Member Article

ALERT Hospital May Be Excluded For Physician Recruiting On May 8, 2006 the OIG announced that it intends to exclude San Diego-based Alvarado Hospital from participation in Medicare, Medicaid and all other federal health care programs because of payments the Hospital made under relocation agreements involving placement of newly-recruited physicians in established physician practices. According to the OIG, significant portions of the salary and overhead payments made by the Hospital under the agreements were funneled to established physicians instead of being used to provide support for the new physicians. The OIG alleges that these payments were kickbacks to induce the referral of patients by established physicians to Alvarado. The OIG's announcement is the latest chapter in a long-running battle between the federal government and Alvarado Hospital regarding the relocation agreements. In 2003, a federal grand jury indicted Alvarado, its former CEO and its parent corporation, Tenet Health Systems, for criminal violations of the anti-kickback statute and two jury trials were held, both of which ended with hung juries. In the criminal trials, the government was unable to prove guilt beyond a reasonable doubt. In the exclusion proceeding, the OIG will only have to establish its case by a preponderance of the evidence. Dykema contact: Thomas J. McGraw 313/568-6500 or [email protected]. Michigan Supreme Court Clarifies Property Tax Exemption For Nonprofit Clinic On May 4, 2006, the Michigan Supreme Court issued its decision in Wexford Medical Group v City of Cadillac and held that Wexford is a "charitable institution" exempt from property taxes under the Michigan General Property Tax Act ("Property Tax Act"). The Court reversed the decisions of the Court of Appeals and Michigan Tax Tribunal, noting that the lower courts had wrongly focused on the amount of free medical services provided by Wexford, rather than considering Wexford's overall charitable purpose and the way it fulfills that purpose. The Court concluded that the health care clinic operated by Wexford demonstrated it was charitable due to its policy of providing free or below-cost care on an unrestricted and open-access basis, and the fact that any financial gain is reinvested in the clinic. Characteristics of the Clinic. The petitioner in Wexford was a nonprofit health care clinic exempt from federal income tax under §501(c)(3) of the Internal Revenue Code. The clinic was created by two charitable parent corporations after the community's largest for-profit medical group experienced severe financial difficulties and ceased its business operations. The Clinic is located in a rural and economically depressed region of Michigan that was a federallydesignated health professional shortage area. The clinic accepted and treated all patients, regardless of ability to pay, accepted Medicare and Medicaid patients without restriction, and had an established charity care policy. Clinic's Position. Wexford argued it was exempt from taxation under the Property Tax Act as a "charitable institution" because its bylaws expressly prohibited any individual from profiting monetarily from clinic operations. Wexford also argued that it was operated for charitable purposes as evidenced by its open-access policy, acceptance of any patient on a first-come, first-serve basis, its charity care program that provided free and reduced-cost medical care to the indigent with no restrictions, and acceptance of an unlimited number of Medicare and Medicaid patients. Importantly, Wexford argued that it also qualified as "charitable" because it absorbed on a "charity care" basis the shortfall between Medicare and Medicaid reimbursement and the actual cost of providing care and continued to do so even though it sustained significant financial losses. The Clinic's financial losses on charity or "under-reimbursed" cases were subsidized not only by other patients and government reimbursement, but by the charitable parent corporations that owned Wexford. Finally, Wexford argued that the clinic lessened the government's burden by providing critical services in a health care shortage area. Without the clinic, patients would either be transported at the state's expense to other communities for treatment, or treated at the local emergency room at a significantly higher cost. Key Criteria Adopted by Court. In its opinion, the Court identified six (6) key criteria that, at a minimum, will determine whether exemption as a "charitable institution" is appropriate. Specifically, an organization seeking property tax exemption must demonstrate that it: (1) Is a nonprofit institution; (2) Is organized chiefly, if not solely, for charity; (3) Does not offer charity on a discriminatory basis, but serves any person who needs the particular type of charity being offered; (4) Brings people's minds or hearts under the influence of education or religion, relieves people's bodies from disease, suffering, or constraint, assists people to establish themselves for life, erects or maintains public buildings or works, or otherwise lessens the burdens of government; (5) Any charges it imposes for services are not more than what is needed for successful maintenance of the organization; and (6) Demonstrates that the overall nature of the institution is charitable, regardless of how much money it devotes to charitable activities in a particular year. In applying the above factors, the Court specifically observed that government reimbursement has little bearing on whether an organization qualifies as a charitable institution, especially where it demonstrates that the reimbursement falls "well-short" of defraying the actual costs of rendering the service. The Court also clarified that an organization may make a profit, so long as the institution reinvests any gain in the organization. The Court declined to address whether Wexford was exempt under the separate public health exemption of the General Property Tax Act. Practical Implications. The Wexford decision provides much needed clarification as