Nonprofit hospitals will have to file a new report next year with the Internal Revenue Service — for the first time accounting for the free health care and other benefits they provide to justify their tax breaks.

The move is one of several measures being taken by federal, state and local governments to make nonprofit hospitals prove they deserve their tax-free status or pay up. The pressure could increase in Wisconsin and elsewhere this year because of budget shortfalls stemming from the economic recession, observers say.

"I expect a resurgence of interest among municipalities in extracting payments in lieu of taxes," said Alan Zuckerman, a health-care consultant in Philadelphia. "Municipal budgets are going to be strained. Not-for-profits are a logical target."

George Quinn, senior vice president for finance at the Wisconsin Hospital Association, said he fears such proposals will resurface in Wisconsin, where the state government faces a $5.4 billion budget shortfall.

"They could definitely rise again given the budget situation," he said. "We're concerned."

There are already signs that the issue is gaining more attention.

The city of Mequon has forced a nonprofit hospital to pay $600,000 for fire trucks and traffic signals. The city of Rice Lake is trying to get its nonprofit hospital to pay property tax. Two Milwaukee-area communities got the nonprofit Aurora Health Care system to pay millions of dollars as a substitute for taxes on hospitals to open next year.

The city of Wauwatosa denied the tax-exempt status of a nonprofit hospital's clinic. The city of Madison made the nonprofit UW Medical Foundation pay property tax on its clinics, as the city of Eau Claire did with the nonprofit Marshfield Clinic.

Nationally, a bill to be introduced in Congress soon would require nonprofit hospitals to spend at least 5 percent of their budgets on charity care.

Meanwhile, a decision in Illinois to strip a hospital of its tax exemption is headed for the state Supreme Court. The state says the hospital provided too little charity care.

Hospitals are closely following the Illinois case as a possible sign of challenges to come, said James Orlikoff, a health-care consultant in Chicago.

"It has sent a chill through the hospital industry," he said.

Defining 'community benefit'

Until 1969, tax-exempt hospitals had to provide a substantial amount of charity care — free or discounted care.

But four years earlier, the government created two programs: Medicare, the federal health plan for seniors and the disabled, and the state-federal Medicaid health plan for the poor.

The new programs caused the IRS to loosen its requirement for nonprofit hospitals, stating that they had to provide a more general "community benefit." No particular amount is required.

(An exception: 218 hospitals around the country must provide charity care because they were built with federal loans. Moundview Memorial Hospital in Friendship is the only one in Wisconsin.)

Nonprofit hospitals' definition of community benefit can vary.

Most hospitals count charity care and losses from Medicaid. Most also include immunization clinics, health screenings, education programs and other outreach services.

Some also factor in bad debt, or bills patients are expected to pay but don't. Others include losses from Medicare.

State estimates

In its community benefit estimate of $1.3 billion for 2007, the Wisconsin Hospital Association included $145 million it says the state's hospitals lost by conducting research and training doctors, nurses and other health-care workers. Hospitals spend more on those services than what they get from the government to do them, said Mary Kay Grasmick, spokeswoman for the hospital association.

The Madison hospitals' community benefits for 2007, based on the hospital association's formula: Meriter; $29.3 million; St. Mary's, $25.5 million; UW, $80.3 million.

A report in September by the Government Accountability Office called for standard definitions for community benefits. "IRS's community benefit standard allows nonprofit hospitals broad latitude to determine the services and activities that constitute community benefit," the report said.

But even when the same categories are used, the amounts of help provided by hospitals can vary greatly, according to an IRS survey of nonprofit hospitals released in 2007. Nearly half of the hospitals said they spent less than 3 percent of their budgets on charity care and bad debt; a fifth said they spent more than 10 percent of their budgets on those benefits.

Fifteen states — Wisconsin is not among them — have community benefit requirements, five specifying minimum amounts. Alabama, for example, says 15 percent of a tax-exempt hospital's budget must go to charity care.

A section of a new IRS Form 990 for hospitals aims to standardize the reporting of community benefits. The form, which hospitals must fill out next year for activity this year, will force them to report the various elements of community benefits the same way.

It's a partial solution, said U.S. Sen. Chuck Grassley, R-Iowa, who is expected to soon introduce the bill requiring nonprofits hospitals to spend 5 percent of their budgets on charity care.

"Congress may need to fill in the blanks since hospitals still get to choose how they calculate their costs," Grassley said in a news release in October.

