Pittsburgh lawsuit challenges UPMC's tax status

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Pittsburgh Mayor Luke Ravenstahl likened it to "the David versus the Goliath."

The David, in this case, is the cash-strapped City of Pittsburgh, whose coffers are feeling the strain of burgeoning pension obligations and rising health care costs -- the plight of many municipalities across the state.

The Goliath that Pittsburgh faces is UPMC, a $10 billion medical enterprise defined by superlatives -- largest health care provider in the region, biggest property owner in Allegheny County. It is considered a tax-exempt nonprofit, which means it gets a $20 million tax break from the city every year because it pays taxes on only a portion of its properties and no payroll preparation tax.

Mayor Ravenstahl: UPMC is 'not a charity'

Pittsburgh Mayor Luke Ravenstahl and other officials pledged to challenge the tax exempt status of regional medical giant UPMC. "They're not a charity," the mayor said at a press conference. (Video by Kalea Hall; edited by Melissa Tkach; 3/20/2013)

On Wednesday, the mayor opened a new chapter in the longtime struggle between the two. In a lawsuit filed in the Common Pleas Court, the city demanded six years' worth of back payroll taxes and a removal of UPMC's tax-exempt status.

"Enough is enough," Mr. Ravenstahl said. "Today is the day we start to fight back."

In an email statement, UPMC spokesman Paul Wood called the challenge politically motivated and "based on the mistaken impression that a nonprofit organization must conduct its affairs in a way that pleases certain labor unions, certain favored businesses, or particular political constituencies."

The city also plans to challenge UPMC before the Allegheny County Board of Property Assessment, Appeals and Reviews to force UPMC to pay taxes on all its properties.

While the city faces an uphill fight -- and a company with sizable legal resources -- it has one extra stone in the arsenal: a Pennsylvania Supreme Court case decided last year raised the bar for organizations to prove that they are tax-exempt public charities. The court's decision resurrected the standards established in Hospital Utilization Project v. Commonwealth (1985), a set of five criteria known as the HUP Test.

A 1997 state law had loosened those standards. But the high court ruled last year in favor of the HUP Test, which requires that organizations "operate entirely free of profit motive" and "donate ... gratuitously a substantial portion of its services," among other things.

At a news conference, flanked by several council members, Allegheny County Controller Chelsa Wagner and state Sen. Jim Ferlo, the mayor made the case that UPMC is behaving more like a cutthroat corporation than a charity.

Mr. Ravenstahl cited its closure of hospitals in low-income communities -- in Braddock and on the city's South Side -- while it took over and built hospitals in affluent communities. He also spoke of UPMC's ongoing feud with insurer Highmark, which banned some Highmark insurance holders from seeing UPMC doctors.

And numerous times, he mentioned the plight of the UPMC's blue-collar workers. The Service Employees International Union, which represents many of the workers, has criticized the giant for paying its blue-collar workers rock-bottom wages. In January, the National Labor Relations Board settled 80 charges with UPMC for its "hostile anti-union campaign."

And, the mayor said, UPMC donated less than 2 percent of its net patient revenues -- over $5.7 billion -- to patients eligible for financial assistance, while several of its executives earn over $1 million a year.

"They're not a charity," Mr. Ravenstahl said. "They haven't been operating as a charity, and it's time that this community step up in that regard."

But UPMC challenged that characterization and maintained that it can pay multimillion-dollar salaries and compete in the marketplace and still be considered a purely public charity under the HUP Test.

The HUP Test, Mr. Wood said, "does not mean a nonprofit shouldn't strive to have a positive operating margin -- organizations that don't do that go out of business," he said. "It also does not mean a nonprofit cannot compete vigorously with other nonprofit institutions -- indeed, the nation's antitrust laws require just that. And, it does not mean that a nonprofit should pay its officers and employees anything other than compensation pegged at market equivalents."

He touted UPMC's charitable contributions to the city, saying it provided $238 million in charity and other uncompensated care, a number that has been challenged by critics because it includes patients who walk out on their bills and the difference between what UPMC charges and what Medicaid will pay. Around $87 million of that is donated care for patients who qualify for financial assistance.

Mr. Wood also suggested the charity care that is provided by UPMC would be threatened if its tax-exempt status was overturned.

"UPMC has always been a significant contributor to the City in a myriad of ways that are often disregarded, including as the primary funder of Pittsburgh Promise college scholarships for the city's public high school graduates," he said. "Any sort of new, discriminatory tax scheme would certainly result in less monies for the region and, while satisfying to some, would be bad public policy resulting in many unintended consequences, including diminishing the economy and competitiveness of the region."

Pittsburgh Public Schools solicitor Ira Weiss was unsettled by the mayor's decision to challenge UPMC because he worried it would jeopardize the funding for the Promise, around $100 million over 10 years. Under the Promise, the district agreed it would never challenge UPMC's tax status or seek tax income.

If push comes to shove, the district will do whatever it needs to protect the agreement, Mr. Weiss said.

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Andrew McGill and Tim McNulty contributed. Moriah Balingit: mbalingit@post-gazette.com, 412-263-2533 or on Twitter @MoriahBee. First Published March 21, 2013 4:00 AM


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