to the "charitable purpose" exemption under the Property Tax Act. This decision also may stem a recent trend by local taxing authorities to deny "charitable institution" tax exemption on the basis that the charitable care provided is merely an "incidental part" of the entities' operations. However, nonprofit organizations seeking such exemption are well advised to undertake a careful review of the criteria in Wexford, in conjunction with their organizational documents and operations, to ensure that these criteria are satisfied. Although the Court agreed that Wexford was entitled to property tax exemption as a "charitable institution," it cautioned that eligibility for such exemption is a "fact-specific" question and that "each case is unique and deserving of separate examination." Dykema represented the Michigan Association of Homes and Services for the Aging in the Wexford case as amicus curiae. Other organizations submitting amici briefs in this case included the Michigan Health & Hospital Association and the Michigan Rural Health Clinics Organization. For assistance with a risk assessment for your organization with respect to ongoing property tax exemption, please contact: Phyllis Adams at 734/214-7664 or [email protected]; Sherrill Wolford at 313/568-6849 or [email protected]; Stewart Binke at 517/374-9152 or [email protected]; or Christine Mason Soneral at 517/374-9184 or [email protected]. IRS Steps Up Political Activity Compliance Efforts PACI Report is Issued. In February, the Internal Revenue Service published the final report (the "Report") on its Political Activities Compliance Initiative ("PACI"). The Report 3 summarizes the efforts by the IRS to identify and investigate 501(c)(3) organizations involved in political intervention. The Prohibition. Section 501(c)(3) of the Internal Revenue Code (the "Code") specifically prohibits an exempt organization from participating or intervening in any political campaign on behalf of, or in opposition to, any candidate for public office. The IRS is concerned that exempt organizations, particularly churches, are intervening in political activities, in direct violation of the Code. PACI Background. The IRS has stepped up the PACI in 2006, with a focus on the November 2006 elections. Although the IRS clearly is focusing on churches, it also included other types of exempt organizations, including hospitals, in the 2004 PACI. The IRS will initiate investigations based on "referrals" from the public and other sources of evidence of potential noncompliance (i.e., review of web sites). The IRS has used the Report to develop the IRS 2006 PACI program. As a result, the Report is an informative guide for exempt organizations on what types of political activity the IRS found to violate the Code. Problem Activities. In the Report, based on the 2004 PACI, the IRS identified the following activities as problematic: • Distribution of printed documents supporting specific candidates, such as newsletters, church bulletins and letters to exempt organization members. • Candidate use of an exempt organization, such as use of facilities to hold a political event or speaking at an exempt organization's function. • Distribution of voter guides or ratings of candidates through printed materials or exempt organization web sites. • Political signs on exempt organization property. • Exempt organization officials, particularly church officials, directly or indirectly endorsing or opposing a specific candidate, including links on web site to candidate information. • Permitting a third party to endorse or oppose a candidate at an exempt organization's function. Activities That Did Not Trigger Enforcement. The IRS found no political intervention when the exempt organization presented all views or permitted all candidates to participate. The IRS also took no action when the political intervention was a one-time, nonrecurring event or was taken in reliance on advice of counsel and the exempt organization agrees to cease the activity and make corrections where possible. IRS Response to Violations. The Report also outlines the procedures the IRS will follow when a potential problem is identified. Generally, the IRS will send an initial contact letter with an Information Document Request. The IRS will select certain cases for examination, while others may be resolved by a written advisory. The IRS may revoke the organization's exempt status and/or impose an excise tax and may require that any political contributions raised be refunded. Dykema contact: Kathrin E. Kudner, 313/568-6896 or 312/627-2554 or [email protected]. OIG Promotes Use Of Self Disclosure To Resolve Improper Hospital-Physician Arrangements On April 24, 2006, the Inspector General of the Department of Health and Human Services announced a new initiative to promote the use of the OIG's Self-Disclosure Protocol ("SDP") to resolve potential civil monetary penalty ("CMP") liability for improper financial arrangements between hospitals and physicians. In an "Open Letter to Health Care Providers," the Inspector General stated that the OIG is "seeking to increase awareness in the hospital and physician communities of a way to resolve conduct that may result in liability under the OIG's CMP authorities for physician self-referral and anti-kickback violations." The key provisions of the announcement are summarized below. • Applies to Stark and Anti-kickback. The initiative is limited to matters that involve conduct subjecting providers to potential CMP liability for violation of the Stark and anti-kickback laws. The OIG may impose perviolation CMPs of up to $15,000 for each service billed by a hospital or other entity in violation of the Stark selfreferral law, and assessments of up to three times the amount claimed for such services. The OIG may impose CMPs of up to $50,000 for each kickback violation and assessments of not more than three times the total amount of improper remuneration involved in the arrangement. The OIG may also seek to exclude violators from participation in Medicare and other federal health care programs.