they contributed $1.3 billion in community benefit in 2016, the most recent year for which statistics are available. 

From 2013 to 2016, the local health systems saw double-digit growth in their operating revenues. The Clinic had revenues climb 24 percent to $8 billion in 2016, while UH jumped 43 percent to $3.29 billion. MetroHealth recorded 22 percent growth to $1.04 billion during the same time period. The percentages of revenues each directed to community benefit remained relatively unchanged. The arrangement helps hospitals continue to provide healthcare to the community but keeps millions in taxes from the county, which uses property taxes to fund operations, school districts and libraries.

The Clinic and UH are among the top 10 largest employers in the state and, as of 2013 owned about $2 billion in tax-exempt property in the county, according to an analysis of county fiscal office records by Policy Matters Ohio, a left-leaning think tank. That’s an estimated $43 million in unpaid taxes. And the systems have only grown in the past five years. 

Representatives from The Center for Health Affairs, a trade association representing Northeast Ohio hospitals, maintain that the community and economic benefit these health systems provide outweighs any uncollected taxes.

“Community benefit in this community is higher than it has ever been, and it continues to grow,” said Tony Gutowski, director of government affairs for The Center for Health Affairs. 

In a 2015 report, The Center estimated that Northeast Ohio hospitals employed 81,000 people directly and another 4,300 people through construction projects, supporting $7 billion in salaries and benefits. 

“The largest employers, with very significant property, don’t contribute in any significant way to the finances of the school district,” said Zach Schiller, research director for Policy Matters Ohio and the author of two reports on local hospitals’ community benefit. “Whether or not you feel that the answer is for these institutions to have to pay certainly is a question that needs an answer.” 

Because local hospitals have always been tax-exempt, the county has never collected property taxes from them, apart from their for-profit endeavors, such as the Clinic’s InterContinental Hotel. The Clinic said it pays roughly $11 million annually on its taxable properties.  

“Collections and exemptions are prescribed by law,” said county spokeswoman Mary Louise Madigan. “We follow Ohio Revised Code. Until there’s a change in the law, we don’t collect them.”

Locally, Beachwood City Schools unsuccessfully challenged the Clinic’s application for tax-exempt status on a family health and surgery center there, and the Cleveland Metropolitan School District questioned the tax-exempt status of the Clinic’s Taussig Cancer Center on main campus. 

In other cities, like Boston, nonprofit hospitals annually contribute millions of dollars through a Payment in Lieu of Taxes (PILOT) program. 

Breaking down community benefit

With the passage of the Affordable Care Act and the 2014 expansion of Medicaid in Ohio, more than 700,000 Ohioans gained health insurance, reducing the amount of costly charity care (indigent care) hospitals provide. At the same time, there was an influx of patients onto Medicaid, for which the federal government partially subsidizes care. The American Hospital Association estimates hospitals receive 90 cents per dollar spent on Medicaid. 

Gartland said the amount of unreimbursed Medicaid care far exceeds the drop in charity care. The cost for care is set by individual hospitals. 

UH’s charity care costs were $45 million in 2016, down 24 percent, or $14 million, from three years before. At the same time, the hospital’s Medicaid shortfall rose 87 percent, or $59 million, to $127 million in 2016. 

More than half (57 percent) of UH’s 2016 community benefit was spent on charity care and its Medicaid shortfall. Likewise, 51 percent of the Clinic’s community benefit dollars were spent on free and discounted care and the Medicaid shortfall. 

UH dedicated 15 percent of its community benefit to community health improvement initiatives, which include things like health screenings and population health efforts. The remaining $86 million was spent on research and education. 

The Clinic directed only 7 percent of its community benefit to outreach programs and subsidized health services like behavioral healthcare. Forty-two percent, or $336 million, went to research and education. 

MetroHealth doesn’t publicly break down its community benefit. 

Assessing community needs 

To decide how to invest locally, nonprofit private hospitals complete community health needs assessments every three years, as required by federal law. By analyzing patient data and health outcomes and talking to people in the community, they figure out where the greatest challenges lie. 

“It’s really important that you engage on a lot of levels with the community and let them have a voice,” said Rita Andolsen, director of communications and engagement for MetroHealth, which voluntarily completes community health needs assessments.  

For example, MetroHealth used its 2017 assessment to identify five focus areas for the next three years: infant mortality, the opioid epidemic, racial and ethnic disparities in chronic disease outcomes for patients, community building in the Clark-Fulton neighborhood and addressing community trauma in East Side neighborhoods.

To that end, the system in June launched a Community Trauma Institute, in which it will coordinate with local churches to ensure those experiencing trauma, such as victims of violent crimes, receive the mental health and support services they need. 

And, through a new Opioid Prescribing Initiative, MetroHealth cut the number of opioid pills prescribed by 3 million in a year and a half. 

“The community holds us accountable, and we hold ourselves accountable,” Andolsen said. “We’re dedicated to improving the health of the community.” 

One of UH’s major initiatives involves local hiring and sourcing. Through the Step up to University Hospitals program, the system works with local nonprofits to train and hire employees from at-risk neighborhoods near its campus. As of May, the program had helped 200 people get entry-level jobs in the system in the past five years.  

At the Clinic, there is a big focus on education. Apart from staff training, the Clinic operates four school-based and two clinic-based education programs each year, reaching thousands of grade school students. 

In the past four years, more than 7,000 students have participated in the Clinic’s Adventures in Health Science and Medicine, a program designed to teach middle school students about health science and medical professions. 

And hospitals have begun collaborating on some of the most pressing issues. 

The Center recently organized the Northeast Ohio Hospital Opioid Consortium, a joint effort of UH, the Clinic, MetroHealth, the Northeast Ohio VA Healthcare System, St. Vincent Charity Hospital and The Academy of Medicine of Cleveland and Northern Ohio, to combat opioid addiction. 

Hospitals are working together “on keynote issues where their collective weight can make a difference,” said Phil Mazanec, interim president & CEO of The Center. 

But health challenges in the community will “take decades to curb,” Gutowski said. 

However, he noted, hospitals are on the right track. For a long time, hospitals concentrated on serving the patients who came through their doors and on investing to improve care long term. In recent years, they have expanded their focus to also address the health of the communities in which they operate. 

“Their role has constantly been expanding in a number of ways,” Mazanec said. “We want to move the needle. Will that take time? Absolutely. Will it be easy? Absolutely not.” 

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