Business

Towns pay hospital tax, aid St. Luke's

Idaho Statesman

When voters in rural Weiser went to the polls in November, the vast majority gave their blessing to St. Luke's Health System's takeover of their local hospital - and agreed to continue paying a special tax to support that hospital.

St. Luke's expects the acquisition to take place this spring. It will be the third time in five years that Boise-based St. Luke's has acquired a hospital from a taxing district. The first was a McCall hospital in 2010. The second was a Mountain Home hospital in 2013.

Each of those hospitals was a community medical center - a public facility supported by local property taxpayers and overseen by elected boards. Each of the hospitals' local boards approached St. Luke's - a private nonprofit - to take over their institutions, which were old and operating on slim margins.

And each made a deal with St. Luke's to keep levying property taxes and remitting that money to St. Luke's. The combined revenue will amount to more than $3 million a year once the Weiser deal closes - roughly one-tenth of 1 percent of the health system's $2.8 billion yearly revenue, but money St. Luke's says is vital to keeping the hospitals afloat and making them better.

In all three cases, the taxpayers owned the hospitals and paid St. Luke's for years to manage them. Under the new agreements, the taxpayers no longer are owners. Instead, their districts have some oversight, and they can buy back their hospitals if they want.

Idaho law is silent on that kind of transaction.

"The law does allow the taxing district to transfer assets (and) make payments to other entities. It doesn't speak specifically to the type of relationship," said Christine Neuhoff, chief attorney for St. Luke's.

The Idaho Attorney General's Office declined to comment on whether Idaho law permits or prohibits the funneling of hospital taxing district revenues to a private organization.

Idaho has 17 hospital districts that can collect taxes, according to the state.

AN EXTRA BOOST

Taxing district board members say St. Luke's gives the community more than enough to make up for what taxpayers pay. It hires doctors and specialists. It uses the money to remodel run-down emergency rooms, replace antiquated equipment and care for patients who can't, or won't, pay their bills.

All levels of government already give St. Luke's and other Idaho nonprofit hospitals a slew of special payments and tax breaks for those purposes. Officials say those provisions fall short of covering the high costs of health care, so the tax faucet must remain open.

That's a pittance to the fast-growing hospital system. St. Luke's has more than $800 million in net assets, including buildings, multimillion-dollar equipment, property it plans to someday use for medical care, stocks and numerous other investments.

St. Luke's had tens of millions of dollars in income left after paying its bills in recent years, though its latest tax filing shows a much narrower margin systemwide because its Treasure Valley operations lost money.

Still, the drop-in-the-bucket hospital taxes are enough to irk some property owners in McCall, where St. Luke's acquired the hospital five years ago. A property owner provided the Statesman a tax bill that shows $1,068 of a total $10,927 in property taxes going to St. Luke's McCall. She declined to be interviewed.

State Sen. Steven Thayn, whose legislative district includes McCall, said a constituent raised the tax issue when he visited recently.

"My first impression is, no, there's something not right about this," Thayn said. "At the very least, we need to have a discussion about a nonprofit raising taxes when there is no longer a community hospital."

Taxing districts exist at the will of voters. Hospital districts are governed by a board whose members stand for election every six years, and voters can dissolve their taxing districts. St. Luke's officials say, however, that they could sever the relationship and return the hospital if the tax revenue stopped flowing.

Leaders of the local hospital districts say the tax money is earmarked for three purposes - bad debt, charity care and capital investments - and none of it can be used for executive salaries, as one example.

Leaders say the St. Luke's acquisitions have preserved their hospitals and benefited their communities.

"Our relationship has been a win-win situation for the McCall community," said Derek Williamson, chairman of the hospital district there. "It was the district board that wanted to ask St. Luke's to enter into a relationship. ... We've benefited tremendously."

SYMBIOTIC RELATIONSHIP

Taxing districts are just one way taxpayers support hospitals such as St. Luke's. Every level of government provides for nonprofit hospitals, which are considered a public good.

