HHA’s Dilemma--Be a Good Citizen or Fight Extortion--Case Study

HHA’s Dilemma: Be a Good Citizen or Fight Extortion

Deborah Williams, the CEO and President of the nonprofit Harristown Home for the Aged, responded to the knock on the door of her office with a “Come in, Steve,” recognizing the distinctive knock of her CFO.

“This is not good,” began Steve Rightgold, his usually deadpan face betraying signs of the anxiety he was feeling about the news he was about to relay to his boss. He brandished a single piece of paper and thrust it out to Deborah.

She skimmed it and let out an audible groan. “Not what we need now,” she told him.

For nearly a decade, Steve had competently kept financial operations running smoothly in a complex environment that required the constant juggling of nearly a dozen different accounts to maintain a positive cash flow situation for the facility. In recent months, accomplishing this successfully had become more of a struggle. With budget cuts beginning to be implemented by the State’s Medicaid program and with many of the home’s private pay residents falling behind on paying their invoices, HHA was already in financial distress, as were virtually all of its competitors, nonprofit and for-profit alike. In theory, HHA was a charity, exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code, and also exempt from paying local property taxes levied by the county, city of Harristown, and the Harristown School District.

The reality, as Ms. Williams was often reminded, was that HHA doled out only a minimum level of charity to the needy. And by any calculation, that amount was usually less than that provided by most of the for-profit competitors in her community.

Perhaps at one time in its early history, in the early 20th century, HHA had operated like a traditional charity, considering itself to be an old-age home, accepting residents who had no place else to go regardless of whether they needed health care. Back then, there was no continuum of long-term care that ranged from designated long-term care wings of acute care hospitals at one end of the spectrum to providing services in the home to those who could maintain their independence. HHA had participated in providing services to almost this entire range, including providing services to those in what have been designated as Naturally Occurring Retirement Communities (NORCs), funded by grants authorized by the 2006 revision of the Older Americans Act.

NORCs are geographical areas with a high concentration of older persons who have “aged in place,” in housing not originally intended for an elderly population. Deborah had personally visited one member of the community who was still independent in her home at the age of 95, and who received chore services. She could still drive to the supermarket by herself, but she was unable to replace a burned-out light bulb in her ceiling by herself. “Not quite as spry as I used to be,” the woman had admitted to her.

In between those two poles are a wide range of services that are available to the aged, offering various degrees of independence. With the fastest growing age group in the county (and the country, as well) the over-85 cohort, long-term care had come a long way since being 60 was considered “old” and folks were shipped off to nursing homes to die and be out of the way.

At one end of the continuum of long-term care are services available to those who can stay in their own homes such as chore services; senior centers such as those sponsored by Area Agencies on Aging (AAA); home health care provided by visiting nurses; respite care programs provided in the home; and adult day care programs whereby seniors travel to a central site during the day to receive healthcare, recreation, and peer companionship. HHA participated in several such programs, and even made a profit, which was used to cover the difference between costs and revenue it received from the Medicaid program for traditional nursing home care services.

Aging individuals who required minimal health interventions might leave their residences for housing designated for the aged, such as retirement housing communities and continuing care retirement communities. Those choosing the latter service might sign a contract that guaranteed their admission to a skilled nursing facility should their deteriorating health conditions require it.

Aged individuals who were relatively healthy but required some assistance in performing activities of daily living such as eating and bathing might opt for an assisted living facility, which also had medical staff on site and on call.

HHA had expanded its campus several years earlier by purchasing an adjacent parcel for the purpose of building an assisted living facility, which was projected by a marketing study to make a net revenue contribution to HHA. Unfortunately, HHA made its land purchase from a for-profit corporation that had paid substantial real estate taxes to the city and county.

Perhaps it was this that had triggered the letter from the County addressed to Steve, although it was quite possible that every charitable long-term care facility in the county had been a recipient of one like it. Deborah would have to find out. And the most intensive long-term care short of hospitalization was the nursing home that offered both skilled and intermediate care, the main business and focus of HHA. The facility she ran had 120 beds, with only a handful of vacancies at any one time.

