Ada County commissioners say hospitals get too many tax exemptions. They propose this

Twenty-five years ago, Ada County leaders unsuccessfully challenged the tax exemptions received by one of Idaho’s largest employers by calling into question its charitable status.

This year, Ada County leaders want the same authority. They want the Legislature in 2024 to give local Idaho governments control over charitable tax exemptions for hospitals.

The county’s proposal, which was endorsed by the Idaho Association of Counties at its annual meeting in September, would affect some of the largest employers in the state, including St. Luke’s Health System and Saint Alphonsus Health System, by potentially reducing a standing tax exemption the nonprofit hospitals receive.

The proposition has drawn criticism from the state’s hospital lobby, which argues that imposing taxes on nonprofit hospitals would increase health care costs for residents and endanger rural health care.

The Republican Ada County Commission presented a resolution to local legislators Nov. 13 that would remove an automatic tax exemption that hospitals receive for most of their properties to “not include ancillary facilities such as doctors’ offices.”

“Also, an element of charity, which was historically a requirement of the exemption, should be returned to the exemption,” according to a copy of the proposal, which was sponsored by Ada County commissioners as well as leaders in Canyon, Adams and Madison counties, according to Ada County spokesperson Elizabeth Duncan.

In the U.S., many hospitals are registered as nonprofit charities with the Internal Revenue Service, which means they are not required to pay federal income taxes. The major hospital systems in Idaho, including St. Luke’s and Saint Al’s, are registered nonprofits. In addition to operating emergency departments that serve all people, the hospitals also are required to provide community benefits and charity care.

Some other hospitals are for-profit companies owned by shareholders or investors.

Nationwide, hospital consolidation has led to increased health care costs, and nonprofit hospitals have come under scrutiny for allegedly reducing charity care while increasing executive pay and receiving billions in tax breaks. Some states, like Oregon, Illinois and Utah, have moved to compel nonprofit hospitals to spend certain amounts on community benefits, according to a report from KFF Health News. KFF is the organization formerly known as the Kaiser Family Foundation.

In Ada County, there are 401 hospital parcels that qualify for hospital exemptions, with a total assessed value of $1.3 billion, according to data from the Ada County Assessor’s Office. If those exemptions were entirely removed, nonprofit hospitals in the county could owe $10.9 million in property taxes.

At the Nov. 13 meeting, Commissioner Tom Dayley referred lawmakers to a U.S. Senate report from October, released by Sen. Bernie Sanders, I-Vermont, that found that “many nonprofit hospital systems across the country are failing to provide low-income Americans with the affordable medical care required by their nonprofit status.”

In a response, the president of the American Hospital Association called the report “tunnel-visioned,” and said “it’s been proven that nonprofit hospitals more than earn their tax-exempt status by providing benefits determined to best serve each community.”

St. Luke’s paid about $1.5 million in property taxes in Ada County in 2022, spokesperson Christine Myron told the Statesman by email. The hospital system provided $27 million in charity care and gave $78 million to community ventures, she said.

Myron said potential tax increases could impede some of the hospital’s investments in “urban and rural settings,” and the hospital sometimes houses medical equipment at locations outside of its main hospitals.

“We are concerned with any proposed legislation that disincentivizes that kind of cost-saving innovation and taxes properties that St. Luke’s uses to support its operations and functions,” she said.

Saint Alphonsus referred the Statesman’s requests for comment to the Idaho Hospital Association.

Rep. Lauren Necochea, D-Boise, was at the Nov. 13 meeting and said she was concerned about how changes to hospital tax exemptions could affect access to health care for Idahoans.

“In the rhetoric I’m hearing from the commission, there’s a subtle disdain for nonprofit hospitals and a preference for for-profit health care providers, which doesn’t make sense,” she said. Necochea said nonprofit health providers ensure people on Medicaid and Medicare receive health care, when they otherwise could not. Most hospitals accept Medicare and Medicaid, as both programs together account for more than 60% of hospital care, according to the American Hospital Association.