Losing tax-exempt status

In Illinois, a case against Provena Covenant Medical Center in Urbana is headed for the state Supreme Court.

Champaign County revoked Provena Covenant's tax exemption in 2003, saying the hospital aggressively tried to collect money from poor patients and spent just 0.7 percent of its budget on charity care.

The state Department of Revenue agreed with the county, and last September an appeals court reversed a lower court's ruling in favor of the hospital.

Mike Klemens, a revenue department spokesman, said Provena Covenant doesn't meet the state's strict requirements for nonprofit hospitals. "They're more like a business than a charity," he said.

Jon Sokolski, board chairman of Provena Covenant, said in a news release in September that forcing nonprofit hospitals to pay property taxes "takes millions of dollars away from direct expenditures on patient care."

In Mequon, north of Milwaukee, Columbia St. Mary's Hospital-Ozaukee expanded its facility in 2007. The city asked the hospital to make payments in lieu of taxes on the addition.

The hospital refused. "We feel we're deserving of our tax-exempt status," said Paul Westrick, a vice president for Columbia St. Mary's.

But the hospital agreed to pay $600,000 for fire truck equipment and traffic lights, and it is contributing $25,000 a year to a city fund, Westrick said.

In Rice Lake, the Marshfield Clinic acquired the nonprofit Lakeview Medical Center and plans to replace it with a new hospital, said city attorney Wayne Arnold.

The city has asked for $240,000 a year in taxes on the new building, and Marshfield Clinic has offered less than $10,000 a year in services, Arnold said.

The town of Summit, near Oconomowoc, got Aurora to pay $2.7 million plus $100,000 to $250,000 a year in lieu of taxes on a new hospital, said town manager Henry Elling.

The village of Grafton, north of Milwaukee, got Aurora to pay $3.4 million plus $116,000 to $180,000 a year on another new hospital, said village administrator Darrell Hofland.

The city of Wauwatosa denied a tax exemption for a freestanding clinic that Wheaton Franciscan Healthcare's St. Joseph's Hospital opened in 2003.

The hospital sued in 2006 to recover at least $2.9 million in property taxes, and the case is in Milwaukee County Circuit Court, said Anne Ballentine, spokeswoman for Wheaton Franciscan Healthcare.

Ballentine said the clinic should be exempt because it's an extension of the nonprofit hospital.

But Beth Aldana, Wauwatosa's assistant city attorney, said the clinic should be taxed because it's a separate entity that doesn't provide much charity care.
"We don't think the current state of the law exempts outpatient clinics," Aldana said.

Madison example

The city of Madison didn't think so either when the UW Medical Foundation, UW Hospital's doctor group, sued in 2000 to request that its clinics be exempt from property taxes.

The nonprofit doctor group had acquired the for-profit Physicians Plus Medical Group and its clinics.

"We see ourselves as a totally charitable organization," said Pete Christman, the foundation's chief operating officer.

The foundation lost its case in 2002, and the state Supreme Court refused to hear it. The organization pays about $1.4 million in property tax each year on 11 clinics it owns, Christman said.

Marshfield Clinic lost a similar case against the city of Eau Claire in 2003 and pays $6.5 million a year at its 43 sites, said Reed Hall, executive director.

The clinic had been making payments in lieu of taxes in several communities, of about 40 percent of the property tax amount, Hall said. The Eau Claire case caused the clinic to pay full property taxes in each city, he said.

A scattering of nonprofit hospitals around the country make payments in lieu of taxes, said Tom Getzen, executive director of the International Health Economics Association. There is no good data on how many, Getzen and other experts said.

"It's a patchwork system that goes lots of different ways based on how aggressive the local tax authority has been," he said.

Cities generally can't force the issue until hospitals plan new projects and seek building permits or zoning changes, said Arnold, the Rice Lake city attorney.

"The only way you can get your hooks in is when they need some concession from you," he said.

CHARITY CARE: HOW MUCH SHOULD HOSPITALS GIVE?

Day 1: Wisconsin hospitals provide less free care and make more money than the national average. But they say they contribute other benefits to justify their tax breaks.

Day 2: St. Mary's Hospital, which made a lot of money and gave relatively little charity care in recent years, paid for a $140 million addition in cash. Can a nonprofit hospital become too much like a business?

Day 3: Some public officials are making nonprofit hospitals contribute more to their communities. The troubled economy could expand this trend.