Deborah was in constant competition with other facilities for filling those beds with aging individuals who could pay the private pay rate as long as possible before converting to Medicaid, which increasingly reimbursed the home for a large, but declining share of its actual expenses. But one couldn’t survive by keeping too many beds vacant in the hope that a call would come from a well-heeled client with the ability to afford the private pay rate and with enough health problems to justify admission.

Deborah mused that almost all of her residents had enough medical problems that would have required treatment in an acute care hospital only a few decades earlier. And many residents in her home had been admitted directly from such a hospital, often still seriously ill, but discharged simply because their insurance payments would no longer justify keeping them hospitalized. “Quicker and sicker” was the cliché used to describe the realities of managed care. In most cases, Medicare rather than Medicaid would reimburse the home for short stays for those who were admitted to the home directly from a hospital, and at least so far, Medicare reimbursements were reasonable.

Still, Deborah was proud that her facility could boast that some residents improved enough as a result of the services she provided with a committed staff that they could return to their homes after a few weeks or months at HHA. And those residents who died while in the facility’s care did so with dignity.

For perhaps a couple of decades, nursing home residents needed to be certified by the state as having serious health problems that justified their being cared for in that facility—and those problems might well have been more appropriate to be dealt with in a hospital just a few decades earlier. Today’s modern nursing home bore little resemblance to that of the 1960s, let alone that of the 1920s. Each resident, for example, required an average of 2-3 hours of care by licensed nurses, and many residents had serious health needs that required physician services. A new philosophy was that residents in nursing homes could receive and benefit from rehabilitation services and could improve their health status as a result of being in the facility, rather than simply being warehoused there until they died. And with this new philosophy came a concurrent increase in the expenses of these services.

As a practical matter, no modern reasonably-sized long-term care facility could afford to provide free services to more than one or two residents, if that, with verifiable costs approaching $70,000 annually for the residents who required the least amount of care. HHA also cared for residents on ventilators and had an Alzheimer’s wing, and costs for care in those units were astronomical.

Typically, almost every resident admitted to HHA came there as a private-pay resident, paying the full market rate of $6,000 per month. They would spend down their assets and then be added to the Medicaid program, a federal-state partnership that financed long-term care and many other health care services for the indigent. Ironically, few residents at HHA whose expensive health care was being financed by federal and state taxpayers were “poor.” Rather, they were almost all from middle-class backgrounds and had either spent down their life savings before converting to Medicaid or had found a legal way to transfer their assets to family members. Many of these family members were upper middle- or middle-class themselves and could afford to contribute to the health care costs of their aging and ill family member if government policy so provided.

Deborah reached across her desk and started reading the letter from the beginning, word for word. The letter was from the Alford County Board of Assessment Appeals. In a terse, three paragraph letter, the head of the board noted that the board determined that the parcel on which the HHA was located did not qualify for tax-exempt status because the home didn’t meet the board’s interpretation of the statutory test for community benefit for charities provided exemption from county real estate taxes. HHA owed the county for back real estate taxes for each of the previous three years.

“And the bad news is that the same criteria for exemption are used to determine local property taxes, which have a liability of several times what the county wants from us,” Steve informed her. “This could easily cost us six figures, unless we find some way to deal with this.”

All of this was vaguely familiar to Deborah. Back in the 1980s, she had been the chief financial officer at another nursing home in the state and had received a similar letter. She remembered that the County solicitor had sent the form letter to virtually every tax-exempt charity with property in the county, referencing some court cases that had been decided that revoked the tax-exemptions of a hospital and nursing home. Economic conditions back then mirrored what was occurring today: High unemployment, a burgeoning increase in the demand for services, a decline of the taxable tax base as tax-exempt charities expanded their real estate holdings, draconian cuts of state and federal grants to local governments, and unfunded mandates. Many cities had suffered an erosion of their tax base as wealthy residents sought to improve their quality of life by fleeing the explosion of drug abuse, crime, homelessness, deteriorating public education systems, and other city ills to the perceived safety and security of the suburbs.

Some, but not all, local governments responded with a powerful weapon—threaten well-heeled charities with the loss of their tax exemption unless they agreed to pony up millions of dollars in PILOTs (payments-in-lieu-of-taxes).