Idaho has the lowest number of doctors per capita, according to the Centers for Disease Control and Prevention, and Necochea said she worries tax exemption changes could lead nonprofit health systems to think twice about opening clinics in rural areas when a local county commission could question its finances and impose property taxes.

She said rural clinics, which in Idaho are often owned by large nonprofit health systems like St. Luke’s, are “not there because they generate lots of revenue. They’re there because they’re part of the mission.”

“You’re going to heap additional risk onto them with no express benefit to the public,” she said.

How are Idaho nonprofits defined?

Idaho law does not define charitable organizations, but a 1984 Idaho Supreme Court ruling involving Sunny Ridge Manor, a Nampa nursing home, provided eight factors state and local governments can use to determine if an entity is charitable, and therefore should receive tax exemptions.

In 1997, the Ada County Board of Equalization — which is made up of the county commissioners — denied property tax exemptions for some St. Luke’s properties after the hospital system earned $20 million in profits, which former Commissioner Frank Walker said amounted to the hospital no longer qualifying as a “charitable situation,” according to previous Statesman reporting. At the time, the hospital said it had provided $10 million in charity care, community education, health screenings, subsidized clinics and other services for poor people.

The Ada County assessor estimated that St. Luke’s could owe $2 million in taxes as a result, according to the previous reporting.

The hospital system appealed the decision to the State Board of Tax Appeals, arguing that hospitals provide major community benefits regulated by federal requirements, including that net income must be used to improve patient care, expand services or contribute to education and medical research.

As part of the dispute, the county submitted a report written by a Harvard Business School professor that found that large cash reserves and high rates for medical care at St. Luke’s meant it is “hard to identify the ‘charity’ in this very commercially driven enterprise.”

But the board ruled in 1998 that St. Luke’s still qualified for a charitable exemption. That year, the Idaho Hospital Association lobbied the Legislature to automatically exempt hospitals that are federally recognized nonprofits from local taxation. Larger hospitals must submit annual reports to counties about their charitable services, but counties cannot alter the exemptions based on the reports, according to Statesman reporting then.

The Association of Counties fought against that bill — which became law — in the 1990s, and now is back more than 20 years later in an attempt to gain more local control for taxing authorities.

”We’re not looking at granting county commissions broad discretion,” Seth Griggs, executive director of the association, told the Statesman. “We want to make (the law) have clear standards so the hospitals know what’s accepted, but also so county commissions have the basis for making their decisions.”

“We do think that St. Luke’s and Saint Al’s and other hospitals, they need to be brought into compliance and at least pay a little property taxes for the benefits they get from the community,” Beck said at the meeting with lawmakers, noting that some hospital parcels include parking lots and administrative offices.

In the legislative session this year, two bills were introduced to rewrite the exemption status hospitals get. House Bill 109 would have made “administrative and medical facilities not contained within a hospital” ineligible for an exemption, according to a summary of the bill. House Bill 110 would have given counties “full authority to determine whether to grant a property tax exemption in full, partial, or an exemption at all,” according to the bill summary.

Both proposals were sponsored by Rep. Josh Tanner, R-Eagle. Neither bill received a hearing.

Beck told the Statesman in an interview that the County Commission supported the first bill, but that he would be in favor of either bill getting a hearing in the upcoming 2024 session.

He said he wants hospitals to get the same treatment as other nonprofits, which includes an evaluation by the local commission about whether an organization meets the charitable factors laid out by the Idaho Supreme Court.

“Ada County is not after a larger chunk of property taxes,” Beck said. “We just want the hospitals to be on the exact same footing as every other 501(c)3.”

Beck gave an example of a church in Meridian that runs a for-profit day care business. He said the Ada County Assessor’s Office calculated that 20% of the building is used for the day care business, so the church — which is generally tax-exempt — received an 80% exemption from its property taxes.

Duncan, the county spokesperson, said in an email that any increases in taxes on hospitals would be used to reduce the taxes of other property owners, rather than generating additional revenue for the county.

A spokesperson for the Idaho Hospital Association, Greg Morrison, told the Statesman the proposal could raise health care costs and have “serious negative impacts” on patient care, especially in rural areas.