Idaho's hospitals get much - in some cases, more than half - of their income from Medicare and Medicaid.

Nonprofit hospitals get a break on property and income taxes. That legal tax exemption is meant as a trade-off. In exchange for not paying some taxes, the hospitals must invest in the health of their communities. They also take everyone who walks through the door, not just those who can pay.

Idaho's state and county "catastrophic" and "indigency" funds reimburse hospitals on behalf of poor patients. Those funds amounted to about $2.5 million in fiscal year 2013 in counties where St. Luke's tax-district hospitals are located.

Medicare pays a premium to "critical access hospitals" - a special group that includes the hospitals in McCall, Mountain Home and Weiser. That's because Medicare wants to give these hospitals in remote areas an incentive to stay open, even when they're not packed with paying customers.

Weiser Memorial Hospital CEO Thomas Murphy said last fall that St. Luke's was interested in his hospital largely because it qualified for the extra Medicare payments, according to The Argus Observer, a newspaper in Ontario.

TO THE RESCUE

The hospitals looked to St. Luke's to bail them out during a time of upheaval in health care, officials said. Their pockets weren't deep enough to keep pace with technology and the movement in health insurance toward paying more for high quality and penalizing hospitals when they fall short of high standards.

One major argument for taxing districts is that they help ensure there is a hospital available to patients who lack insurance.

At least in McCall, the hospital doesn't spend much on charity care and community benefit - between 2.4 percent and 5.1 percent of total spending in recent years. The chairman of McCall's hospital taxing district said unemployment rates, a surge of very ill indigent patients and other things outside the hospital's control can drive its charity care rates up or down.

VOTERS SAID YES

In Valley County, St. Luke's bought the hospital now known as St. Luke's McCall Medical Center from its local taxing district in 2010. Eighty-six percent of voters backed the deal. Since then, McCall residents have paid $1.3 million to $1.5 million a year in special taxes destined for St. Luke's.

That area's taxing district board chairman, Derek Williamson, said St. Luke's cannot line its pockets with the money from property owners. The district performs an audit every year to make sure St. Luke's is complying, he said.

In Elmore County, St. Luke's bought the hospital now dubbed St. Luke's Elmore from its taxing district in 2013. Seventy-five percent of voters supported it.

Taxing district board member Jack Walborn said the agreement requires St. Luke's to update the board every month and hit quality benchmarks. If St. Luke's falls short, the district could take back the hospital, as long as it pays St. Luke's for any upgrades it does in the meantime. So far, those upgrades include a $5 million emergency room project, a $1 million specialty clinic project and a CT scanner that cost $500,000.

"They acquired it as a liability," Walborn said. "Anybody that's trying to operate a hospital is assuming more of a liability than an asset, especially if they are trying to grow services."

Walborn said hospital taxes - about $1.5 million - don't approach Elmore County's $15 million in shortfalls from Medicare, Medicaid and uncollectible patient debts.

In Washington County, 82 percent of Weiser Valley Hospital District voters in November favored a sale. St. Luke's and the district said they put the question on November's ballot to gauge public opinion - not because they legally needed the deal approved.

The hospital has "had financial issues over the past 10 or 15 years," so the taxes buffer the debt St. Luke's will assume when it absorbs Weiser Memorial Hospital, said Diana Thomas, Weiser's mayor and a member of the hospital district board.

"I see this personally as kind of an economic development thing for our community. St. Luke's won't be getting money from our hospital, really."

St. Luke's says each of its units must be financially strong to meet local needs, and the tax revenue helps ensure that.

"St. Luke's overall may have a positive margin traditionally," said Neuhoff, the St. Luke's attorney. "And in order to be able to provide the quality and scope of services that we do, we need to be smart about maintaining our financial health, and in some of these districts ... if that hospital, prior to becoming part of St. Luke's, had not had the tax support, it would have been unable to continue for very long. So it's fairly unlikely that St. Luke's would have entered the relationship in the first place if there weren't those resources in place."

Audrey Dutton: 377-6448, Twitter: @IDS_Audrey

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