At the time, Deborah’s facility had considered the letter to be a thinly disguised extortion plot—either agree to make payments to the local government or face the inevitability of incurring hundreds of thousands of dollars in legal fees to fight the battle in court. The board of Deborah’s facility had made the decision to make a settlement with the county and local governments, which siphoned off over a million dollars over the course of 10 years that would have otherwise been available to provide services. She remembered the board had had an internal struggle that frayed relationships for years afterwards, as about half of the members wanted to fight the tax challenge as a simple matter of standing up to injustice and the other half were more pragmatic. Even then, Deborah had had some ambivalence herself about how the board should have responded.

She knew that her previous facility, while it did provide substantial services to the poor and admitted residents who required subsidization at the time of their admission, did so because of its affiliation with a religious order that bent over backwards to make its services accessible to those in need, and diverted hundreds of thousands of donated dollars for that purpose. HHA was not structured that way, and would have a difficult, but not impossible, task proving that it did provide a substantial amount of charitable services. But, on the other hand, she had to admit to herself that her previous facility did require county and city services, such as police and fire protection, and was in a stable enough financial position to make a contribution toward funding these services at a time when all local governments were distressed.

Now, the situation was different. Although the distress of the local governments was real and serious, almost all nonprofit long-term care facilities were equally distressed. Reimbursements for care provided by the federal and state governments were being cut. Deborah knew that every time the fire alarm was pulled, either for a fire or a false alarm, at least three emergency vehicles would respond immediately, and more would follow if there was an actual fire. The county road that ran adjacent to the facility was plowed shortly after snowstorms. She would have been quick to acknowledge that the facility benefited from the services of local government.

On the other hand, the county ran a nursing home itself, and Deborah justified that by serving needy clients, she was relieving the government of a burden. Taxing the facility would simply mean that fewer residents would be able to be subsidized.

One of her board members, Jane Udall, a prominent attorney with both personal and professional ties to the county commissioners, might be able to shed some light on the situation. With one telephone call, Deborah knew she could get a better picture as to the extent to which the County had spread its net to try to capture revenue.

She was grateful that the receptionist put her right through to Jane.

“Let me apologize for not giving you a heads up on this,” Jane told her, “but what I knew about this was required to be confidential, and I honored that. But now that the cat is out of the bag, I can answer any questions you might have, at least to the extent that I know about this.”

Deborah wasted no time getting to the point. “How is this going to play out, what is our exposure, and what can we do about it?”

Jane, cognizant that she was “not on the clock” generating the legal fees she needed that justified her status as a senior partner of the firm, came right to the point.

“There are two aspects of this,” she began. “The legal issues and the political issues. The legal issues are a bit complicated, but I can summarize them quickly.

“The State Constitution authorizes the legislature to statutorily grant tax exemptions. It did so years ago. In the 1980s, some local governments, including ours, were suffering economically, and decided to challenge whether tax-exempt charities met the Constitutional and statutory criteria. At the time, it was somewhat of a ‘Hail Mary’ effort. But to the surprise of many, some courts agreed with the local governments, and interpreted (most say ‘misinterpreted’) previous court decisions on this. Lots of large hospitals and nursing homes, and other types of facilities, even the YMCAs, lost their cases, and many others simply agreed to make PILOTs to avoid the prospect of losing their tax-exemptions altogether or having to pay hundreds of thousands of dollars in legal fees to protect them. Eventually, the charitable community organized, convinced the Legislature to pass a law protecting exemptions, and also benefited from a couple of cases that went up to the State Supreme Court. And by the time all this occurred, the economy had improved, and local governments were no longer desperate for the money.

“Now for the politics of this. Generally, the county commissioners have reached the obvious conclusion that they are facing a massive budget deficit unless they either cut spending or increase income. They were willing to absorb the political fallout when they cut library spending almost in half last year, and started phasing out some lucrative, but wasteful, consulting contracts that were politically expedient for the majority commissioners. This year, there is not as much wiggle room to cut any waste, and certainly no interest in raising taxes, particularly in an election year. That is just not going to happen. The feds have quietly cut a lot of grants that go directly to counties in the last couple of years. So, what they decided to do—at least the two majority commissioners with the tacit assent of the third—is to send these letters to every hospital and nursing home in the county. The thinking is that a lot of these facilities have lots of cash stashed away for emergencies. And many of them, particularly the hospitals, are perceived as pretending to hide behind their charitable exemptions while in practice engaging in as little charity as they can get away with.

