Aug 20 - Fitch views the increased scrutiny of the tax-exempt status of
California's nonprofit hospitals with concern given the added financial pressure
it could present if the tax-exempt status was revoked. The California Senate
Select Committee on Charity Care and Nonprofit Hospitals began hearing arguments
last week considering whether hospitals provide sufficient charity and community
benefit to justify their tax-exempt status. A state audit published in early
August showed that there is no defined amount of community benefits required
from nonprofit hospitals, and the amounts they provide vary widely.
We expect these legislative efforts will likely result in the establishment of
quantitative thresholds and measures hospitals must meet to qualify for
tax-exempt status. However, this definition of charity care could have a broad
impact on the sector, since tax-exempt hospitals benefit from property tax
exemption and issuance of tax-exempt debt. A similar situation arose in Illinois
this past June, though the outcome was favorable for hospitals, as the
definition of charity care was broadened by the state to include the difference
between the cost of care and the amounts reimbursed under Medicaid, subsidies
paid to physicians who treat low-income patients, and community outreach,
research, and education programs. How the legislative process will define
charity care in California remains uncertain.
We believe the potential denial of not-for-profit status may add to financial
pressures in an already challenging operating environment, including weak
revenue growth, tighter reimbursement, and increasing costs. According to
California's Office of Statewide Health Planning and Development (OSHPD), in
2010, approximately half of the state's hospitals were considered tax exempt.
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