Critics say hospitals misuse tax exemption

OLYMPIA — Linda Davis knew that the doctors at the University of Washington Medical Center's Diabetes Care Center were among the best, and she hoped she might enroll in a clinical trial for the latest treatment.

She didn't expect to have to pay $150 even before setting foot in their Seattle clinic.

The diabetes center demanded the money as a down payment when Davis, an Olympia small-business owner without health insurance, called for an appointment. Outraged, Davis called off the visit.

"Health care is a basic human need," Davis said. "My own philosophy of 'people over profits' came into play. I felt extremely disillusioned."

Aroused by the incident, Davis became an activist in a cause that has been roiling at hospitals all over the country: forcing nonprofit health providers such as UW Medical to justify billions of dollars in tax breaks.

In Washington, Davis and other community activists have directed their ire at a largely obscure agency called the Washington Health Care Facilities Authority (WHCFA), which issues tax-exempt bonds for borrowers. They claim WHCFA has failed to enforce its rules requiring nonprofit hospitals and clinics to pass the savings they get through the low-interest loans directly to patients.

Biggest borrowers


The Washington Health Care Facilities Authority has helped nonprofit health providers in the state borrow $6.4 billion since 1980 through tax-exempt bonds. Here are the five largest and the five smallest bond issues.

Largest

Swedish Health Services, Seattle: $259 million

Providence Health & Services, Seattle: $212 million

MultiCare Health System, Tacoma: $174 million

Swedish Medical Center, Seattle: $150 million

Children's Hospital & Regional Medical Center, Seattle: $147 million

Smallest

Behavioral Health Resources, Olympia: $148,000

Whatcom Counseling & Psychiatric Clinic, Bellingham: $172,000

Whatcom Counseling & Psychiatric Clinic, Bellingham: $227,000

Evergreen Counseling Center, Hoquiam: $375,000

Spokane Mental Health, Spokane:$383,000

Source: Washington Health Care Facilities Authority

The agency responded to the criticism earlier this year by watering down the contract language to eliminate some of the most explicit obligations for the state's tax-exempt health providers to benefit the community.

WHCFA officials said the contract was outmoded and contended that the state Legislature never intended the agency to enforce medical providers' charitable activities.

But that has only further incensed the consumer advocates, who cite recent examples such as a $6.6 million pay-and-retirement package for the former chief executive of Providence Health System as evidence that nonprofit health providers need stricter accountability.

"We just want to make sure the public gets something out of" the tax breaks, says Jack Hanson, an analyst for the Service Employees International Union District 1199 NW in Renton, which represents nurses and other health-care workers.

"We're skeptical."

Substantial tax breaks

Washington lawmakers established the WHCFA in 1974 to help hospitals borrow money more cheaply than they could through commercial lenders. The agency, governed by a five-member board that includes representatives of the governor and the secretary of health, acts as middleman to issue tax-exempt bonds on behalf of the hospitals.

Congress has allowed tax breaks to nonprofit hospitals in exchange for "community benefit," including providing free care to the indigent and the uninsured. But there have not been minimum standards for what that community benefit should be.

The tax breaks can be substantial. For instance, a hospital with the best credit rating might pay 7 percent interest on taxable 30-year bonds, but only 5 percent for the tax-exempt bonds. Bond buyers accept the lower rate because they don't have to pay tax on the interest income.

Since 1980, the WHCFA has issued $6.4 billion in bonds on behalf of virtually every hospital system, community clinic, nursing home and other nonprofit health provider in the state. According to WHCFA, its borrowers together have saved more than $50 million a year in interest payments since 2002.

The critics say that some nonprofit hospitals misuse their tax exemptions by giving too little charity care and overcharging patients. They point to dozens of class-action lawsuits alleging overcharging that have been filed across the country, including against Seattle's UW Medical Center and Virginia Mason Medical Center. The IRS this summer began investigating nonprofit hospitals for compliance with their tax-exempt status.

In Washington, hospitals are barred from denying emergency medical care to people who can't afford it. The state also requires hospitals to have a charity-care policy for indigent patients — defined as people whose incomes are no more than twice the poverty level — but it doesn't require hospitals to admit such patients for non-emergency treatment.

However, under the WHCFA's loan agreements, borrowers signed "savings covenants" pledging to pass on savings from the tax-exempt bonds to patients by reducing fees or by forgoing planned rate increases. The critics contend those covenants aren't being heeded.

The Northwest Federation of Community Organizations, a coalition of activist groups, says the $50 million in annual savings reaped by the medical facilities from the low-cost bonds would be enough to buy private health insurance for more than 12,000 people.

Hanson, of the Service Employees union, agrees that tax breaks are appropriate for small community clinics that focus on poor, rural and other underserved patients. But he balks at subsidies for large health-care systems such as Seattle-based Providence, which operates hospitals and clinics throughout Washington, and Seattle's Swedish Medical Center, whose top executives earn half a million dollars or more a year.

"The hospitals could be doing God knows what with those savings," Hanson said. "They're not running little charity hospitals. They're making big bucks."

Accountability sought

Earlier this year, community groups began pressing the WHCFA to enforce the covenant by requiring borrowers for the first time to document in detail how they fulfilled it. But John Van Gorkom, the agency's executive director, responded that it would be superfluous.

"If the hospital pays 5 percent instead of 7 percent [interest], it obviously benefits the customers," Van Gorkom said.

Besides, enforcing fee reductions isn't the WHCFA's job, Van Gorkom argues. Rather, it's simply to help build and expand health-care facilities by holding down financing costs.

So instead, Van Gorkom and his staff have proposed changing the agency's rules so the medical centers won't have to document how they pass on the interest savings.

The agency plans to hold public hearings on the rule changes before the board votes on them. So far only Carol Sureau, who represents state Insurance Commissioner Mike Kreidler on the board, has publicly supported keeping — and enforcing — the savings covenants.

Leo Greenawalt, president of the Washington State Hospital Association, supports the rule changes, saying most hospitals in the state fall short of the 5 percent profit margins necessary to maintain healthy operations. Greenawalt says charity care is just one way that nonprofit hospitals serve the public, noting that programs such as diabetes screening also benefit the community.

"Hospitals are giving much more in community benefit than they are receiving in tax exemptions," Greenawalt said.

In Olympia, activist Linda Davis isn't buying. With her diabetes and a recent diagnosis of emphysema, she said she has been unable to find affordable health insurance for herself and her husband on the couple's income as software consultants.

"We really need to have accountability so that the money goes back to the people," Davis said.

Kyung Song: 206-464-2423 or ksong@seattletimes.com