“Back in the 1980s, when the county did something like this, half of our hospitals agreed to provide payments-in-lieu-of-taxes that funneled millions of dollars to the county coffers over the ten-year period of the agreement. I don’t remember any of those hospitals suffering from this.

“My guess is that HHA might be better off making contacts with the majority on the commission and work out a PILOT deal on favorable terms. That is basically what they are looking for, as engaging in litigation is not only expensive for those who receive these letters, but also for the county, as well. I would expect the county commissioners would be sympathetic about the ability of HHA to pay, and HHA would probably have to pay less for a PILOT agreement than it would if the case went to court and HHA had to pay for legal fees, even if it won. Normally, I would expect my firm would pledge to do some of this pro bono, but we also have the county as our client, so we would be unable to participate directly in helping you out, as we have done in the past because of the conflict of interest we would have in representing both parties. But from what I can tell, the real target of these letters is the hospitals, and you and the other nursing homes are going along for the ride, along with some other facilities in the county that are perceived to have lots of revenue, require lots of county services, and are perceived to offer minimal amounts of free services to the needy.”

“I think I understand,” Deborah responded. “What options do we have?”

“Well, this situation is similar to what happened in the 1980s. Some charities fought the challenges in court. Eventually, one of these cases from another county worked its way up to the state’s Supreme Court, and the charities won a victory that effectively ended the litigation.

“Some waved the white flag and worked out a deal with the local governments to provide payments-in-lieu-of-taxes on favorable terms, often negotiating the provision of providing more free and subsidized services than they were previously providing. At the time, I was a young lawyer in town and I was engaged in negotiating a couple of these agreements. One thing I remember that was helpful was that my client put together a detailed audit of all of the charity it provided, including the value of all of the volunteer work contributed. The facility also quantified how the amount reimbursed under the Medicaid program did not cover all of its costs.

“And I would recommend that while you and the board are deciding between these two options, HHA can participate in an organized effort by those in HAA’s situation to work out a county-wide settlement with the other side, or organize a statewide advocacy effort to protect charities from efforts such as this. If the legislature came up with some money to pay to local governments that agree not to challenge the exemptions of these facilities, the local governments would put the dogs back on the leash.”

“Thanks, Jane. You’ve been helpful, as always. I’ll see you at the board meeting.”

Deborah hung up and considered the recommendation she would make to her board at its next meeting the following month.

Discussion Questions:

1. Discuss the pros and cons of negotiating a PILOT agreement with the county and the alternative option of mounting a legal defense to the tax challenge.

2. What are some of the steps Deborah should take if she chooses to engage in helping to organize other facilities to respond to these letters?

3. Discuss some of the politics of engaging in a fight among those who are usually natural allies, such as those who have close ties to local government and those with close ties to charities.

4. Discuss how fair it is that the Medicaid long-term care program finances care mostly to those who were not needy at any point during their healthy lives.

5. Research laws relating to how one qualifies for the Medicaid program. Discuss the ethics of whether it is fair that wealthy children of Medicaid-eligible persons are not required to make any contribution to the care of their parents, and what may be legally done by nursing home residents to protect substantial assets so that they can qualify for having the government pay their costs of care.

6. Nonprofit nursing homes often point to the fact that Medicaid fails to pay the full cost of care for residents in these beds, and thus these homes contribute millions of dollars in charity care to make up the difference. Those who manage for-profit homes can say that they also have a substantial number of residents who are cared for under Medicaid (in some states, even more than nonprofit homes), and they provide this care without any real estate exemption. Discuss the validity of both perspectives.

7. Discuss whether the same rules with respect to tax exemptions should apply to hospitals, nursing homes, and other “commercial” nonprofits that will typically charge a market rate for their services compared to charities that do not charge clients for services, or that charge a modest amount.