He said nonprofit hospitals must abide by “strict federal requirements” to receive charitable status, which the IRS reviews on a per-parcel basis. That means that a hospital property that includes a parking lot could be tax-exempt if deemed so by the IRS, but standalone parking lots would not qualify, he said.

When hospitals buy up physician practices, as has become common, they often buy only the practice, meaning that rented office space is still taxed, with taxes paid for by the landowner, Morrison added.

“At the end of the day, the last thing we need is to create another layer of government regulation that will only make it more costly and complicated and have a negative impact on patient care,” Morrison said.

He said the proposal would introduce uncertainty for hospitals, which could potentially owe millions in taxes depending on the whim of county commissioners — a shift he said could also potentially conflict with federal law.

Rural health care in Idaho ‘dramatically underfunded to begin with’

Mark Baker, the chief administrative officer of Bingham Healthcare, which owns Bingham Memorial Hospital in Blackfoot, told the Statesman that changing tax exemptions could make it difficult for hospitals like his to make ends meet while they face rising labor and supply costs, lower Medicaid reimbursement rates and an increase of insurance claim denials.

He said his nonprofit hospital already pays about $130,000 on property taxes for standalone clinics and other ventures, and estimated the proposed law change could double that.

“Raising taxes on small rural hospitals that are barely making ends meet could be the straw that finally breaks the camel’s back,” he said. “It’s a slippery slope to start down based on the whim of some people in Boise.”

“You reach a point where the sustainability equation doesn’t work out any longer,” he said. “A well-behaving nonprofit hospital is not there to make wide margins and high profitability … just because there are some bad actor systems out there doesn’t mean that we should pass laws that negate the benefit from all the good-acting health systems.”

Brad Huerta’s hospital in Arco, a town with fewer than 1,000 people, serves an area larger than Rhode Island.

Called Lost River Medical Center, the nonprofit has an emergency room and is designated as a critical access hospital, which confers special benefits as part of a federal effort to ensure rural residents have health care.

“The problem with rural hospitals is nobody lives here,” Huerta told the Statesman by phone, pointing out that elk and bear outnumber residents where he lives.

In addition to the care they provide, Huerta said, rural hospitals are often economic engines in small towns, driving commerce and providing well-paying jobs.

“Rural areas are already dramatically underfunded to begin with,” he said. “For them to lose any type of exemption would be an extreme hardship.”

Huerta’s hospital has its own taxing district, which he said raises a couple of hundred thousand dollars for the hospital each year. But the hospital is not owned by Butte County, the local jurisdiction. If the automatic property tax exemption for nonprofit hospitals were removed, the Arco hospital would still qualify for property tax exemptions, because its hospital district status makes the hospital qualify for a governmental exemption, according to the Idaho Tax Commission.

Morrison, of the Idaho Hospital Association, said his association is still concerned about how a final bill proposal could affect any nonprofit hospitals, since the proposal has not yet been finalized. He said there are 21 nonprofit hospitals that are members of the association and could be affected.

Huerta said his hospital and others like it give away millions of dollars in free health care to residents without insurance, which he thinks more than covers the tax exemptions they receive.

At the hospital in Arco, Huerta said he used grant money from the state to build a day care center, because he heard from nurses that they couldn’t work unless they could find care for their children. If the law is changed, he worries the status of the day care center could be jeopardized.

“Would that be tax exempt?” Huerta said, adding that no patients are seen in the day care center, but that without it he could lose nurses, forcing him to close his hospital.

There are two main highways in Butte County, and Huerta said residents have to travel at least 90 minutes by car to seek treatment elsewhere.

Huerta said changes to the exemption could spell “dire consequences” for hospitals like his and “cripple rural health.”

Potential for change at legislative session

In an interview with the Statesman, Idaho Senate Majority Leader Chuck Winder, R-Boise, said this issue comes up from time to time but he would withhold his judgment until he sees a final bill.

“This has been probably more of an issue in the last five or six years, as the hospitals have bought up medical practices,” Winder said. “They still pay taxes on outlying buildings.”