April 22, 2013

The Honorable Raul Bocanegra Chair, Assembly Revenue and Taxation Committee State Capitol, Room 4167 Sacramento, CA 95814 SUBJECT: AB 975 (Wieckowski/Bonta) - OPPOSE Dear Assembly Member Bocanegra: The California Hospital Association (CHA), on behalf of its more than 400 hospital and health system members, regrets to inform you of our opposition to AB 975 (Wieckowski/Bonta). This bill imposes a vague and subjective standard on nonprofit hospitals, threatening their tax exemption while prescribing new, unnecessary requirements on nonprofit multispecialty clinics. AB 975 is unnecessary and would negatively impact implementation of the Affordable Care Act (ACA). It also tears a hole in the health care safety net, damaging the effective partnerships between community-based organizations and nonprofit hospitals to meet the needs of Californias diverse communities. Please consider these facts: Current law already holds nonprofit hospitals accountable to ensure they operate under the requirements to receive tax-exempt status. All of a nonprofit hospitals operating margin must be reinvested into the hospitals charitable and public service activities. It is irrelevant whether a nonprofit hospitals operating margin is one percent or 11 percent, just as long as all of those funds are used for exempt purposes according to federal and state law. Current law already provides a strong remedy if a hospital does not operate as required. The California Board of Equalization monitors and can work with local government to revoke a hospitals tax status. Current law already requires full transparency by nonprofit hospitals. Community benefit plans are public documents available for inspection at any time. They include a local needs assessment and the programs to meet those needs. The plans are updated every three years to ensure they address issues in real time. The California State Auditor has concluded that nonprofit hospitals are complying with all applicable federal and state laws regarding their tax-exempt status. AB 975 supporters misrepresent the report, which did not directly call for any change to current law absent legislative prerogative.

It is clear that AB 975 is a solution for which there is no problem, and it would punish well-managed hospitals that are providing substantial community benefits.

The Honorable Raul Bocanegra April 22, 2013

Impact on Tax-Exempt Status Existing law, California Revenue & Taxation Code 214, provides that hospitals are exempt from property taxes if:

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1. They are not organized or operated for profit; 2. No part of the net earnings of the owner inures to the benefit of any private shareholder or individual; and 3. The property is used for the actual operation of the exempt activity, and does not exceed an amount of property reasonably necessary to the accomplishment of the exempt purpose. Section 214(a)(1) specifically provides that a hospital is deemed not-for-profit if its operating margin does not exceed 10 percent. In Rideout Hospital Foundation v. County of Yuba, 8 Cal.App.4th 214 (1992) the court interpreted this safe harbor provision to mean that a hospital does not lose its property tax exemption simply because it has an operating margin exceeding 10 percent in any one year as long as all funds are used for the hospitals public and charitable purposes. Guilty Until Proven Innocent This bill turns existing law on its head by establishing a guilty until proven innocent rebuttable presumption that a nonprofit hospital is actually organized for profit if its operating margin happens to exceed 10 percent in any one year. The rebuttable presumption standard is so vague and ambiguous that nonprofit hospitals will be faced with subjective interpretations regarding whether the nonprofit hospital has met its burden of proof. Hospital margins vary from year-to-year depending on a number of forces and uncertainties. Hospitals spend years planning and building reserves for major improvements in medical technology, improved diagnostic or treatment equipment, or building upgrades or replacements required by state law, or meeting bond covenants on bond holders. Revoking a hospitals not-for-profit status based on one measure at one point in time is contrary to case law and places important community services at risk. Cutting Community Benefit Programs AB 975 will limit the charitable activities and community benefits provided by nonprofit hospitals. The false premise behind AB 975 is that a nonprofit hospital with a healthy operating margin is abusing its tax exemption. In fact, the opposite is true. The public is not served by hamstringing nonprofit hospitals in their efforts to care for the uninsured, underinsured and provide community benefits. The consequences would not only undermine implementation of health care reform, it compromises access to vital health care services. Critically important services like trauma centers, emergency services, burn units, neonatal care, cancer research, and training for health care professionals is at stake. Potential cuts go well beyond the nonprofit hospitals. Community benefit partners are also affected. For example, in the greater Sacramento region Wellspace Health is a community organization that helps provide respite care for homeless citizens. It is funded collectively by Sacramentos nonprofit hospitals through community benefit funds. Similarly, Sacramento Covered is another organization funded by nonprofit hospitals to support uninsured local residents. There are thousands hundreds of programs like these throughout California that could be cut or eliminated if AB 975 were enacted. Click here to access a short video that details these groups. One Size Does Not Fit All AB 975 is based on false assumptions that all hospitals have similar services and patient and payer mixes, none of which are accurate. Every hospital is unique and every community served is unique.

The Honorable Raul Bocanegra April 22, 2013

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This bill also penalizes nonprofit hospital systems for operating hospitals in areas with high levels of uninsured and Medi-Cal patients. Hospitals within the system that have better margins help subsidize safety-net hospitals that operate at a loss. Penalizing the few individual hospitals that have an operating margin exceeding 10 percent makes it impossible for a nonprofit system to subsidize the hospitals that lose money. As a result, this bill will make it harder for uninsured and low-income patients to receive timely and accessible hospital care because it will force the safety-net hospitals to cut back services or close. Impacting the Affordable Care Act Right now, the focus must be on successful ACA implementation, which is presenting significant challenges and uncertainties. AB 975 will only make things worse. Californias not-for-profit hospitals are navigating through a changing and extremely challenging landscape. Millions of uninsured Californians will become eligible to obtain health care coverage. Hospitals, their community partners and local governments are working overtime to try and meet the new demand for services. At the same time, the state and federal governments are implementing deep cuts in Medi-Cal and Medicare funding. The ACA expands Medicaid (Medi-Cal) significantly (by more than two million people) on January 1, 2014. In addition, the ACA will add more than two million Californians to the insured rolls through federally subsidized coverage. The exact impact of these changes, coupled with all of the other consequences of the ACA, make it impossible to predict with accuracy the impact on health care providers, insurers or employers. One thing is certain: major changes will occur during the next four years. It would be irresponsible to start piling on more requirements on hospitals during such a transitional period. For all of the above reasons, we urge you to vote NO on AB 975. Sincerely,

Martin Gallegos Senior Vice President and Chief Legislative Advocate MG:tm cc: The Honorable Bob Wieckowski The Honorable Rob Bonta The Honorable Brian Dahle, Vice Chair, Assembly Revenue and Taxation Committee The Honorable Members of Assembly Revenue and Taxation Committee Oksana Jaffe, Chief Consultant, Assembly Revenue and Taxation Committee Julia King, Consultant, Assembly Republican Caucus